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More clarification around trustee decision-making

11 Feb 2022

| Author: Andrew Steele

The Court of Appeal in Kain v Public Trust & Ors [2021] NZCA 685 recently settled the lingering question as to whether settlor’s wishes expressed after the creation of a trust have the same legal effect as those given at the time the trust is created.

The judgment is significant in two other ways:

  • it reaffirmed the status and importance of settlor’s wishes more generally in trustee decision-making; and
  • it clarified whether trustees are bound to take into account the benefits received (or which might be received) by beneficiaries under different family trusts settled by the same settlor.

The judgment involved an application by the Public Trust, qua trustee, for directions under s 66 of the Trustee Act 1956. Such an application would now be made under s 133 of the Trusts Act 2019.

Settlor’s wishes

It is well understood by lawyers that trustees are entitled to take into account the settlor’s wishes when exercising their powers and discretions but that they are not required to do so.

In New Zealand, the principle was settled in Chambers v S R Hamilton Corporate Trustee Ltd [2017] NZCA 131. The judgment in Chambers left open whether statements of wishes expressed subsequent to the establishment of the trust have equal standing.

The appellants contended that any statement of wishes given after the settlement of a trust should be treated as irrelevant because they violate the principle that settlors dispose of their property to a trust and in doing so give up control.

The Court of Appeal noted that although there were no New Zealand cases that directly considered the status of subsequent wishes, there were several New Zealand and overseas cases which impliedly supported the proposition that they could be taken into account.

The court referred with approval to In Hartigan (1992) 29 NSWLR 405, where Mahoney JA for the New South Wales Court of Appeal stated at 431:

  • There is, in my opinion, no distinction to be drawn between the views of a settlor expressed during the administration of the trust and those expressed before the constitution of it. Provided that the trustee is satisfied that views expressed before the constitution of the trust remain those of the settlor or would have been such, he may act upon or in accordance with those wishes.

The Court of Appeal concluded that the High Court was correct to accept the status of subsequent wishes, so the High Court’s following direction accurately reflected the law:

  • Where subsequent wishes are inconsistent, [the trustee] is in principle entitled to consider the most recent wishes as overriding earlier wishes. However, it remains a matter for Public Trust’s assessment, in the exercise of its discretion to vest or make distributions, whether in the circumstances the subsequent wishes of the settlor, …, should have that effect.

The other significant issue resolved on appeal was the extent to which the trustees of interrelated family trusts were obliged to consider the benefits received (or which might be received) by beneficiaries under different family trusts settled by the same settlor (my emphasis).

Interrelated trusts

The appellants argued that the trusts were interrelated family trusts where, among other things, the assets of one trust were used to acquire assets settled on other trusts. They contended that the trustee must therefore take into account benefits, given and potentially to be given, to the beneficiaries of both trusts when making a distribution decision from either trust (my emphasis).

In support of this argument, reference was made to s 21 of the Trusts Act 2019 which states that in performing their mandatory duties and default duties “… a trustee must have regard to the context and objectives of the trust” and Lewin on Trusts which states (20th ed, Sweet & Maxwell, London, 2020 at [29-057]):

  • It often happens that members of a single family are beneficiaries of several settlements, perhaps many. The settlements may have the same or much the same trustees. Where the classes of beneficiaries overlap but are not identical it is a frequent error to treat the assets of all the settlements as a common pool for the family as a whole. When considering whether or how to benefit a given beneficiary out of one settlement, it is, of course, proper to take into account his entitlement or expectation under another. But it is not proper to exercise the powers conferred by one settlement so as to benefit someone who is not a beneficiary of that settlement.

But the respondents contended that:

  • “[The High Court] … was correct to note that the trustee of one trust may take account of distributions from related trusts, to the extent they may be relevant to assessing the financial circumstances of a particular beneficiary. However, the fact that trusts in the [group of trusts] were largely settled by the same person or fell within the same family group or were intermingled did not mean that their assets should be treated as part of one collective pool”.

The Court of Appeal affirmed the principles of law promoted by the appellants but accepted the respondents’ submission that it is proper for the trustees to take into account what a beneficiary has received or may be entitled to under another trust but they were not required to do so (my emphasis).

In short, the requirement to take into account entitlements or expectations under other trusts, was permissive not obligatory.

Andrew Steele is an Auckland barrister

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