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Evening out the playing field

4 March 2018

Most people aren’t all that interested in reading cases about trust law, but there are some valuable lessons to be learned from situations where things go wrong. Take for example the case of the Clement Family Trust. It clearly shows the difficulties that can arise when sibling beneficiaries cannot agree on how to give effect to the arrangements made by their parents for the protection of the wealth they strived to accumulate over their lifetimes.

The facts are relatively straight forward. The parents owned a very large farm in Hunua comprised of three titles. There were three children, one of whom worked on the farm without any payment from his parents but he did receive a parcel of land in recognition. Another son moved onto the farm and occupied a farmhouse, to which he made considerable improvements. In recognition of that and the fact that he also worked on the farm for no reward, land was given to that son as well. The daughter, who did not work on the farm, had a house given to her on a much smaller parcel of land.

The parents then decided to set up a trust for the balance of the land they held in their own names. The intention in setting up the trust was to ensure that the land stayed within the family and passed to the sons with the daughter to receive equal provision through other assets. Most importantly, the parents made it very clear when setting up the trust that because there had been previous unequal gifts of land to the three siblings, when it came time to distribute the trust assets, a re-balancing act would be undertaken. The parents signed a memorandum of wishes to the trustees to set out what they wished to happen with the assets. It changed over time as circumstances changed, mainly because as the investible assets decreased in value, further provisions had to be made for the daughter.

Relationships between the siblings deteriorated, which is not uncommon in situations such as this. After the death of both parents, lengthy legal proceedings began and new independent trustees were appointed. The siblings simply could not agree on a way forward, and despite being asked for submissions by the new trustees, a consensus as to what should happen could not be reached. The trustees came up with a decision to sell the property in the trust and divide the proceeds equally between the parties (each of them would have an option to buy). What the trustees didn’t do though, and what was the subject of the court proceedings, was to take into account the previous gifts of land made by the parents. The trustees’ argument was that they could only deal with the trust assets they had under their control and split those.

The Court found that the trustees could have taken into account those previous gifts made by the parents. In fact, the Court concluded that the trustees should have taken those previous gifts into account when making a decision; so, their original decision was therefore set aside. While not wanting to make a decision for the trustees, the Court effectively told the trustees to reconsider taking into account the intentions of the parents and gave some guidance as to how a distribution of the assets might be made.

Even though the Court sent the trustees back to reconsider their decision, this case clearly shows how effective a trust with independent trustees can be when there is conflict between family members. The trustees, in this instance, were looking to ensure that each of the three siblings were treated equally as was their parents wish. They used their independence to make a decision despite each beneficiary claiming they were entitled to more than the others. Assuming the trustees reconsidered their decision in line with the Court’s suggestion, this shows the flexibility that trusts can have in ensuring that they not only protect you from third party claims, but they can be structured so trustees are able to pick and choose which assets go to which beneficiary.

So what are the other practical lessons that can be taken from this? While setting up the structure in the most effective manner and using an independent trustee, in our view, is vital, so is communication with the various parties to the trust, to be clear as to what the intention is in setting it up. Clearly, creating expectations can go a long way to ensuring that individuals have an awareness of what their likely “share” is going to be, and so too can understanding the rationale behind decisions made by the trustees. The beneficiaries, in this case, have allowed the deep grievances between each other to tear apart their family relationship even further, which potentially could have been overcome by making sure from the outset it is very clear as to why the trust is being established and what the intentions are when it comes time to distribute its assets.

Source: InBrief Autumn 2018

InBrief Autumn 2018

Agent Brief March 2018

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