14.03.2023

Removing a child as a beneficiary of a trust: a breach of fiduciary duty?

In Pollock v Pollock [2022] NZCA 331, the Court of Appeal had to consider whether trustees owed fiduciary duties to a beneficiary when exercising the power to remove him as a beneficiary. 

Background 

Rex Pollock was a successful businessman whose career included property development, road haulage and sizeable crane businesses.

Rex had three children from his first marriage: Steven, Nathan and Letitia Pollock.  In 1995, Rex married Cheryl who had three children from a prior marriage: Wayne, Thomas and Casandra Slater.

In 2007, Rex settled the Judea Valley Trust (the Trust) with himself, Cheryl and a corporate trustee as trustees.  The final beneficiaries were Steven, Nathan and Letitia Pollock, and Wayne, Thomas and Casandra Slater.  Discretionary beneficiaries included the final beneficiaries, any child or remoter issue of the final beneficiaries, Rex and Cheryl. 

Rex and his son, Steven, had a turbulent relationship.  Steven worked for his father on and off from the age of 15 and left the family business for a third and final time in 2013 after his stepbrother Wayne was made a director ahead of Steven.  Following Steven’s departure from Pollock & Sons in 2013:

  • Steven was removed as a final and discretionary beneficiary.
  • Rex signed a memorandum of wishes stating that he had not made any provision in his will or his trusts because Steven no longer wished to work in the Pollock & Sons business.
  • Rex signed a memorandum of wishes for the Trust directing the trustees to exercise caution in distributing funds to his children and to consider the needs of his grandchildren.
  • Rex’s solicitors registered a number of companies to prevent the use of the Pollock name in any new crane operations Steven might establish.

In January 2014, Rex was diagnosed with cancer.  Shortly after Rex’s diagnosis, Steven wrote to Rex indicating that he would like to hear from him and expressing regret for past events.  Rex did not reply.

In April 2014, Rex signed a document titled ‘Record of Events I have endured with my son Steven Rex Pollock’ which outlined how Steven’s journeys in life had cost a lot to Rex.  The document stated that due to the heartache, stress and Steven’s selfish ways, it was Rex’s wish that Steven received nothing from Rex’s estate or trusts.

Later that year Rex divested himself of assets to frustrate any claims made against his estate.  In November 2014, he made his final will leaving his chattels and bank accounts to Cheryl and his residuary estate to the trustees of the Trust.  The final memorandum of wishes concerning the Trust directed the trustees to consider paying income from the Trust to Cheryl and other named beneficiaries as the trustees saw fit.

Rex died on 8 February 2015. 

In May 2017, Steven commenced proceedings pleading five causes of actions.  This article focuses only on the claim that the trustees of the Trust owed fiduciary duties to Steven as a final and discretionary beneficiary of the Trust. 

Court of Appeal’s decision

Did the trustees owe a fiduciary duty to Steven in exercising the power of removal? 

The Court concluded that the power of removal, although unfettered, did impose “some obligations on the trustees of a fiduciary nature”, disagreeing with the High Court’s conclusion that the trustees did not owe Steven a duty of any kind. 

Steven contended that at a minimum the trustees needed to “act responsibly with an appropriate level of diligence and prudence, and to avoid taking into account irrelevant, improper or irrational factors… [and] not to act in bad faith or for an improper motive” (as quoted in McLaren v McLaren).  However, the Court noted that there was nothing in the Trust deed that suggested that the scope of the power of removal was intended to be limited and that the trustees did not breach their duty when they removed him as a final and discretionary beneficiary.  

Was Steven’s removal as a beneficiary wrongful? 

The Court found that Steven’s removal was not irrational or disproportionate and referred to the reasons identified by the High Court namely, that:

  • Steven had let Rex down for a third time;
  • He turned away from Rex’s business for a third time; and
  • He threatened to use the Pollock name in competition with Pollock and Sons.

The Court agreed with the High Court’s approach not to evaluate the merits of the trustees’ reasons but instead consider whether the trustees’ obligations had been discharged. 

Steven’s counsel argued that the real reason Steven was removed as a beneficiary was that he suffered a mental breakdown and the trustees’ apprehension about his intention to compete with the family business was just a smokescreen.  The Court was not persuaded by this argument and held that the trustees were justified in believing that Steven was threatening to set up in competition with the family business, as he had done so.

The appeal was dismissed.

Takeaways 

There are fiduciary constraints on trustees removing a child as a beneficiary of a trust.  It is important that when exercising the power to remove beneficiaries, it is done honestly and in good faith.  

The Court will look to see how the trustees’ decision was reached so record keeping is important.  Here, the history of Rex and Steven’s working and personal relationship and the trust and estate documentation that mirrored that relationship was critical.

As with anything trust related, the first port of call is always the trust deed.  The power of removal and the breath of that power must be carefully considered before the trustees take any action.  In this case, the power of removal was very wide which worked in the favour of the trustees. 

Removing a beneficiary of a trust, particularly where they are a child or close relation to the settlor, is an important decision that requires careful consideration and legal advice.

If you have any questions, 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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