December 08 2014
What are the rules?
Over the years, the trust has been one of the favourite entities for farm ownership. Historically this has been for estate duty and tax reasons. However, in more recent times, a trust has been used for its more general ability to keep the farming assets ‘in the family’ and free from claims from third parties.
Keeping the farm (or farms) in the family can call for unequal or delayed distribution of trust assets. What are the rules around treating beneficiaries differently? One of the features of the modern ‘discretionary trust’ is its flexibility. The settlors, appointors or trustees are usually given wide powers to:
- Vary the terms of the trust deed
- Appoint and remove trustees
- Add and exclude beneficiaries
- Allocate income or capital between beneficiaries each year, or on a permanent basis
- Resettle the trust on other trusts for some beneficiaries to the exclusion of others
- Bring the date of distribution of the trust forward, and
- Distribute the trust on the date of distribution between beneficiaries, in equal or unequal shares.
On the face of most trusts, these discretions or powers are given in very broad terms, often with little or no limit on the exercise of those powers by the settlor, appointor or trustees. Are those discretions or powers as wide as they seem, or are there limits or rules that must be followed in exercising them? There are rules which are very technical in nature and have been built up by case law over hundreds of years.
One of the powers mentioned above is the ability to add or exclude beneficiaries. In a recent case¹, the trustees had the power to declare in writing that any person or persons could be excluded as beneficiaries of the trust, for such period as the trustees determined.
In this case, the trustees (who were the settlor and a law firm’s trustee company) excluded one of the settlor’s children (and her deceased brother) as beneficiaries of the trust, leaving her other three children as sole beneficiaries of the trust. When the trust was to be wound up, the excluded daughter didn’t even have a right to be considered as a beneficiary and had no prospect of receiving any of the trust property. Also, on the same day as the Deed of Variation excluding the daughter was signed, her mother made a Will transferring her entire estate to the trust, which effectively meant the excluded daughter would receive no inheritance at all.
The daughter challenged the trustees’ decision on the basis that excluding her as a beneficiary was in breach of the trustee’s duty to act in good faith, not act capriciously, not act irrationally and to act even-handedly between beneficiaries. The reason she was excluded was her mother’s personal dislike of her – for no apparent reason. The court held that the trustees were able to make the decision that they did.
The very traditional view around a trust still stands – that a settlor creates a trust, puts their assets in the hands of a set of trustees, gives them a set of rules (a trust deed), and then it is up to the trustees to carry out those rules as they see fit as long as they act honestly, not in bad faith and not for their own personal benefit.
This decision, and cases like it, will give comfort to those farming families often in difficult situations wanting to apportion assets in sometimes unequal ways between siblings, for a variety of reasons. In this case, the trustees’ decision was one of excluding a beneficiary, but the same rules would apply if the trustees exercised their discretions on the trust distributions and, for example, they were following a settlor’s Memorandum of Wishes which might call for an unequal distribution.
As always in dealing with trust matters, caution in decision-making is important as is getting proper professional advice as to what limits a court might impose on decision-making powers.
¹ Penson v Forbes  NZHC 2160