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A warning for beneficiaries in two key decisions on trustee decision-making

14 Jun 2024

| Author: Priscilla Brown

Three years after the Trusts Act 2019 came into force, the first two judgments reviewing trustee decisions under ss 126 and 127 of the Act have been released.

Section 126 allows a beneficiary to apply to the High Court to review a trustee’s “act, omission or decision” on the grounds that it was not reasonable in the circumstances. The review procedure is set out in s 127.

If the beneficiary can establish a reasonable dispute about the decision, the onus shifts to the trustee to establish that the decision was “reasonably open to the trustee in the circumstances”.

This is a potentially powerful mechanism for beneficiaries to hold trustees to account via a relatively streamlined process to review their decisions or proposed decisions.

If the court finds against the trustee, it can set aside the decision, direct or restrain a specific action by the trustee or make any other order the court considers necessary, provided the order does not affect a valid distribution made before notice of the application or the right of title acquired by a third party in good faith and for value.

The two judgments referred to in this update provide a salutary warning to beneficiaries and offer some comfort to trustees.

It appears that the High Court is not willing to interfere with the exercise of trustee discretion if the decision was reasonably open to the trustee after taking into account the relevant considerations.

The decision under review may impact harshly on a beneficiary, but judges seem to appreciate that there is a range of reasonable decisions that could be made by different trustees without requiring judicial intervention.

Section 126 is no quick fix for disgruntled beneficiaries. Trustees should feel confident that their actions will not be unwound or restrained, provided they can show the court they took the relevant matters into account at the time the “reasonable” decision was made. There has been no appellate consideration of s 126, so the boundaries of this review mechanism are not yet certain.

 

Paton v Acropolis Holdings Limited [2024] NZHC 43, decision of Churchman J on 31 January 2024

For present purposes, the decision is summarised only as to the application under ss 126 and 127 concerning distributions to the grandchildren.

Paton died in 2017 leaving three children and one grandchild, Raven. He had established trusts to benefit his family. A memorandum of guidance was signed six months before his death which set out his following wishes for the trusts:

  • Trust income should be divided into seven equal shares:
  1. two shares distributed to each of his three children; and
  2. one share “to my granddaughter Raven”.
  • On winding up of the trusts, the trust fund should be divided into seven equal shares:
  1. two shares for each of his children; and
  2. one share for “such of my granddaughter Raven and any other grandchildren of mine who shall be living on the distribution date and reach the age of 20 years as tenants in common in equal shares”.

In 2018 the trustees decided to allocate a one-seventh share of the capital of the trust fund amounting to $4 million to Raven. Following this decision, Paton’s son had two children, Louis in 2022 and Thomas in 2023.

The trustees reviewed the 2018 decision in December 2022 and again in 2023. They continued to hold the $4m for Raven but any additional capital was to be divided equally between the three grandchildren. At the date of the hearing, Raven was to receive $4,241,286 and Louis and Thomas were each to receive $241,286.

Louis’ and Thomas’ father brought an application challenging the decision on the basis that the trustees failed to consider relevant considerations and the decision was unreasonable and perverse.

Justice Peter Churchman was satisfied that the trustees took into account the terms of the trust and memorandum of guidance in reaching their decision. This was evidenced by the relatively minor change in position in 2022 and 2023.

Justice Churchman did not agree that the trustees failed to consider the needs of Louis and Thomas. There was no requirement to treat the grandchildren equally and there was no evidence that Louis or Thomas would suffer any material detriment from the decision.

The duty of impartiality does not require equal treatment or equality in distributions. The judge did not agree that the trustees had fettered their discretion when they allocated $4m of capital to Raven in 2018. He held that the trustees were free to, and did, modify their decision following the births of Louis and Thomas.

Justice Churchman held that the trusts were discretionary trusts and the trustees had powers of absolute discretion over the distribution of the trust funds to beneficiaries under the deeds.

The trustees’ decision was “not unreasonable or perverse so that no reasonable trustee in the trustees’ position could have reached such a proposed outcome”.

 

Sherwin v JKA Holdings Limited [2024] NZHC 920, decision of Becroft J on 24 April 2024

Dr Martin Brian Sherwin died, leaving five children. His son, Wayne, was a sickness beneficiary with no significant assets.

As a result, Sherwin left Wayne half his estate. However, because of protracted estate litigation, the estate was depleted from $800,000 to around $300,000.

The five children were the only beneficiaries of a trust. All the children wanted the trust fund to be fully distributed. Wayne and his sister Zoe sought a greater share of the trust fund because of their financial position.

However, the trustees’ decision was to divide the trust fund into five equal shares of $366,014. Each child’s share was to be equalised to take into account prior distributions. Accordingly, Wayne was to receive $220,100 from the trust.

Wayne’s lawyer was permitted at the hearing to bring a late application under s 126 to review the trustees’ decision. The issue was whether the proposed distribution of the trust fund was reasonably open to the trustees in the circumstances.

The trustees did not take into account the reduced value of the estate when they made their decision. Justice Andrew Becroft, however, held that it was reasonable for the trustees to administer the trust separately from the will/estate.

Sherwin did not leave a memorandum with parallel instructions regarding the distribution of the trust to benefit Wayne more than his siblings.

Justice Beecroft noted that the trustees could have decided to do more to assist Wayne. However, their decision not to do so was well reasoned, considered and well within the terms of the trust deed and their own discretion, in light of their knowledge of the family.

The proposed distribution was held to be reasonably open to the trustees in the circumstances.

 

Conclusion

Both decisions illustrate that applications under ss 126 and 127 are being determined on the facts of the cases rather than any exposition of the case law decided under the previous s 68 of the Trustee Act 1956 (such as Clement v Lucas [2017] NZHC 3278) or offshore.

Based on these decisions, it appears that the High Court is unlikely to override a trustee decision if it falls somewhere on the (quite broad) reasonable spectrum and was the result of careful consideration.

As noted, there has been no appellate consideration of these sections and we can certainly see scope for broader intervention by the courts in appropriate cases. ■

 

Priscilla Brown is a special counsel at Russell McVeagh and a member of The Law Association’s Trust Law committee

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