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Beneficiaries, Variation

What the hell does this mean?

As the Trusts Act 2019 coming into full force and effect in 2021 gets closer, many reviews of trusts deeds are being carried out to determine what a presumption to notify each beneficiary of basic trust information will look like.   While for many trusts the issue is a wide class of beneficiaries, for others the class might be too small.  Judd v Cowley is an example of a trust where the latter is the case.  The main issues in Judd v Cowley are perhaps surprisingly, not as uncommon as might be thought.  The issues?

  1. the Trust’s settlor and the source of the Trust’s wealth is not a beneficiary of the Trust (although regular distributions were made to her for her support), and
  2. the deed for the Trust was amended by hand from time to time due to the terms not reflecting the settlor’s intentions.  Notwithstanding that there was no power of variation.

The matter came before Moore J with two causes of action:

  1. an application for rectification, or in the alternative
  2. a declaration that the original deed for the Trust was of no effect and the Trust’s assets are held on bare trust for the Trust’s settlor.

Rectification

The principles of rectification are set out in Re Butlin’s Settlement Trusts at [262], these being:

(a) a settlor may seek rectification by proving that the settlement does not reflect their true intention;

(b) it is not essential for the settlor to prove that the settlement fails to express the intentions of the trustees; and 

(c) the Court may decline rectification where a trustee objects.

In New Zealand the current legal position is that the following criteria must be met before a rectification can be made:

(a) there must be an operative mistake, in that the deed does not reflect the settlor’s intentions;
(b) the mistake must be causative and of sufficient gravity, rather than mere inadvertence;
(c) there must be convincing proof of what would have been intended if the mistake had not been made; and
(d) it must be appropriate to make the Deed conform with that intention.

For contemporary examples of rectification being granted in New Zealand see Re Hindle and Kusabs v Staite.   Also see Walker v Restieaux.

With respect to Judd v Cowley in determining whether to order rectification Moore J noted at [33] that “… I record that there is no contemporary documentary evidence from the time proximate to the original Deed being drafted and executed in 1994. Ms Reid’s intentions as settlor are to be inferred from correspondence with her various solicitors four years later, her second solicitor’s files notes, a memorandum of wishes and notes made in Ms Reid’s hand commenting on the original draft Deed and its apparent shortcomings.”

However, as noted at [34] to

[34] In my view there is ample evidence to support the inference that the original draft Deed did not reflect Ms Reid’s intentions at the time the Trust was settled and that rectification should be ordered. My reasons follow.
(a) Is there an operative mistake in that the deed does not reflect Ms Reid’s intentions?

[35] Under this heading I consider the three mistakes in the original Deed:
(a) First, and plainly the most significant, is the failure to include Ms Reid as a discretionary beneficiary. The effect of this is that she is unable to benefit from the Trust. As settlor it is plain she intended that the Trust would provide for her financial needs. The evidence, particularly the memorandum of wishes dated 7 August 1998, reveals that she intended the trustees to treat her interests as paramount during her life. That document also reveals she did not, in fact, realise she was not named as a beneficiary until that fact was brought to her attention by her second solicitor. Her second solicitor’s advice and file notes record that he told Ms Reid in 1998 she was not a beneficiary. Handwritten notes apparently in Ms Reid’s hand, on a copy of the original Deed forwarded to her by Rice Craig state:

“What about me!!? Spending if needed.”

Furthermore, between 1994 and 1997 Ms Reid transferred all her property interests to the trustees. It is inconceivable that she would have adopted that course absent a belief that the Deed empowered the trustees to provide for her if and when that was necessary. Indeed, that is just what the trustees did and have continued to do up to the present time, ignorant of the fact that they did not have the power to do so under the Deed.

The second solicitor’s file note of 17 March 1998 adds additional weight. It records:

“[Ms Reid] tells me that when she retires in about five years time she wants to be able to have access to the income from some of the rental properties. She wants to have the properties all paid off from the income. I indicated that she should be a beneficiary of her own trust.
Instructed to advise regarding the new trustees. I suggested that perhaps [Ms Reid] could also be a trustee and that she most certainly has to be a discretionary beneficiary if she wants to receive income from the trust property. …”

The following day, the solictor [sic] wrote to Ms Reid confirming his earlier advice that she was not a discretionary beneficiary of the Trust. Relevantly, he said:

“… Deed of family trust and the proposed amendment are both unsatisfactory as regards the list of discretionary beneficiaries. Discretionary beneficiaries only include your  daughter and your grandchildren. There are no other classes of discretionary beneficiaries.”

Ms Reid’s memorandum of wishes removes any doubt as to her intentions in settling the Trust. Relevant portions are reproduced below:

“I have assumed that my trustees will at all times regard the interests of Jeanette Reid as paramount during her life. This no doubt goes without saying. It is essential that she have no financial or other worries and I would not like her own independent resources of capital and income to be whittled away. My trustees should disregard Jeanette Reid’s own assets in considering what assistance should be given.
After my death I want the trustees to provide primarily for my natural born daughter Joanne Brooke Barton and my natural born grandchildren. So far as is possible I wish the trustees to maintain equality between them. The assets of the trusts are sufficient that it should not be difficult to do this. …”

It follows I am thus easily satisfied on this point there is an operative mistake contrary to the intentions and purpose of the settlor.

[37] Again, I am easily satisfied these omissions amount to an operative mistake such that the Deed did not and does not reflect Ms Reid’s intentions.

(b) Are the mistakes in the Deed of sufficient gravity to justify rectification?

[38] Plainly the mistakes are of sufficient gravity to justify rectification. The central purpose of the Trust was to make provision for Ms Reid, particularly in her retirement years and to provide support for her daughter and her natural born children after her death. The mistakes prevent the trustees from being able to carry out these intentions without acting in breach of the Deed as it is presently expressed.

(c) Are the mistakes qualifying mistakes?

[39] The question here is whether the errors alleged are, in fact, mistakes rather than the product of ignorance, inadvertence, forgetfulness or misprediction.

[40] On the evidence it is plain to me that Ms Reid’s original solicitors failed to record her intentions in the Deed. This omission was not rectified by the first tranche of changes.

[41] The omissions and alleged errors did not arise from mere ignorance or other conduct on Ms Reid’s part. The evidence easily satisfies me that the solicitors acting for Ms Reid failed to incorporate her intentions when settling the Trust.

Perhaps most tellingly is a margin note made by Ms Reid on a copy of the trust deed: “What the hell does all this mean?”

As noted at [47] “If the Deed is not rectified so as to include Ms Reid as a beneficiary she would be unable to afford to continue to live at the retirement village which provides her with specialised care. That would defeat the primary purpose for which the Trust was created.”

Rectification was ordered.   The case highlights the need to ensure that trust deeds are not finalised until all parties are clear regarding the terms and effect of the trust deed.  No client should be left to ask “What the  hell does all this mean?”

The Trusts Act 2019 and its plainer English may assist, but largely, the responsibility lies with those drafting trust deeds and advising on the creation of trusts taking the time and effort to ensure that all parties are fully informed.  This can be difficult as it is not the bliss of many to consider the terms of a trust deed clause by clause.  However, it is incumbent on advisers to be able to ensure that the client does understand. The failure to do so, may reflect more on the adviser than the client and hence the new requirements in s 39 (Adviser must alert settlor to modification or exclusion of default duty) and s 43 (Adviser must alert settlor to liability exclusion or indemnity clause).

References:

  • Judd v Cowley [2020] NZHC 184
  • Re Butlin’s Settlement Trusts [1976] CH 251
  • Racal Group Services Limited v Ashmore [1995] STC 1151
  • Re Stokes Family No 2 Trust HC Hamilton M288/94, 30 September 1994
  • Pitt v Holt [2013] UKSC 26
  • Re Hindle [2012] NZHC 903
  • Walker v Restieaux [2015] NZHC 1875

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