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A sorry tale

28 April 2017

In the judge’s words “This is a sorry tale of what can occur when a family adopts an inappropriate form of trust deed without adequate advice or sufficient understanding of the legal effect of its terms.”

The case of McLaren v McLaren

David, Mary and their children had farmed mussel farms for decades. After working on different mussel farms David and Mary’s son Bruce began working full time in the business. They formed a 50/50 partnership, and after three years the partnership’s accountants recommended a family trust to provide asset protection and a means of succession of the business to Bruce. The BDM Trust was formed.  As is common with many succession plans, David, Mary and Bruce’s intention was for David and Mary to receive a good income from the BDM Trust during their lifetimes and Bruce would take over the assets once David and Mary died.

The BDM Trust Deed was in a form adopted by David and Mary’s accountant. David, Mary and Bruce did not take legal advice on the terms of the Trust and how they would be affected if there was a change in their circumstances – for example, if they fell out, which is what in fact happened.

Bruce was made the “appointor” under the Trust Deed. The appointor had the power to appoint and remove trustees and also to remove beneficiaries. When Bruce and David and Mary fell out Bruce appointed two new trustees to replace his parents and signed a document removing them as beneficiaries. This meant that David and Mary then had no say in the trust decisions and no expectation of benefitting from the trust (even though they effectively gifted assets to the BDM Trust). This was not what had been intended by them when the BDM Trust had been formed.

David and Mary issued legal proceedings challenging their removal as beneficiaries and the appointment of the new trustees. The success of David and Mary’s claims depended on the Court’s decision as to how Bruce should exercise his powers. David and Mary also asked the Court to set the BDM Trust aside.

The removal of David and Mary as beneficiaries

The judge held that there was a relationship of trust and confidence between Bruce and David and Mary. As such Bruce was required to act in good faith and with proper motives when removing beneficiaries, bearing in mind the purposes of the BDM Trust and the circumstances that existed when it was set up. The judge held that Bruce had breached those duties and reinstated David and Mary as beneficiaries.

The appointment of new trustees

The judge held that the power of appointment of trustees should be considered differently. This power should be exercised reasonably and by not taking into account irrelevant, improper or irrational factors. The judge further found that Bruce had exercised this power reasonably because of the rift that had arisen between the trustees and the fact that the appointment of the independent trustees would increase the likelihood of a resolution of the dispute. David and Mary failed in this claim.

Claim to set aside BDM Trust

Finally, David and Mary asked for the BDM Trust to be set aside and the assets to be transferred back to the partnership. This claim was based on the fact that Bruce had the power to remove all beneficiaries, thus rendering the BDM Trust a bare power and a personal holding for Bruce. The judge did not accept this claim and stated that the Court is reluctant to revert the position to that which existed before the assets were transferred to the BDM Trust just because David and Mary may have been inadequately advised at the outset.

Despite the judge’s decision on these claims there were numerous issues still outstanding between Bruce and his parents. The judge urged all of them to consider their primary task as being building bridges, not preparing rockets to fire at each other.

Thinking of forming a Trust?

Trust law is a specialist area of law. Careful consideration should be given to the form of the Trust Deed to be used and whether it suits individual circumstances. As David and Mary found to their considerable detriment, there is a real danger in adopting a precedent document without proper advice.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


 
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott