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Beneficiary classes in trust deeds should be clearly defined to ensure the assets of the trust benefit the people who the settlor(s) of the trust originally intended.
If they are not, then disputes can arise, and the Court may be required to step in to decide who is a beneficiary and who is not. An example of where this was necessary is case of Re: Merona Trustees Ltd [2022] NZHC 1971.
Background
Mr and Mrs Cooper had two children together, Lily and Amanda. Mrs Cooper also had two children from a previous relationship, Robert and Ray. Robert grew up with Mr and Mrs Cooper as his parents, and Lily and Amanda were not told that Robert had a different father to them.
Ray grew up under the care of Mrs Cooper’s aunt Mrs Moody and her husband Mr Moody. At no point during Ray’s childhood did Ray know that Mr and Mrs Moody were not his biological parents. It was not until Ray was in his thirties that he learned Mrs Cooper was in fact his biological mother, and that Robert was his brother.
During the lifetimes of Mr and Mrs Cooper, they established the M & R Cooper No 2 Trust (Trust). The trust deed for the Trust stated that a class of discretionary beneficiary of the Trust would be: “Any of the children of the Settlors”.
Mr and Mrs Cooper also signed a memorandum of wishes to the Trustees of the Trust setting out their wishes for the administration and management of the Trust. Those wishes included a direction for the Trustees to make equal distributions of income to Robert, Lily and Amanda. Ray was not referenced in the memorandum of wishes.
Several years after the death of Mrs Cooper, the Trustees engaged a law firm to review the Trust. The Trustees were advised that the meaning of this discretionary beneficiary class was ambiguous and raised doubt as to whether Robert (who the Coopers raised) fell within the definition of “Any of the children of the Settlors”.
Various legal opinions were then obtained by the Trustees of the Trust on the meaning of this discretionary beneficiary class, which each reached differing views. Following the death of Mr Cooper and faced with uncertainty, the Trustees ultimately decided to seek the Court’s assistance as to the meaning of “Any of the children of the Settlors”.
Court’s Decision
The legal arguments put forward to the Court boiled down to three interpretations. Did the words of this discretionary beneficiary class mean:
- Option One – The two natural children of the settlors together (i.e. Lily and Amanda);
- Option Two – The settlors’ two natural children as well as the son they raised together, who was the natural child of one of the settlors (i.e. Lily, Amanda and Robert); or
- Option Three – The settlors’ two natural children and the two natural children of one of the settlors (i.e. Lily, Amanda, Robert and Ray).
The Court preferred Option Two, and stated that notwithstanding the plain meaning of this discretionary beneficiary class, which the Court agreed would ordinarily mean Option One, the trust deed provisions had to be expanded to include children who were considered part of the Coopers’ family unit at the time – or in other words, include not just the natural children of the marriage but also Robert as the child the Coopers brought up as their own. The Court stated that this was necessary because a reasonable person would distinguish between Ray and the children who the Coopers raised, Lily, Amanda and Robert.
Therefore, the outcome was that Ray was held not to be a discretionary beneficiary of the Trust, and that the original wishes of the Coopers were preserved.
Key Takeaways
- Interpretation of Trust Deeds – This case highlights the importance of carefully interpreting the language used in trust deeds. Courts will often seek to uphold the intention of the trust as reflected in the deed, even if the terms are broad or ambiguous.
- Scope of Discretionary Powers – Trustees have significant discretion in managing and distributing trust assets, but this discretion must be exercised within the bounds set by the trust deed.
- Clarity – The decision serves as a reminder of the need for clear and precise drafting of trust documents to avoid disputes and ensure that the intended beneficiaries are clearly identified, particularly in an age where blended families are more common. Ambiguity in the trust deed can lead to legal challenges and require judicial clarification, which can be costly and may cause family disharmony.
If you have any questions about Trusts, please get in touch with our Private Wealth Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
