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Beneficiaries, Testamentary trusts, Trustees, Trusts, Wills

Generosity can have its limits

A grandfather, Mr Greenwood, told his grandson that he could buy his house for $300,000 after his death. He expressed this wish to others, including his daughter (mother of the grandson) who was one of the executors of his estate, although it was not in his 2005 will.

This occurred in Christchurch before the Earthquakes of 2010 and 2011. The house was severely damaged and Mr Greenwood’s insurance company agreed that a new house needed to be built to replace the damaged house.

The grandson gave evidence that Mr Greenwood reiterated his offer on the basis that after his death he would be able to build the floorplan of his choice, the insurer having agreed to defer the rebuild.

Following Mr Greenwood’s death his executors sold the house to his grandson for slightly over $300,000 (under market value at the time of sale by approximately $240,000).

The executors were one of Mr Greenwood’s sons and his daughter (the grandson’s mother), who were among four living siblings who were the residuary beneficiaries of the estate. However, one of the siblings was unhappy about the house sale transaction because of its impact on the residue. He applied to the High Court to have the executors make good the difference to the estate.

At issue were the consequence of the verbal instructions and whether they had testamentary effect as guidance to the executors, and also whether the executors had a duty to sell the property at market value, or whether they had discharged their duties through the sale at an undervalue to the grandson.

Mr Greenwood’s instructions regarding the sale of the property were never put in writing. The only evidence of them was from the grandson who benefited and from his mother. The plaintiff did not deny his father’s wish to sell the property to his grandson, only that he had no knowledge of the discussions. The defendant executors accepted that the instructions were not in writing and therefore not a codicil, but  argued that they did not see it as Mr Greenwood changing his will but rather that it was consistent with what he had previously stated about his will instructions and that the size of the residue was similar to what he had previously indicated. The defendants argued that the oral instructions merely clarified Mr Greenwood’s intentions as will-maker and was therefore no different to cases of unsigned or poorly drafted wills where orally expressed intentions have been considered.

Dunningham J disagreed with this analogy. The will was sufficiently clear that s 32 of the Wills Act 2007, which allows the Court to consider external evidence if the will is uncertain, could not apply in this case. Nor did any other circumstances arise that created an exception from the general rule that testamentary intentions must be in writing, in the will or a codicil to the will. Accordingly, the oral statements could have no testamentary effect.

The defendant’s next argument was that they had a fiduciary duty to the will-maker to give effect to his expressed intentions. However, as the Judge pointed out, personal representatives have a duty to act prudently and properly with respect to the estate as a whole. As the role of executor becomes that of trustee in the administration of an estate, the fiduciary duties become those of a trustee toward the interests of all those beneficially affected.  In this context, her Honour found that in the circumstances of executors/trustees of an estate dealing with residential property, they had a duty to get the best possible price. The instrument creating the trust, in this case the will, did not provide for the making of gifts or voluntary payments out of the estate – which, in substance, a sale at undervalue is. Accordingly, the defendants had no power to sell to the grandson at an undervalue.

Dunningham J cited two English cases, Buttle v Saunders and Cowan v Scargill, for the proposition that the defendants had a duty to obtain the best possible price when selling the property. While Cowan concerned a trustee’s obligation in respect of the investment of funds, there is no difference in principle between investment to obtain the best return for beneficiaries and the realisation of property to achieve the same results. The fact the defendants had not obtained a valuation before selling also deprived them of another possible defence. Nor was the purely verbal “agreement” between Mr Greenwood and his grandson legally enforceable, on any possible construction.

Finally the defendants argued that the Court should exercise its discretion under s 73 of the Trustee Act 1956 to relieve them from personal liability. To do so the trustees had to have acted “both honestly and reasonably” and they “ought fairly to be excused for both breaching the trust and omitting to obtain directions…”

The plaintiff did not dispute that the defendants had acted honestly but, as stated in Cowan v Scargill, that does not discharge the need to act reasonably also. Reasonableness refers to the standard of conduct of trustees. It was here that the clearly conflicted position of the daughter executor as mother of the grandson meant that her Honour could not consider that the defendants acted reasonably.

In the event, Dunningham J awarded the plaintiff $60,000 (25% of the amount of the undervalue) as the three other living children of the deceased who would also be entitled to the residue of the estate, had all waived their interest in the underpayment. Because of the waivers her Honour felt that she was dealing with a plaintiff in his personal capacity and not as a representative of the estate or on behalf of all beneficiaries. There could therefore be no order requiring the payment of the undervalue back to the estate as a whole.

Editor’s note:

It is interesting to contrast this decision against that in Clement v Lucas where the court held that it was appropriate for trustees to have heed to the circumstances surrounding the settlement of an inter vivos trust.  Perhaps the distinction is that a will must be in writing (bar very limited legislatively proscribed circumstances), whereas a trust will not fail for want of writing.

References:

  • Re Estate of Greenwood, Greenwood v Simpson [2018] NZHC 845
  • Cowan v Scargill [1985] Ch 270
  • Buttle v Saunders [1950] 2 All ER 193
  • Kilsby v Kilsby (1996) 1 NZTR 6-001 at 121
  • Clement v Lucas [2017] NZHC 3278

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