Navigating Trust Disputes
The transfer of intergenerational wealth is steadily increasing the number of estate and family trust disputes our Dispute Resolution Team is assisting our clients to resolve.
While careful succession planning as recommended in our earlier article, Fairness in farm succession: protecting the farm and the family, is best to avoid disputes like that in, Sewell v Sewell, even the most harmonious family relationships can come under pressure.
What we are seeing
We are increasingly advising on disputes involving:
- challenges to trustee decisions;
- beneficiary requests for trust information;
- allegations of conflicts of interest; and
- applications to remove trustees.
Now that the “new” Trusts Act 2019 has been in force for five years (it took effect from January 2021), we have clearer guidance from the courts on how the Act will be applied in disputes.
Protecting trustee decision-making
Beneficiaries can ask the court to review a decision, or proposed decision, of the trustees under sections 126 and 127 of the Act. Trustees can also proactively apply to the court for directions or “blessing orders” under section 133 seeking the Court’s approval (blessing) of a proposed decision.
What the Judge will consider is not whether the Judge would reach the same decision as the trustees, but was the decision reasonably open to the trustees in all the circumstances?
The key considerations are:
- Have the trustees acted within the terms of the Trust?
- Have the trustees taken into account irrelevant considerations or failed to consider relevant considerations?
- Have the trustees acted in bad faith or for an improper purpose?
- Is the trustees’ decision perverse or irrational?
Unequal distributions are often challenged by beneficiaries. While trustees have a duty of impartiality and even-handedness towards beneficiaries, this does not require equal treatment (unless the Trust Deed specifies this). The case of Paton v Acropolis Holdings Limited [2024] NZHC 43 highlights this.
The trustees of various trusts set up by the now deceased Bob Paton proposed to distribute approximately $4.6 million of trust assets between his three surviving grandchildren. His granddaughter Raven, the only child born before Bob’s death, was to receive $4.2 million, while each of Bob’s two grandsons born after he died were to receive only $200,000. Despite the grandsons only receiving one 20th of the sum received by Raven, the Court held that the disparity did not make the trustees’ decisions unreasonable or perverse.
The grandchildren were all discretionary beneficiaries of the various trusts. Although Bob’s most recent memorandum of wishes expressed that the grandchildren should be treated equally, the Trust Deed did not require equal treatment and the Court confirmed that memoranda of wishes are “relevant and important considerations” but nevertheless only “an expression of desire rather than obligation“.
The trustees had considered the memorandum of wishes and the needs of all beneficiaries and the amount of $200,000 was still said to be a “not insignificant” sum.
Paton is a useful case for supporting robust decisions by trustees, but it is hardly surprising that such a decision ended up before the courts. The trustees’ application for directions blessing the distributions was heard together with the application on behalf of the grandsons for a review of the proposed decision. Seeking the Court’s approval before making the distributions in this case was wise.
Requests by beneficiaries for trust information
When disputes are brewing, beneficiaries will often request trust information from trustees.
There is a presumption that trustees will provide “trust information” to beneficiaries upon request.
“Trust information” is any information (other than the reasons for trustees’ decisions) regarding the terms of the trust, the administration of the trust or the trust property which is reasonably necessary for the beneficiary to have to enable the trust to be enforced.
At a minimum, this usually means beneficiaries should have the Trust Deed and recent accounts.
However, the Act sets out reasons which might displace the presumption that a beneficiary is entitled to trust information.
Refusing disclosure can further sow suspicion and if proceedings are commenced, the trustees will likely be required to disclose the information sought in the process of discovery (now called disclosure). This can be why trustees might also decide to disclose the reasons for their decision-making, even though that is expressly carved out of the definition of “trust information” to which beneficiaries are presumed to be entitled.
More often than not, it is pragmatic to be transparent. However, as these decisions can be strategic (particular care needs to be taken if beneficiaries are requesting legal advice given to trustees), we recommend seeking advice if you are faced with a request for trust information.
Conflicts of interest
Allegations that trustees are acting in their own self-interest are common. Unless the trust deed says otherwise, trustees have default duties not to exercise power for their own benefit and to avoid conflicts of interest.
It is common, however, for trustees to be beneficiaries. It is critical that trustees understand the terms of the trust and, in particular, follow any specific terms addressing distributions to themselves.
Independent trustees must make sure that they are not passive and are fully informed of and partake in all decisions. Things often come unstuck where any distribution benefiting a trustee beneficiary is required to be made by the independent trustee and any other remaining trustee but the independent trustee is not involved in the decision-making. The independent trustee cannot sit back and later ratify decisions made by the other trustees to distribute to trustees – they must have been part of the decision-making at the outset.
The exercise of the power of appointment and removal of trustees is also where advice should be sought.
Dysfunction and removal of trustees
It is common for aggrieved beneficiaries alleging conflicts of interest to seek the removal of trustees. This is not always necessary but trustees should seek advice if the conflict has escalated to this point.
Removal does not require any wrongdoing or breach of trust. The Court only has to be satisfied that removal of one or all trustees is expedient.
This can arise where there is breakdown in the relationship between trustees and decisions are deadlocked, and the trust assets are at risk because of the level of dysfunction.
Independent trustees might find themselves required to remove their co-trustees who are couple in the process of separation.
Sadly, once the parent generation has passed, there can be an impasse between the siblings of the next generation when they replace their parents as trustees. Trustees may be unable to agree on whether the trust asset should be sold or retained. If the trust assets are at risk from the inertia, the court will intervene.
Resolving disputes out of court
It is never in anyone’s best interests for a dispute to end up in court. This is particularly so for trusts, where the disputes often involve personal affairs and are between family members. Litigation is also costly and prolonged, and there are many examples of the legal costs of trust disputes gutting the trust of its assets.
The Trusts Act recognises this and gives the courts the power to compel parties to engage in alternative dispute resolution (ADR), which includes mediation and arbitration.
Mediation involves an experienced mediator being appointed to facilitate the parties meeting to try to resolve their dispute. The role of the mediator is not to determine the dispute, but to assist the parties to communicate with each other to negotiate a resolution. It is often successful and it usually allows the parties an opportunity to lay the foundation for repairing relationships.
Arbitration is best described as a private court process. The parties (or Court) appoint an arbitrator (usually a lawyer or retired judge) to determine their dispute, instead of having their case go through the court system. The procedure can be more flexible and, most importantly, it is a private forum so the dispute does not play out in the public eye. There is also usually only a limited right of appeal, so the process is not prolonged by appeals.
The ability to apply to the court to compel other parties to engage in ADR is a powerful strategic tool to get reluctant parties to work towards a resolution rather than embarking on litigation.
Takeaways
Trustees can minimise the risk of challenges to their decisions if they ensure they know the terms of the trust and act within them, particularly where they might have a conflict of interest.
However, when tensions are rising, or when making a momentous decision, we recommend seeking advice early so we can navigate you towards a resolution before your dispute becomes the next published court case.
If litigation is unavoidable, our Dispute Resolution team are experienced advocates with expertise in this space.
Want to know more?
If you have any questions about Trust Disputes, please contact our specialist Dispute Resolution Team.
View the PDF here.