The Settlors’ Plan

Not only in the words that are written on the pages of the trust deed, but also in your plans as you express them in your memorandum of wishes and other communications with your lawyer and the trustees.

Investment of trust property will be subject to the context and objectives of the trust.  Below, I discuss the case of McLaughlin v McLaughlin[1] where the Court determined that the subdivision of trust land was part of the settlors’ plan and therefore the investment and management of the trust was undertaken prudently.

The McLaughlin case involved a trust settled by Jim and Edna McLaughlin for the benefit of themselves and their four sons.  The trust was settled in 2004 and Jim and Edna transferred to the trust a property near Nelson.  There were four sons: one (John) who was involved in the trust as trustee.  A significant family conflict developed between the brothers about the trust and its management.  Two of the sons (Mark and Andrew) were very unhappy with the way that the trust was managed and brought proceedings against their brother John and his co-trustee.

John was appointed as an initial trustee right from the formation of the trust.  The duty not to self-deal was therefore negated and he could act both as a trustee and benefit himself as a beneficiary (exercising that discretion together with his co-trustee).

The core of the claim was that the trustees had breached their fiduciary and equitable duties as:

• They did not assess the needs and interests of the beneficiaries.
• They did not assess alternative investment strategies.
• They did not adopt proper decision-making processes.
• They did not keep proper budgets and monitor financial performance.
• They created and then allowed a conflict whereby John, as trustee, was also project manager for the property development, even though he was allegedly inexperienced.  Further, the brothers pointed to the fact that John’s own land, neighbouring and previously part of the trust block, benefitted from the development of the trust land.

The Court held the trust was set up for the overall benefit of the extended McLaughlin family as a group, but also with a specific operating framework.

The trust deed of the trust included a bespoke provision:

It is declared as the further wish of the Settlor that the Trustees shall realise the value of the farm property by way of subdivision into individual or lifestyle allotments to better benefit the discretionary beneficiaries.

The lawyer who advised on the terms of the trust gave evidence that it had been Jim and Edna’s wish to mandate the subdivision of the property.  However, the lawyer had advised against that and proposed instead the declaration of intent set out above.

There was much argument at the hearing about the phrase “to better benefit the discretionary beneficiaries”.  The Judge noted that Mark and Andrew’s view was that this meant that they should have received funds from the trust as soon as possible after their father’s death.  Whereas the Judge’s view was that the phrase would better be read as a direction to benefit to all of the beneficiaries in the fullness of time and by undertaking a careful programme of property development to extract the best value possible from the trust’s land holdings.

Other factors which supported the finding that subdivision was Jim and Edna’s intention and direction to the trustees included:

• Jim and Edna had already assessed that the farm was not a good economic venture.
• Jim and Edna had been pursuing a consenting and zoning programme for the land for some years.
• Jim had given considerable thought as to how the subdivision might be undertaken.
• Previous efforts to test the market had shown the land was not readily saleable as an undeveloped block.
• John was chosen as trustee because he was interested in the subdivision project.  Jim also expressed his wish that the other sons not be appointed as they were not interested in the subdivision of the land.

In summary, the Court found that the subdivision was Jim and Edna’s long term plan and they established the trust for this purpose.  Jim and Edna’s direction was very clear both in the specific terms of the trust deed and the surrounding evidence.  Accordingly, it is in light of this specific direction, that the trustees’ management of the trust must be assessed.

The Court held that the approach of the trustees fitted with the plan set out by Jim and Edna as settlors.  While the trustees still had to satisfy themselves that proceeding with the subdivision is a prudent course of action, they can give Jim and Edna’s direction significant weight.  The trustees management of the trust was appropriate given the terms of the trust.

If you establish a trust with a specific plan or direction in mind, it is important that you record that plan and intent.  As your legal advisers, we can direct where best to incorporate your directions, whether in the trust deed itself, a memorandum of wishes or other document.

If you have any questions about setting up a trust, 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.