The recent High Court decision Clement v Lucas[1] highlights what Trustees have a duty to consider when making decisions about Trust property, and also shows the thorny issues Trustees can face when beneficiaries don’t agree with the Trustees’ decisions.
In this case, the Trustees wished to distribute what remained of the Trust fund equally to certain beneficiaries and then wind up the Trust. The Settlors of the Trust (being the beneficiaries’ parents) had particular reasons why the Trust was formed and how they wished the Trust to be distributed. In the Memorandum of Wishes, the Settlors stated that the Trust was to provide a mechanism to equalise interests between their three children (the beneficiaries) and to “even the ledger”.
Correspondence prior to the Trust being formed, between the Settlors’ solicitor and financial advisers, showed it was important to the Settlors that “each of the family should have a fair share” of the Trust assets. Significant Trust assets had already been distributed to one of the beneficiaries, with smaller distributions being made to the other two beneficiaries. The Trust assets in this case included farm land used and occupied by some of the beneficiaries.
On the Vesting Date, the Trustees expressed their desire to distribute the Trust fund equally between the beneficiaries, regardless of the fact that one of the beneficiaries had previously received a large portion of the Trust assets. One of the beneficiaries challenged the Trustees’ decision, stating that the Trustees had acted in bad faith by failing to take into account relevant considerations; taking into account irrelevant considerations; and behaving unreasonably.
This case shows that the Court may intervene to set aside trustee decisions when they have been made without considering the following points:
“What has to be established is that the Trustee in making his decision has … failed to consider what he was under a duty to consider. If the Trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the Trustee can be in no breach of duty and its decision cannot be impugned merely because in fact that information turns out to be partial or incorrect.”[2]
In deciding whether they should consider pre-Trust correspondence in making their decision to distribute Trust assets equally, the Trustees took legal advice and were told that they did not have to consider pre-Trust correspondence. The Court concluded this advice was wrong and the Trustees were under a duty to consider the purposes for which the Trust was established, and the intentions of the Settlors, even if the Trustees had wide discretion in exercising their powers under the Trust deed. The Court held that failing to consider such matters amounted to a breach of the Trustees’ duty.
The Trustees felt it was not their role to deal with or resolve the collapse of the family relationship or to find a solution that all beneficiaries could accept. The Court stated their role was to reach a decision regarding the distribution of Trust assets by considering the Trust’s purposes which clearly included “evening the ledger”. This should have involved the Trustees making allowances for the earlier distributions even if this decision resulted in the beneficiaries disagreeing with the Trustees’ decision. The Court held that the Trustee’s decision to sell and divide the Trust’s assets equally among the beneficiaries be set aside and the Trustees ordered to reconsider their decision. Note, the Court did not make the decision for the Trustees as to the distribution between the beneficiaries, but required them to reach their own fresh decision in light of the Court judgment.
This case shows that although Trustees may have wide discretionary powers under a Trust deed, the purpose for which a Trust is established and the intentions of the Settlors are paramount in making Trustee decisions. This case reminds us that intentions should be set out in a Memorandum of Guidance or Letter of Wishes completed by the Settlors so that the Trustees are in a position to make a determination as to the thoughts of the Settlors in forming the Trust.
[1] Clement v Lucas [2017] NZHC 3278
[2] Clement v Lucas [2017] NZHC 3278 at [73][b] per Van Bohemen J
Glenda Graham is a Partner in the Succession & Wealth Protection Team at Norris Ward McKinnon. You can contact Glenda at [email protected]
