Our German Desk
In Legler v Formannoij the surviving widow Marina Formannoij, was forced to navigate the complexities of two trusts that were part of her late husband Ricco Legler’s estate plan: the Kaahu Trust (which the litigation concerned) and the Horowai Trust.
The Kaahu Trust was set up to benefit Ricco and Marina, and Ricco’s children were also beneficiaries. The Kaahu Trust held the property where Ricco and Marina lived and managed funds which provided income to support Ricco and Marina.
The Horowai Trust held a significant forestry block, farmland and funds of approximately $3million. Its focus was on Ricco’s children.
Before his death, Ricco removed himself (and by association, Marina) as a beneficiary of the Horowai Trust. The evidence at trial was that Horowai was intended primarily to benefit Ricco’s children and the Kaahu Trust was intended to provide for Ricco and Marina. However, Ricco’s children remained beneficiaries of the Kaahu Trust, which became a source of contention when the Kaahu Trust was restructured.
While the primary focus of the Supreme Court decision was Marina’s appointment of Kaahu Trustee Limited (KTL) (of which she was the sole director and one of the shareholders) as sole trustee of the Kaahu Trust, the decision also provided an interesting insight into the subsequent decision of KTL to divide up the Kaahu Trust.
Marina gave evidence that, after carefully considering legal advice, she, as the sole director of KTL, decided to:
- Distribute $1 million to herself as a beneficiary of the Kaahu Trust.
- Release the debt of $3.7 million owed by the Horowai Trust to the Kaahu Trust (Horowai Debt).
- Remove Ricco’s children and the Horowai Trust as beneficiaries of the Kaahu Trust.
- Distribute all other assets of the Kaahu Trust to herself as beneficiary.
- Appoint herself as the beneficiary entitled to receive the trust fund on the vesting day of the Kaahu Trust.
(referred to as the 2020 Deeds).
The Horowai Debt had arisen when funds were moved, during Ricco’s lifetime, from investment with the Kaahu Trust to the Horowai Trust to support the investment of the forestry block. Evidence from Marina and the financial advisor indicated that these funds were intended as a ‘gift’ to Ricco’s children and were earmarked for their benefit. The decision to release the Horowai Debt put the funds clearly in the dominion of the Horowai Trust for the benefit of Ricco’s children and importantly, carried out the settlor’s intention.
Marina explained this part of the restructure in the following way:
My intention in forgiving the debt owed by the Horowai Family Trust to the Kaahu Trust and removing Ricco’s children and the Horowai Family Trust as beneficiaries of the Kaahu Trust was to sever the link between the Kaahu Trust and the children, based on my understanding that Ricco’s children were already very well provided for and that the purpose of the Kaahu Trust was to provide for me and Ricco, or the survivor of us, for our retirement.[1]
The fact that Ricco’s children had been sufficiently provided by other means was also considered relevant by the Court:
Fifth, Li, Ken and Laila do not directly challenge the March 2020 deeds. In the Judge’s opinion, such challenge would have been “forlorn” as they had been provided for and were well off, both through Horowai and because each of the children had received CHF 750,000 (around $1.4 million) from their grandfather’s estate. The Judge also considered that the evidence made it plain that Horowai was primarily for the children and Kaahu primarily for Ricco and Marina, referring to the unchallenged evidence of Mr Tyler and Mr Clarke to that effect. The Judge said that this cast a “different light” on the March 2020 deeds, which the children had advanced as evidence of Marina’s purpose to benefit herself in November 2019.[2]
Therefore, it is essential that trustees ‘zoom out’ and consider how a trust restructure aligns with a settlor’s intentions and where relevant, their wider estate plan.
Releasing the Horowai Debt was a crucial step. It helped align the funds with the Horowai Trust, ensuring that they were applied for the benefit of Ricco’s children and applied in accordance with Ricco’s intention as settlor. These considerations were important ones that were viewed positively by the Court:
We also accept Marina’s submission that the whole case must be seen against the background that Kaahu was set up in order to provide for the needs of Ricco and Marina while they were alive, while Horowai was to provide for the interests of the children. It must also be seen in the context of the fact that Marina had foregone her rights under the 2003 relationship property agreement with regard to the farm109 and the forest now held by Horowai. It is also significant that Ricco left the residue of his estate to Kaahu, the trust set up primarily to provide for them as a couple.[3]
Takeaways
Restructuring a trust can be a challenging task. This case highlights the complexities trustees can face in balancing legal and familial issues while managing trust assets. It also emphasises the Court’s focus on considering and following settlor wishes.
If you have any questions about this article 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.
[1] Legler v Formannoij [2024] NZSC 173 at [81].
[2] At [88].
[3] At [112].
