22.02.2022

Putting all your assets in trust? What can your children do about it?

The High Court holds that a fiduciary duty can be owed to adult children.

The High Court’s (Court) recent decision in A v D [2021] NZHC 2997 is an important decision, demonstrating the evolving law around fiduciary relationships between parents and adult children.  A fiduciary is someone who another person has placed their trust in to act in their best interests.  A fiduciary relationship attracts fiduciary duties and obligations with legal consequences if they are breached.

In this case the plaintiffs made a successful claim against their father’s trust.  The Court held that there was a fiduciary relationship between the father and his adult children, and the father had breached his fiduciary obligations by placing all his assets in trust to purposefully disinherit them.  Part of the Court’s reasoning for this decision was the abusive nature of the relationship between the father and his children.

This decision raises the question as to whether claims can be made by children against trusts settled by their parents and the extent to which trusts will remain an effective tool to reduce or prevent claims against estates.

Background

 In New Zealand, generally there is a moral duty to make adequate provision for the proper maintenance and support of your children under your will.  If you are ‘disinherited’ as a child (whether as a minor or an adult), you can make a claim against your parent’s estate under the Family Protection Act 1955 (FPA). 

There is an ongoing dialogue in New Zealand as to whether this is the correct approach given changes in New Zealand society since the introduction of the FPA in 1955.  The Law Commission is currently reviewing the law of succession. Until the law changes however, the FPA remains as part of New Zealand’s legal framework.

One consequence of the use of trusts has been as protection against FPA claims as, while the Court cannot rewrite your trust for FPA purposes, the Court can effectively rewrite your will.  In this case the father of the three plaintiffs, Mr Z, settled a trust before his death in which he transferred all his assets to the Trust specifically to defeat any FPA claim that his children may have had.

High Court Decision

In this case, the plaintiff’s adult vulnerabilities were held to be a direct consequence of Mr Z’s egregious abuse inflicted on them as children.  Therefore, the Court found that there was a fiduciary relationship between Mr Z and the plaintiffs at the time Mr Z gifted the property to the Trust.  Consequently, Mr Z was held to have a fiduciary duty to act in the best interests of his children.  Mr Z was held to have breached this duty by transferring his property to the Trust as it was deliberately done to prevent his children receiving his assets and to ensure his estate would not meet the plaintiff’s needs.

The Trust was imputed with Mr Z’s knowledge of the fact that the trust was knowingly receiving the property in breach of Mr Z’s fiduciary duties and with the intention of knowingly putting the property beyond the reach of the plaintiffs.  The trustees were therefore found to be holding the property on constructive trust for the plaintiffs.  As a result, Mr Z’s dispositions were set aside, and the assets fell back into Mr Z’s estate.  

Key Learning

Although this is a landmark case in terms of holding that a parent can owe fiduciary duties to their adult children, this is unlikely to ‘open the floodgates’ to allow claims by all children against their parent’s trusts.  This is because the Court suggested that not every vulnerability will create fiduciary obligations between a parent and child. In this case Justice Gwyn specified that the fiduciary duty Mr Z owed his children was to “refrain from sexually and physically assaulting them”.  The question remains whether cases not involving such abuse would have a similar outcome. 

The case is currently under appeal to the Court of Appeal and, given the consequences of the decision, may be well be appealed further to the Supreme Court.

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.

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Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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