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Beneficiary rights, Directions, Discretionary, Right to trust information, Trustees, Trusts

Redundant

A final beneficiary has a contingent proprietary right, the value of which (if any) can only be determined on the final vesting date.    While such a right can be treated as simply a right to receive trust assets on a final vesting, the status of having such a right can elevate the position of a beneficiary in the eyes of the court.  The converse analysis is that if a beneficiary is “distant” and purely discretionary then that beneficiary’s position as a beneficiary of a trust can be somewhat tenuous.  The rights of beneficiaries and the approach adopted by the court to “close” versus “distant” beneficiaries is canvassed in Ruby v Ruby.[1]   This case, which has been anonymised relates to:

  1. an application by “Molly,” a beneficiary of the “Ruby Trusts” for review decisions of the trustees of the Ruby Trusts with respect to a trust property in “Clarkville”
  2. an application by the trustees of the Ruby No 2 Trust to bless the proposed decision to sell a property owned by the trustees of the Ruby Trusts in “Wildtown.”

Following the commencement of the hearing all matters were settled.  That settlement was recorded in a Deed of Family Arrangement pursuant to which the court was asked to approve three variations to the A Ruby Trust, a trust that was created in the 1980s.  The proposed variations were:

  1. an amendment to the power to appoint and remove trustees
  2. the addition of a new power to give effect to the bespoke distribution mechanism set out in the Deed of Family Arrangement, and
  3. the removal of certain “redundant” classes of beneficiaries.

The court made the orders sought on the basis of its inherent jurisdiction and pursuant to the Trusts Act 2019.  The reasons decision that followed the orders set out, amongst other things, the basis for the removal of the “redundant” beneficiaries.

The Ruby Trusts were settled by “Zoe” and “Arthur” who had two children “Molly” and “Eileen.”  The Ruby Trusts were settled to hold and manage Zoe and Arthur’s wealth.  The beneficiaries of the A Ruby Trust are:

  1. Zoe
  2. Molly
  3. Molly’s children
  4. Eileen
  5. Eileen’s husband, and
  6. as purely discretionary beneficiaries Arthur’s siblings (Walter and June) and their respective children and spouses and the children’s spouses; and any charitable purpose

The reference to “as purely discretionary beneficiaries” is curious in the context of what are presumed to be discretionary trusts.  It is presumed that this means that the other beneficiaries are named as final beneficiaries.

Approximately 8 years before the proceedings referred to, Zoe and Arthur (since deceased) entered into a memorandum of wishes regarding how the trust and non-trust assets should be used to benefit them during their life-time and how these should ultimately be distributed between Molly and Eileen.  Zoe and Arthur’s wishes provided that the Clarkville property was to be left to Eileen and the Wiltdown property to Molly.

The context for the beneficiary variation application was set out at [25] as follows:

[25] The context for the beneficiary variation is that the A Ruby Trust, which was established over 40 years ago, includes classes of beneficiaries that are not provided for under the distribution mechanism in cl 3.9 of the Deed of Family Arrangement. None of those beneficiaries have been parties to these proceedings nor have any of them been served. They are not parties to the Deed of Family Arrangement.

The age of the A Ruby Trust was also a significant factor in the court’s decision-making process.  As set out at [28] and [29]:

[28] As I have noted the A Ruby Trust was settled in the 1980s and it is now nearly 40 years old. The age of the Trust is relevant here for two reasons. First, I accept it was settled at a time when it was common to include broad classes of beneficiary, particularly by way of discretionary beneficiaries. Secondly, since it was settled the nature of the core family that the A Ruby Trust has in reality provided for has evolved. Eileen, Arthur’s daughter, has a husband, Bruce, and Molly also a daughter of Arthur has two children, Mary and Michael. Those children are Arthur’s grandchildren. Arthur’s siblings and his nieces and nephews were included as discretionary beneficiaries in the A Ruby Trust most likely to benefit in the absence of Arthur’s own children (and his grandchildren if born) surviving him and Zoe. Those children, Molly and Eileen, and the grandchildren, Mary and Michael, have survived Arthur.

[29] Importantly, the nieces and nephews of Arthur and their associated beneficiaries do not have vested interests in the property of the A Ruby Trust. As I understand it, they have also never benefited from that Trust nor even been informed of its existence.

The continued presence of beneficiaries was considered problematic in light of the presumption regarding disclosure of basic trust information provided by section 51 of the Trusts Act 2019.  See [30] and [31]:

[30] The continued presence of those parties as discretionary beneficiaries, counsel says raises potential complications for the trustees of the A Ruby Trust in one respect. This is the requirement in s 51 of the Act whereby the trustees are required to provide basic trust information to those beneficiaries. They could also be obliged to provide other more detailed requested information pursuant to the presumption in s 52 that Trust information be provided. Given that none of these beneficiaries have benefited in the past and would not now be capable of benefiting from the A Ruby Trust (as a consequence of the distribution variation) it is claimed the provision of information would only be the cause of unnecessary delay and expense for the trustees and to the detriment of the parties who are the principal beneficiaries of the A Ruby Trust.

[31] The same rationale applies to the charitable trusts noted at [26](g) above, and to potential spouses or children of Mary or Michael noted at [26](h) above, (of which there are currently none as I understand it). The view of all parties to these proceedings is that, given some classes of beneficiary are to be removed, it would be appropriate and tidier to remove those classes of beneficiary noted in this paragraph at the same time. No objection from any parties to this proceeding to what is proposed has been raised and, indeed, they have unanimously agreed to the proposed variation.

In considering its jurisdiction to make the variations proposed the court considered whether these could be made pursuant to its inherent jurisdiction or the relevant powers under the Trusts Act.

The statutory powers were set out in [34]:

[34] I turn first to the statutory powers. The starting point on this is s 122 which empowers trustees to vary the terms of a Trust Deed by unanimous consent enacting the role in Saunders v Vautier. The Court may supplement that consent with the powers in s 124 which permit the Court to provide consent on behalf of incapacitated, minor or future beneficiaries, and in s 125 which permit the Court to waive the requirement that any beneficiary consent to a variation under s 122. Also see What about the little people?

With respect to the inherent jurisdiction Gendall J noted at [35] that:

[35] This Court has also recently confirmed the breadth of its inherent jurisdiction to vary a Trust in the decision of Isac J in Re Setter: “The view of the limits of the inherent jurisdiction expressed in Chapman v Chapman may no longer be good law. That is because underpinning their Lordships’ judgments was the rejection of “any suggestion that the Court has an inherent jurisdiction to alter a man’s will because it thinks it beneficial”. Yet Parliament when enacting s 130 expressly empowered the Court to approve variations which the Court considers “desirable” for the proper management or administration of the trust property. Implicit in Parliament’s approach is a rejection of the underlying premise in Chapman v Chapman, that is, that a Court cannot vary a trust where it would be beneficial to do so. If the inherent jurisdiction takes its lead from the Court’s statutory jurisdiction, it seems a more coherent approach under the 2019 Act may be to avoid strained constructions of the statutory language regarding variations to trusts and to look to the inherent jurisdiction in appropriate cases to fill any gaps left by Parliament (to the extent any such evolution of the inherent jurisdiction is consistent with the statute).”

The court considered that the jurisdiction for beneficiary variation is broadly the same as for other variations, and rests with the court’s inherent jurisdiction or alternatively a combination of sections 122, 124 and 125 of the Trusts Act.  The court was also concerned to ensure adherence with the principles of the Trusts Act stating at [53] and [54]:

[53] I am satisfied it is also consistent with the principles of the Act, namely the principle that “a trust should be administered in a way that is consistent with its terms and objectives” (emphasis added) and that “a trust should be administered in a way that avoids unnecessary cost and complexity”. A distinction is properly drawn between a trust’s terms and a trust’s objectives. Section 4(a) of the Act emphasises that the Court ought to have regard not just to the words of a Trust Deed but also to its underlying objectives or purpose. Those objectives are to be derived not just from the words of the Trust Deed themselves (given that the word “objectives” must have some meaning and is not simply to be redundant), but from the underlying factual matrix and context of the Trust.

[54] In this case the context is of a family trust established when the first- generation beneficiaries, being Arthur and Zoe, had by [the early 1980s] started to accumulate wealth and they had children who had just finished their schooling. The trust itself 8 Section 4 of the Act. was designed to hold that wealth and give the family a vehicle that would be flexible as the family evolved over time. I acknowledge it is proper to accept that this flex and evolution would have been contemplated by the settlor and Arthur and Zoe at the time. More importantly s 4(a) also authorises the Court to have regard to what the objectives of the Trust are today as they have evolved. As I see the position that is simply what is occurring here.

The court’s reasons to order the removal of beneficiaries who were unaware of the trusts of which they were beneficiaries or the proceedings are largely set out in [44]:

[44] Turning now to the context of the case before me, the represented parties here emphasised that the distribution variation was of significant benefit to all the beneficiaries who are signatories to the Deed of Family Arrangement. I accept that is the case. It provides them all with certainty and parity and was crucial I am told in facilitating the settlement of what was a longstanding and very bitter family dispute. I accept that this benefit outweighed any detriment to what must be seen as distant discretionary beneficiaries who only ever enjoyed a vague hope of benefiting from the A Ruby Trust, and in the circumstances they were effectively in all respects redundant. As I see it in the present circumstances, in reality they never had any real hope of benefiting under the Trust because the immediate and direct family of Arthur Ruby, being his children and grandchildren, have survived and are to benefit in line with both his and Zoe’s expressed wishes in their memorandum of wishes and also in line with the fact that those direct family members had vested interests under the trust. It is noted too that the nephews and nieces and other distant beneficiaries affected here, have always been (and remain) unaware of the trust’s existence and the fact they were named originally as discretionary beneficiaries. There is one additional and important factor here as I see it. This is the fact that at one level, the distribution variation can also properly be said to benefit the entire Ruby family including the remote beneficiaries in the sense that all parties will enjoy the overall benefits to the welfare and honour of the family that will arise from the hard-fought settlement of these proceedings, and the mending of relationships likely to occur once (as here) these underlying disputes within the family have been resolved. All this is of particular importance to the Court’s exercise of its inherent jurisdiction to vary the distribution provision with the bespoke mechanism in cl 3.9 of the Deed of Family Arrangement, but it also has relevance to the statutory variation mechanism I am considering here.

The case is important as it provides a frame-work for “tidying up” classes of beneficiaries and appears to support the removal of beneficiaries who are unlikely to benefit.  However, some thought needs to be given as to whether the focus on contingent proprietary rights is the correct approach as there will be many instances where default final beneficiaries might be considered equally “redundant” but based on Ruby their removal may be less straight-forward.

For a wider of consideration of beneficiary rights, see Trust Series 2022 – Beneficiary Rights, which is presented by Vicki Ammundsen.


[1] [2022] NZHC 282

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