MHK Chartered Accountants Query Ongoing Validity of Trusts

A couple of recent cases have caused angst for some lawyers, accountants, and trust specialist firms, and cast doubts in the minds of many Trustees throughout New Zealand. One of these is the Supreme Court decision in Clayton [2016] NZSC 30.  Simplistically, the Courts in Clayton concluded, contrary to other decisions such as Ward which the majority of judges stated was simply “wrong”, that the assets in this Trust should be shared with an ex-spouse, even though she was not a beneficiary of that Trust.

Does that mean Trusts are not valid, and that any non-beneficiary, who believes they should be a beneficiary, can make a claim?  In which case why state beneficiaries in the Deed of Trust? Ian Malcolm, Managing Director of MHK Chartered Accountants Ltd, and a Fellow of the New Zealand Trustees Association, elaborates on this.

“Simplistically, this was a case where the Family Proceedings Act and the Matromonial Property Act were relevant, and had an influence in the decision, as in this instance, the husband and wife were not equal beneficiaries.  On top of that, the wording used that granted powers in the Trust Deed was so wide, that Mr Clayton had all the power, so much that in this case, the ownership of the trust property itself was called into question, and effectively overturned.  Because of the high level of power Mr Clayton held, the Trust, including all the Trust assets, were “property” for the purpose of the Property Relationships Act.  This meant that those assets were available to be split 50/50.  This totally ignored the fact that the trust assets, which started out as Mr Clayton’s property pre marriage, had grown significantly during their 17 years of marriage to a very material amount.”

A more recent case has put the discretion of Trustees into question.  Just because a trust gives the trustees discretion, that does not mean that discretion can be exercised totally! Mr Malcolm explains, “In this decision, an 88 year old widow, who was not aware of the existence of the trust until after her husband’s demise, challenged the discretionary right of the trustees to give her income only and keep the capital of the trust for eventual distribution to the Freemasons.  Her ex-husband and the trustees were or had been Freemasons. The Trustees stated that was her deceased husband’s intent.  She sought access to the Capital as well as the income.”

She won. The judge said Beatrice White was entitled to receive all of the trust funds.  "The trustees have been shown to have acted inconsistently and they are unable to demonstrate by reference to either documentation or cogent and reliable evidence, what the objects of the trust that they are trustees of were or are ... I find that the [trust] has failed by reason of uncertainty," Justice Davison said.

Mr Malcolm states. “The lessons are simple.  Revisit your Trust Deed and check that one person does not effectively have all the power. Which generally means the trust should have an independent trustee.  And make sure that the trust maintains proper records, the independent trustee is involved in trust decisions, they understand the trust financial statements as well as the intent of the trust, and signs trust resolutions. Update the Memorandum of Wishes frequently.  Had the intent that the Capital of the Trust be for the benefit of the Freemasons been documented, the decision could well have gone the other way.”

“Trusts definitely do have their place when properly controlled and documented, we cannot see these decisions do any more than reinforce the need to have all the correct processes and proper paperwork in place, with these being regularly revisited.”

MHK Chartered Accountants specialise in business structuring and legally minimising all tyes of taxation obligations and offer a no-obligation discussion free of charge.  For more information on this, and MHK Chartered Accountants, see  http://aucklandaccountant.net.nz  .