Trust me – it’s the right decision

Background

In 2004 Craig and Jenny established a family trust, with themselves as trustees and their accountant as a third trustee. Craig and Jenny’s family home was settled to the trust. The trust’s discretionary beneficiaries were Craig, Jenny and their five children, and any grandchildren. In 2007 Craig and Jenny separated and divorced and the trust sold the family home because of threatened mortgagee sale action. The net sale proceeds of around $140,000 were held by a solicitors’ firm pending Craig and Jenny’s decision about what to do with the funds (the trust property).

In 2009, Craig and Jenny’s relationship property was divided as a result of Family Court proceedings. The judge declined to deal with the trust property because it did not form part of the relationship property. However, the judge gave very strong indications that Craig and Jenny should deal with and distribute the trust property as soon as possible in their own and their children’s best interests. In particular, the judge said that Craig needed to realise that if there were to be funds left over for all the beneficiaries he must not continue with litigation (the trust funds being used to pay legal fees for both Craig and Jenny).

Unfortunately Craig and Jenny were unable to agree on the administration of the trust and distribution of the trust property. In 2012, Jenny applied to the High Court for orders to remove Craig as a trustee and bring forward the distribution date in the trust deed from 80 years to the present day. The High Court did not issue the orders sought by Jenny and instead appointed a professional trustee company, Trusts Limited, as sole trustee. The High Court judge said that neither Craig nor Jenny had the capacity to act fairly and impartially as a trustee. The High Court judge also left the decision about whether to bring forward the distribution date to Trusts Limited.

Trusts Limited received around $100,000 from the solicitors in 2013. By then, $40,000 had been spent on legal fees and costs orders. In March 2014 Trusts Limited decided to bring forward the distribution date and divide the trust funds amongst the discretionary beneficiaries on the following basis:

  • 68% to Jenny in recognition of the costs she had personally incurred in raising the children since the marriage breakdown and around $10,000 she had spent on orthodontic work for children.
  • 20% to Craig.
  • 12% equally between the five children.

 

The complaint

Craig complained that Trusts Limited:

  1. Had not been transparent in its management of the trust and had mismanaged the funds. Craig said he should have been invited to the trust’s AGM and provided with minutes.
  2. Incorrectly brought forward the distribution date.
  3. Erred in its decision to distribute the funds in the percentages it had. Craig’s view was the funds should have remained on trust for the benefit of the children and any grandchildren.

Craig also wanted Trusts Limited to be removed as a trustee and for him to be re-appointed as a trustee along with other people he knew.

 

FSCL’s review

We reviewed all of the information we received from Trusts Limited and Craig about the complaint and found that:

 

The trustee’s powers

The key issue in the complaint was whether Trusts Limited had exercised its discretion as sole trustee reasonably in distributing the trust funds in the percentages it had. We looked at the trust deed which outlined that Trusts Limited had a wide power to apply the trust funds for the maintenance, education, and benefit of one or more of the discretionary beneficiaries taking into account all their needs. The trust deed also outlined that the trustee had absolute discretion to distribute the trust funds in the proportions it saw fit.

We told Craig that the exercise of a trustee’s decision is not something to be ‘second guessed’ by another party, as long as a trustee has exercised its discretion in good faith and within the powers of the trustee. A trustee’s decision should only be reviewed if the trustee has made a decision no reasonable trustee could make.

 

The distribution proportions

Trusts Limited’s starting point was a 50/50 split between Craig and Jenny. However, because Jenny had borne most of the costs of raising the children since separation, it was reasonable for her to receive more than 50% of the trust funds.

The Family Court also indicated that there should be some provision for the children. Trusts Limited decided that 12% should be provided to the children. This reduced Craig’s share to 20%.

 

Removal and reappointment of trustees

This was a matter for the court and not within FSCL’s jurisdiction to overturn. However, we noted that as the trust was in the final stages of being wound up, and considering the High Court judge’s comments that neither Craig nor Jenny were capable of being impartial, we thought it highly unlikely that a court would remove Trusts Limited as trustee and re-appoint Craig.

 

Trust funds mismanagement

Trusts Limited said originally it appeared that despite their acrimonious relationship, Craig and Jenny wanted the trust to continue. However, the relationship between Craig and Jenny continued to deteriorate, and Jenny indicated she wanted all the funds paid to her. Because of the dissenting views, Trusts Limited decided that winding up the trust was best for all involved.

The decision to distribute the trust funds was not straightforward and took time. The trust funds were placed on 3 month term deposits. In our view, this was an appropriate way to invest the funds when it was known that the trust fund was going to be wound up and would need to be accessed quickly.

 

Lack of transparency

In our view, Trusts Limited could have updated Craig more regularly about what was happening with the trust. There were around 7 months with no communication. We thought Trusts Limited could have updated Craig more regularly in that 7 month period.

There was then another long delay of around 8 months until another letter was sent to Craig and Jenny advising of Trusts Limited’s decision to distribute the funds and in which percentages. We thought this letter would have come ‘out of the blue’ for Craig and caused him some distress. We thought that Trusts Limited should pay Craig $250 in light of the inconvenience caused.

 

Early distribution

In light of the Family Court judge’s comments and the acrimonious relationship between Craig and Jenny, we thought Trusts Limited had acted appropriately and within its powers to bring forward the distribution date.

Craig did not respond to our formal recommendation that his complaint be resolved by Trusts Limited paying him $250 for inconvenience. We assumed he did not accept the formal Recommendation and we closed our file.