Trusts have proliferated in New Zealand. Some are well managed and some are not. Trustees do not always understand their obligations and beneficiaries are sometimes wrongly locked out of trust property or disadvantaged by trustee decisions. The Courts can intervene to stop trust excesses or to assist trustees with directions. Moreover, the law now permits trust related disputes (apart from issues of validity) to be dealt with under alternative dispute resolution procedures such as mediation and arbitration.
There are hundreds of thousands of ordinary family trusts up and down New Zealand. Trusts are used in commercial transactions. Major utilities are owned by shareholder trusts. Superannuation funds are run by trusts. And very many charitable institutions are run in the form of trusts. This means that many legal issues affecting all these entities have to be resolved taking account of trust principles.
Family trusts often create problems. Sometimes those who establish them do not realize that the property they transfer to trust is no longer theirs, even if they are trustees. The property becomes subject to fiduciary obligations and the trustees have duties that must be carried out. In short the trust has to be run in a way that shows it is genuine and separate from the settlor. If it is not, then the existence of the trust can be challenged and trust property may fall back into the hands of a person who thought they had placed it in trust and out of the way of creditors or a claimant in a failed relationship. It is quite common for the substance of trusts to be challenged in this way in the context of relationship property claims.
There is a debate in this country about the extent to which our courts will strike down trusts on the basis that they are shams. Our senior courts have so far chosen not to follow the more interventionist approach of the Australian High Court and so a sham requires that there be no genuine intention to establish the trust in question and pretense as to its existence.
Potential or discretionary beneficiaries of a family trust often feel frustrated and isolated from trust decisions, even though the assets of the trust are supposedly held for their benefit. Until recently, there were no hard and fast rules that allowed trustees to refuse to supply information about a trust to a potential beneficiary, just as there were no hard and fast rules that information had to be supplied. A judgement was required to ensure that a potential beneficiary was informed sufficiently to be able to know whether the trustees were properly administering the trust. The Trust Act 2019 has enacted a regime under which beneficiaries can expect to be informed at least of the basic information about a trust in which they have an interest. There is still a process under which the trustees may decide to withhold information, but the law has moved to recognise that information is vital to a beneficiary being able to hold trustees to account.
Trusts sometimes outlive their usefulness and need to change. This can be done in several ways. A distribution or resettlement may occur. Alternatively the Court may be approached in some cases to amend the Trust. This latter course is useful if the alternatives would trigger a disadvantageous tax result.
Trust investment is an often contentious issue, particularly when times are difficult. Trustees have certain duties relating to investment. Those are affected by the terms of the trust deed but there are basic obligations of prudence that a trustee ought to fulfill even if their trust deed seems to absolve them of investment responsibility. Extreme cases of investments wasting in value or of one class of beneficiaries being preferred over another have led to trustees being liable for investment loss. Investment performance comparisons are vital in this sort of case.
Geoff Clews has acted in a number of cases between trustees and beneficiaries and has expert contacts to analyse trustee investment performance where that is thought to be lacking. He is able to represent parties in mediation and arbitration and is available to act as mediator or arbitrator in trust disputes.
For frequently asked questions about trust issues and disputes, click here.
To contact us about a trust issue or dispute, click here.