Category: Asset Planning

Contracting Out Agreements: Protecting Your Assets in a Relationship or Marriage

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Introduction

Ensuring you and your significant other are on the same page when it comes to your shared and separate assets gives you both peace of mind. This article outlines how you can make your mutual understanding official with a Contracting Out Agreement (“COA”) (sometimes referred to as a “pre-nuptial agreement”).

What is a COA?

Under the Property (Relationships) Act 1976 (“the Act”) many assets that were the separate property of one party will become relationship property after the parties have been in a relationship of three years or more (making those assets equally divisible between parties upon separation).  A COA allows parties to “opt out” of the Act and identifies property that each party will retain should they separate.

For a COA to be enforceable, both parties are required to receive independent legal advice, and the agreement must be in writing.

What is relationship property?

“Relationship property” is defined in the Act and includes:

  • The family home and contents (but not taonga or heirlooms), other land or buildings and vehicles;
  • Property acquired before the start of the relationship, but with the relationship in mind. For example, buying a holiday home in one party’s name (pre-marriage) with the intent of using it for the family;
  • Income, superannuation, insurance pay outs, rents, and other income earned during the relationship;
  • Any assets you acquired during (or even before) the relationship and that you intended both parties to use;
  • Any increase in value, income/gains derived, and/or proceeds of sale from the items above;
  • Non-personal debts (your personal debts are your own responsibility).
What is separate property?

Simply put, any property not classified as relationship property is classed as “separate property”.

The general rule is that separate property remains the property of the spouse or partner who owns it and does not have to be divided when the relationship ends. Examples of this include:

  • Gifts;
  • Property acquired while not living together as a couple;
  • Increases in separate property value, and/or income derived from separate property.

Separate property can become relationship property if it gets mixed with relationship property or used for family purposes.

Trust Property

In New Zealand, where the use of trusts is widespread, a COA cannot include the division of trust assets.  Essentially, a COA can only record the parties’ intentions towards trust assets, but the final say remains with the trustees.  If parties have significant assets in a trust, best practice is to have two separate agreements – a COA dealing with personal property owned by each party, and a Property Sharing Agreement to deal with trust assets owned by the parties.

When should I get a COA?

While you can get a COA at any stage in your relationship (even after having passed the three year threshold), they tend to crop up in the following situations:

  • When a couple is purchasing property together;
  • Upon inheritance;
  • When one party has significantly more assets than the other;
  • When one party has significantly more debt than the other;
  • Partners entering into their second or subsequent relationships.
Why should you get a COA?

If you are considering getting married or entering a de facto relationship and you have significant assets, a COA is a good idea.  A COA sets out what will happen to property that was acquired both before and during your relationship should you separate.  A COA is not an ironclad guarantee, but it will help provide certainty and reassurance for both parties, and will assist should there be dispute on separation.

Conclusion

Knowing whether to get a COA can be difficult, and a preliminary assessment of a couples’ current assets is usually advised.  A well drafted COA can provide clarity and peace of mind for both parties.  The first step is to have an initial discussion with a lawyer.

Our team of lawyers can help you prepare an agreement that is tailored to you and your partner’s needs.

Andrew is a Solicitor in our Dispute Resolution Team and can be contacted on 07 958 7447.

Trusts Act 2019: Trustee Default Duties and Shields

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With the new Trusts Act 2019 now in force, the spotlight is on trustee accountability.  When setting up or becoming involved in a trust, trustee liability and protection of trustees are important considerations.  Should trustees be exposed for decisions made by a trust owned entity, or should they be shielded?

The Trusts Act 2019 imposes default duties on trustees, therefore clauses to exempt trustees from specific duties will become more important.

A Shield: Anti-Bartlett Clause

Anti-Bartlett clauses come from the UK case of Bartlett v Barclays Bank (Nos 1 and 2) [1980] 1 Ch 515.  Common in offshore jurisdictions such as the Virgin Islands, anti-Bartlett clauses shield trustees from liability for decisions they would otherwise be responsible for.  The clauses expressly exclude particular trustee duties/responsibilities, for example, financial market awareness, prudent investment and supervision of trust owned assets.  They have an added benefit: allowing settlors and beneficiaries (and sometimes settlors who are also beneficiaries) to get involved in the business of the trust or trust owned entities, with the trustee(s) sitting back free from liability.  They do not exclude trustee core liability (dishonesty, wilful misconduct and gross negligence), but they reduce the scope of other duties.  The clauses are popular in trust deeds that manage entities running high risk ventures, such as overseas investments and currency trading.

Relevance for New Zealand

Sections 28-39 of the Trusts Act 2019 impose default duties on trustees, unless specifically excluded from or modified within the trust deed.  The default duties may further reinforce the need for anti-Bartlett clauses if that is what a settlor wants.  The default duties are:

  • A general duty of care;
  • Investing prudently;
  • A prohibition on trustees acting in their own interests;
  • A duty to consider the exercise of trustees’ powers;
  • Banning trustees from actions that fetter a trustee’s discretion;
  • Acting unanimously;
  • Not to profit from the trusteeship or benefit from the exercise of trustee discretions.

Although anti-Bartlett clauses can in theory exclude all of the above, sections 40-41 prohibit a trust deed excluding trustee liability for dishonesty, wilful misconduct or gross negligence.

Case Study

A 2020 Hong Kong Court of Final Appeal (“HKCFA”) case illustrates the usefulness of anti-Bartlett clauses to trustees.

Background

In Zhang Hong Li and Ors v DBS Bank Hong Kong (Limited) and Ors [2019] HKCFA 45, a Hong Kong couple settled a trust under Jersey law (an island in the British Channel which is a self-governing British Crown dependency within the common law).  The trustee, DBS Trustee, held the only shares in the trust property, Wise Lords, an investment company set up with DBS Bank to make high risk investments, particularly in foreign currency.  One of the settlors, Madam Ji, an investment advisor to Wise Lords, directed the investments.

In July and August 2008, Wise Lords increased its credit facilities with DBS Bank to USD $100 million, three times its net assets and purchased USD $83 million worth of Australian currency (“AUD”).  The 2008 GFC struck, sending the AUD crashing down against the USD.  Wise Lords suffered significant losses, approximately USD $16.2 million on investments and incurring a termination fee of AUD $1.5 million.  It appears the trustees were very “hands off”, simply rubberstamping the transactions.

Madam Ji and her husband sued DBS Trustee for gross negligent breach of trust and for gross negligent breach of duty by the directors of Wise Laws for approving the transactions.

At the trial and on appeal both Courts found that the trustees breached a “high-level residual duty” by not supervising the transactions.  The HKCFA analysed the anti-Bartlett clause in the trust deed which instructed the trustees to:

  • Leave the administration, management and conduct of the business and affairs of such company to the directors and other officers;
  • Assume at all times that the administration management and conduct of the business and affairs of such company are being carried on competently, honestly, diligently and in the best interests of the trustees;
  • Ignore any duty to take any steps at all to ascertain whether or not the assumptions above are correct.
Result

Although the case settled prior to the judgment being delivered, the HKCFA still gave its decision as this case will be very important for trusts and anti-Bartlett clauses worldwide.  Reversing the decisions of the lower Courts, the HKCFA unanimously found:

  • The trustees had no “high level residual duty” to supervise the company’s activities, given that the anti-Bartlett clause relieved them from any duty to interfere with or supervise the company’s conduct, unless they became aware of actual dishonesty;
  • The existence of such a duty was inconsistent with the anti-Bartlett clause. Such a duty would require DBS Trustee to query and disapprove the transactions, thus interfering with Wise Lords’ business contrary to the terms of the trust deed;
  • There was no actual knowledge of dishonesty that required the DBS Trustee to interfere;
  • The “rubberstamp” approvals did not constitute gross negligence. While the transactions were speculative and risky, the trust deed specifically allowed the taking of such risks.  The trustees were protected by liability exemption clauses for any acts and omissions short of gross negligence;
  • The corporate director of the investment company did not have any supervisory duty in respect of the investment decisions and was not in breach of its fiduciary duties.

If the trust had been settled in New Zealand after 31 January 2021 without the anti-Bartlett clause, the default general duty of care and the duty to invest prudently would have rendered the trustees liable.  It is prudent for trustees of new trusts to identify their protections and potential exposure.

If you would like further information, please contact Daniel Shore on 07 958 7477.

Trusts Act 2019: Indemnities

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The Trusts Act 2019 provides a long-awaited update to the current trust law in New Zealand and will replace the Trustee Act 1956 on 30 January 2021.  Earlier this year we provided a brief outline of the key changes in the new Act.  This article provides some more information on one of those changes – the new restriction on the indemnity that can be provided to trustees.

Trustee Indemnity

Under the current Trustee Act, there are no specific provisions regarding trustee indemnity.  However, case law does provide that trustees must act in good faith, honestly and for the benefit of all beneficiaries and they cannot be indemnified for failing to do so.

The Trusts Act 2019 (the New Act) does have specific provisions that deal with trustee indemnity.  The provisions state that a trustee will be held personally liable for any breach of trust that arises as a result of a trustee’s dishonesty, wilful misconduct, or gross negligence.  No indemnity for such actions can be included within a trust deed and if it is, it will be deemed invalid.  This closes a previous gap in the law where broad indemnity clauses may have protected individual trustees even when acting in a way which is considered to be grossly negligent – a relatively high standard.  Gross negligence is not specifically defined in the New Act, however section 44 of the New Act does give the Court factors to consider when determining if a trustee has acted in a way that is grossly negligent.  The Court must consider whether a trustee’s conduct was so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee.  We anticipate that the interpretation of this section will likely be a litigious area in the future as more and more trustees are faced with these circumstances.

The intention of the Law Commission for limiting the indemnity of trustees is to provide further protection to beneficiaries as they are usually the ones that ultimately lose when a trustee is protected by an indemnity clause.

Trustees will no longer be able to rely on broad indemnity clauses in trust deeds to protect themselves from beneficiary claims.  Trustees will need to take a higher level of care in all of their dealings with the trust and the general operation/administration of the trust.

It is timely for settlors and trustees alike to review the administration of the trusts in which they are associated and seek legal advice as to the implications/changes of the New Act.

Advisor Liability

There are also additional restrictions on limitations of liability for those paid to advise on the creation of trusts, and it is important to note that these are not limited to lawyers.  Under the New Act, proper advice must be given regarding liabilities, indemnities, and trustee duties and if not, then an advisor can be held liable.  There will be no ability to contract out of this new requirement.

Final Comments

If you are a trustee, or regularly give advice on trust creation/establishment, please feel free to get in touch to ensure you are protected/aligning yourself with the provisions of the New Act.

If you would like further information please contact Amanda Hockley on 07 958 7451.

Last Chance to Change My Will

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Is a will valid when instructions have been given, the will has been prepared, reviewed and approved, but not signed? Although an unsigned document can be a will, recently the Court of Appeal decided an unsigned will was not valid because the circumstances suggested the will-maker did not have capacity and was planning to take another step before signing the will.

This article reviews the Court of Appeal decision Marshall v Singleton [2020] NZCA 450, a case about James (86), who was hospitalised and diagnosed with terminal cancer in December 2017, and his four children.

Due to James’ illness his four children, Peter, Christine, Ann, and Susan, organise a roster to care for him.  Ann and Susan withdraw from the roster due to a falling out in their relationship with the other siblings.  James is upset and in his dying days only Peter and Christine are there to care for him.  James reviews his 2015 will which left his estate in equal shares to his four children and asks Peter to prepare a new will. On 30 December 2017, James explains to Peter how he wants to divide assets – one-third of his home equally to Ann and Susan, two-thirds of his home equally to Peter and Christine, and his remaining assets equally to Peter and Christine.  Due to James’ illness, Peter types up a will for him which was read by James on 3 January 2018.  Allegedly James audibly confirmed that the will outlines his intentions, but he does not sign the will.  James says he wants to write a letter explaining the new will to Ann and Susan.  James passes away on 11 January 2018 before signing the will or writing the letter.

Peter applies to the High Court for Letters of Administration annexing the unsigned will.  Ann and Susan oppose the application on the grounds that James, lacking testamentary capacity and being extremely ill, could not have properly expressed his intentions or signed a will.  Dr Jane Casey, consultant psychiatrist specialising in old age psychiatry, gives expert evidence saying that on the balance of probabilities James did not have capacity, even though James’ treating doctor said that he did.  The High Court finds in favour of Ann and Susan, but Peter appealed to the Court of Appeal in 2020.

Test of Capacity

The Court of Appeal upheld the High Court’s decision for two reasons.  Firstly, Dr Casey said that James was very unwell, on strong medication and had some incidents of confusion recorded in his file, so he most likely did not have the required mental capacity.  Secondly, James wanted to explain the new will in a letter to Ann and Susan before signing it, which he never did.

There is a well-established test for testamentary capacity dating back to an 1870 English case (confirmed in a New Zealand Court of Appeal case, Woodward v Smith [2009] NZCA 449) setting out what the Court looks at when deciding if an unsigned will is valid.

Sickness can be challenging, however, this does not mean that the person necessarily lacks capacity to prepare or sign a will.  The Court will assess whether the will-maker:

  • Has intellectual and moral faculties;
  • Understands the nature and effect of the will, and the extent of their property;
  • Comprehends and appreciates the potential claims to their assets;
  • Has the strength to comprehend making a will;
  • Understands the contents of the will;
  • Is free of any mental disorder influencing their affections, moral compass or natural faculties, with no delusion or insanity.

Other principles the Court considers are:

  • Evidence of an “unsound mind” by lack of organisation, physical weakness or the effect of old age;
  • The will-maker must have enough intelligence to understand and appreciate the will-making considerations. Full mental strength is not required;
  • Extreme physical weakness is not a bar to making a final will, even though it could prevent other business (e.g. attending a board meeting);
  • Whether they have put thought into making the will. Someone who has thought about their will for a long time may find it easier to make one in physically bad health than someone who is new to it;
  • A strong memory is not required;
  • Less than peak mental capacity is acceptable, provided a rational, fair and just will can be made.

If you would like to discuss wills, will validity or testamentary capacity further, please do not hesitate to get in contact with one of our solicitors.

If you would like further information, please contact Daniel Shore on 07 958 7477.

COVID-19 – Can we use electronic signatures to sign documents?

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Electronic signatures have been considered valid by New Zealand law for some time.   Faced with the challenges of the Covid-19 crisis and ongoing restrictions on our ability to travel and meet with others, it is likely we will see widescale adoption of electronic signatures as parties seek to progress matters remotely. However, the use of electronic signatures has not yet completely replaced the practice of signing documents by hand.  This article summarises the law on electronic signatures, and discusses the differences (and advantages) of “digital signatures” versus other forms of electronic signature.

The validity of electronic signatures

So long as certain requirements are met, an electronic signature is just as valid as a written signature under New Zealand law.

Part 4 Subpart 3 of the Contract and Commercial Law Act 2017 (the “Act”) regulates the use of electronic technology for legal purposes.  It aims to promote functional equivalence (meaning the law will not discriminate between paper-based transactions and electronic transactions) and technological neutrality (meaning the Act does not specify or favour any particular technology platform).

For an electronic signature to be valid, the Act requires three core elements: (1) identification; (2) reliability; and (3) consent.  To elaborate further, an electronic signature meets the legal requirement for a signature (including a witness’ signature) if:

  • It adequately identifies the signatory (or witness) and adequately indicates the signatory’s approval of the information to which the signature relates (or that the signature has been witnessed);
  • It is as reliable as is appropriate given the purpose for which, and the circumstances in which, the signature (or witness’ signature) is required; and
  • The person receiving the signed information (or requiring the witnessing) consents to receiving the signature in electronic form.

For the purpose of the Act, an electronic signature will be deemed reliable if:

  • The means of creating the electronic signature is linked to the signatory and to no other person;
  • The means of creating the electronic signature is controlled by none other than the signatory;
  • Any alteration made to the electronic signature after time of signing is detectable; and
  • Where the requirement for a signature is to provide assurance as to the integrity of the information, any alteration made to that information after the time of signing is detectable.
Are there any exceptions?

There are some significant general exceptions to the application of the part of the Act that deals with meeting legal requirements by electronic means.  Some of the key exceptions include:

  • Affidavits, statutory declarations or other documents given on oath or affirmation;
  • Powers of attorney or enduring powers of attorney; and
  • Wills, codicils or other testamentary instruments.

These (and other) important categories of document must still be on paper.

Other documents common in a law office that have always required written signatures include bank documents and authority and instruction (A&I) forms.  While it remains to be seen whether lending institutions will collectively update their current policies regarding written signatures and witnessing in light of the Covid-19 crisis, we have already seen new guidance issued in relation to land transfer documents.    

In its Authority and Identity Requirements for E-Dealing and Electronic Signing of Documents Interim Guideline 2020 published 30 March 2020, Land Information New Zealand (“LINZ”) acknowledged the validity of electronic signatures under New Zealand law and permitted their use with land transfer documents, provided that the electronic signature complies with the requirements of the Act and that the signature is a “digital signature” as opposed to an image of a signature simply inserted onto a document.  Digital signatures are discussed in more detail below.  Practitioners will also have to ensure that an audit record of the digital signing log can be produced, and that the system provides sufficient assurances so that the required certifications can be made.

Digital signature software

The most technologically secure signature (and the form of electronic signature required to comply with the new LINZ guidance) is a digital signature.  A digital signature is a form of encryption technology created and verified by code, and provides a platform to build a secure electronic signature.  Its purpose is to provide verification of the authenticity of a signed record.  Digital signatures will provide a log of the signing activity and, once a signature has been made, that signature and its information, as well as the contents of the document, are locked and unable to be edited or tampered with.

Examples of popular digital signature technology packages include Secured Signing and RightSignature.  This software is not available free to users, and in some cases the cost of obtaining and maintaining a digital signature may not be viable/desirable for lower value and/or lower risk transactions.  However, where a document of significance is to be signed by electronic means, a digital signature offers the highest level of security and reliability, provided the statutory requirements have also been met.

An electronic signature that is not a “digital signature” is an electronic symbol or reference that captures the user’s intent, and is commonly used in email software as a means of signing off.  These simple forms of electronic signature are much less secure than digital signatures and more vulnerable to being challenged on the basis of reliability.

Conclusion

New Zealand law provides a mechanism for the use of electronic signatures on a variety of legal documents.  In most circumstances an electronic signature is a valid way of creating a legal signature where a handwritten written signature would otherwise be used.  For the purposes of security, it is best practice to use encrypted signing software.  There are some significant categories of document where electronic signatures are not yet recognised by the law.  Regardless of the preferred method for signing agreements (whether by hand or electronically), appropriate care should be taken, and advice sought, before assuming legally binding obligations.

If you would like further information please contact Laura Monahan on 07 958 7479.

Trusts Act 2019

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Trust Law in New Zealand is finally getting the upgrade it needs after more than 60 years have passed since the Trustee Act 1956 was enacted.  On 30 January 2021, the Trusts Act 2019 will replace the 1956 Act, triggering a review of the estimated 300,000-500,000 trusts in New Zealand.  The purpose of the Trusts Act 2019 is to restate and reform current New Zealand trust law to make it more accessible to the general public.  The intention is to provide clear guidance for trustees and beneficiaries and make it easier to resolve disputes.  If you are a settlor, trustee, or a beneficiary of any trust (including a charitable trust) there are some important things you need to know.

Trustee Duties

The new Act clearly states the mandatory duties that all trustees must be aware of and act in accordance with.  There is no provision for amending or excluding mandatory duties.  Although these duties already exist, many of them are only understood by a minority of persons due to the complex drafting of the Trustee Act 1956.

Alongside the mandatory duties, there are default duties that will apply to all trusts (existing and new) unless they are specifically modified or excluded within the trust deed.  This is important as there are a number of default duties that are commonly not adhered to by trustees, such as the duty to invest prudently, act for no reward, and to act impartially.  Trust deeds may need to be updated to exclude or modify relevant default duties to ensure that trustees are not in breach of trust by, for example, investing all of the trust fund in one property.

Further, where default duties are modified or excluded, paid advisors in the creation of the trust deed must ensure that the consequences of such changes are fully understood by the settlors and/or trustees of the trust.

Record Retention

The Act also provides clearer guidance around what documents need to be kept by trustees for the duration of their trusteeship.  Trustees must be aware of their obligations and ensure core documents are kept – this includes documents like the trust deed and any variations, appointment/removal of trustees, and financial statements.

Beneficiary Entitlements

If you are a beneficiary of a trust, you are entitled to basic trust information to keep trustees accountable for acting in your best interests.  Beneficiaries are able to request further trust information, however there are a number of factors trustees must take into consideration before supplying or refusing to supply this information.

Indemnity Restrictions

Trustees are currently prevented from limiting their liability arising from dishonesty or wilful misconduct.  The Act extends this to include liability arising from gross negligence.  Section 44 of the Act provides some guidance on what will constitute gross negligence.

Delegation of Powers

A trustee can delegate its power to a third party in the case of temporary lack of mental capacity or temporary inability to be contacted, as well as the current position under the Trustee Act 1956 regarding lack of physical capacity and being overseas.

Final Comments

Due to the impending law changes, it is critical that if you have a trust, you come and see your lawyer to ensure that the current terms of the trust deed do not breach the new Trusts Act.  We expect that as a minimum, trustees will need to instruct their lawyers to review their trust documents.  For those that have more complicated asset planning arrangements, it is likely that lawyers, accountants and financial advisors will need to work together to ensure that all aspects of their clients’ asset planning arrangements are compliant.

We recommend that you start the review process sooner rather than later.  Our Team is happy to assist with a review of your trust documents and/or any queries you may have.

Natalie is a Senior Solicitor in our Asset Planning Team and can be contacted on 07 958 9435.

Fiduciary duties of parents to their adult children: Potential for change

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A recent High Court case confirmed that settlors of family trusts are free to dispose of property as they see fit and, as the law currently stands, do not owe fiduciary duties to their adult children who are not beneficiaries. However, recent comments by Associate Judge Johnston and the Law Commission signal the need for Parliamentary reform in this area.

Background

In A B and C v D and E Ltd and Ors [2019] NZHC 992, three adult children brought a claim against the surviving trustee of the family trust settled by their late father. The father had three children with the claimants’ mother in the 1960s and 70s. Evidence was brought showing the father was physically abusive towards his wife and the children for two decades. In the early 1980s when the marriage broke up, the father commenced a second relationship with a woman who already had three children. In 2014, two years before he died, he settled a family trust and placed all his property in the trust for the benefit of the three children of the woman of his second relationship, leaving no assets for the children of his first relationship.

The claimants originally lodged a Family Protection Act 1955 application for maintenance and support in the Family Court. However, when they found out what their father had done, they immediately brought this proceeding in the High Court. The claimants argued that their father breached an alleged fiduciary duty. They submitted that because of their abusive upbringing, which had so affected their adult lives, alienation of the assets in question constituted a breach of fiduciary obligations owed to them by their father. The defendants, the surviving trustee company, brought a summary judgment application to strike out the claim.

Parents and fiduciary relationships

Associate Judge Johnston reviewed the law as put before him by the claimants’ solicitor on fiduciary duties of parents to their children. In the Canadian case of M(K) v M(H) [1992] 3 SCR 6, the Supreme Court of Canada concluded that being a parent of a minor child is a unilateral undertaking that is fiduciary in nature. The High Court of Australia in Clay v Clay [2001] HCA 9 found the relationship of guardian vis-à-vis ward was also one in which fiduciary obligations existed. Finally, the claimants’ solicitor referred to Rule v Simpson (2017) NZHC 2154 where the Court refused to strike out a claim based on an alleged fiduciary duty owed by a father to his adult son.

Based on these cases, the claimants asked the Court in A v D to conclude that their father had a fiduciary duty to his children. This effectively prevented him from alienating the assets by transferring these assets to the family trust in order to defeat their interests.

Does the parent-adult child relationship fit the fiduciary duty test?

The New Zealand High Court summarised the two broad circumstances where fiduciary duties arise in the Commonwealth jurisdictions:

  • Specifically recognised relationships such as director to company, and solicitor to client. In these relationships, the law imposes fiduciary obligations unless circumstances dictate otherwise;
  • Outside specifically recognised relationships, the law imposes additional obligations only where the circumstances justify it.

Looking at the second category, the New Zealand High Court referred to the test formulated by the Supreme Court of Canada in Frame v Smith [1987] 2 SCR 99:

  • The fiduciary has scope for the exercise of some discretion or power;
  • The fiduciary can unilaterally exercise that power or discretion, so that it affects the beneficiary’s legal or practical interests;
  • The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretionary power.

Referring to the leading text by Paul Finn “Contract and the Fiduciary Principle”, Associate Judge Johnston concluded that there was a reasonable argument that the claimants could satisfy the test on all three criteria. However, Associate Judge Johnston concluded it would be a bold step for him to take. Currently, the parent-adult child fiduciary relationship does not exist. He qualified that by saying that the Law Commission had recently proposed changing the law to cater for this exact situation, but this is not yet in force. He left the door open for a parent-adult child fiduciary relationship.

Observations

This case confirms the current position that a settlor can deal with property as it sees fit. However, it shows that, under the general fiduciary duty test, theoretically a parent could owe fiduciary duties to its adult children. With inter-family relationships, the authorities confirm each case will be decided on its specific circumstances. For instance, a natural mother does not necessarily owe fiduciary duties to her adopted daughter, nor is there a fiduciary relationship between siblings (Sister v Brother  [2001] NZAR 930 (HC). Normally an uncle is not a fiduciary, but if the child is placed in his care with an expectation of safety and the child suffers harm, the Courts have found a fiduciary relationship (J v J [2013] NZHC 1512). In the present case of a parent-adult children relationship, if the current status of the law is changed to create a general fiduciary duty (as the Law Commission and the High Court indicate it could), the case indicates that Parliament is the proper body to make the change, not the Courts.

If you would like further information, please contact Daniel Shore on 07 958 7477.

Common applications under the Protection of Personal and Property Rights Act 1988

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Do you have Enduring Powers of Attorney in place?  If you do not and you lose your mental capacity, someone would need to make an application under the Protection of Personal and Property Rights Act 1988 to the Family Court in order to make certain decisions for you.  Applications are most commonly made by a relative, however the Act does provide for others (such as social workers, medical practitioners, friends etc) to apply.

This article outlines three of the most common applications that are required when a person loses their capacity without Enduring Powers of Attorney in place.  The common applications are for the appointment of the following:

  • Welfare Guardian (personal order);
  • Property Administrator (personal order);
  • Property Manager (property order).
Welfare Guardian

The starting point for most families is an application to the Family Court to have a Welfare Guardian appointed.  A Welfare Guardian is someone appointed by the Family Court under the PPPR Act to make decisions on behalf of a person in relation to all aspects of that person’s personal care and welfare (such as decisions relating to the person’s health, care and living arrangements).  Welfare Guardians are responsible for support and protection as well as acting in the best interests of the person they are acting for.  A person in respect of whom the application is made is referred to as the “subject person”.

A Welfare Guardian order has an expiry date and, at the end of the term, another Court application will be required to either extend the current Welfare Guardian’s term or appoint a new Welfare Guardian (all at an additional cost).

Before a Welfare Guardian application will be granted by the Court, the following criteria must be met:

  • The subject person either wholly or partially lacks the capacity to understand the nature and to foresee the consequences of decisions in respect of matters relating to their personal care and welfare; or
  • The subject person has the capacity to understand the nature and foresee the consequences of those decisions, but wholly lacks the ability to communicate these decisions.

The Court will then assess the application and will only grant an order if they can be satisfied that the following requirements are met:

  • Appointing a Welfare Guardian is the only satisfactory way to ensure that the appropriate decisions are made about the subject person’s personal care and welfare;
  • Appointment of a Welfare Guardian is the least restrictive intervention possible by the Court in the subject person’s life;
  • The Welfare Guardian will enable and encourage the subject person to exercise and develop such capacity to the extent that is reasonably possible;
  • The subject person ordinarily lives in New Zealand and is at least 18 years of age.

The paramount consideration of the Welfare Guardian must be the promotion and protection of the welfare and best interests of the subject person.

Property Administrator

A Property Administrator is someone appointed by the Family Court to administer any one or more items of property outlined in the order on behalf of the subject person.

A Property Administrator will only be appointed where the item of property in question is worth less than $5,000 or the total income/benefit received is less than $20,000.

An example of when this may be used is when the subject person receives a benefit of less than $20,000 a year and the subject person does not hold any assets (like vehicles, bikes, mobility scooters etc) over the value of $5,000.

There are limitations to Property Administration orders, these are as follows:

  • Value restrictions (property of less than $5,000 and income of less than $20,000);
  • Only one person can be appointed as the Property Administrator at a time;
  • You cannot have a Property Administrator where there is already a Property Manager appointed.
Property Manager

A Property Manager is appointed to manage the property of the subject person.  The particular application can be for the entirety of the subject person’s property, or for certain aspects of the subject person’s property.

A Property Manager may be a person or a trustee company (such as Public Trust), and there is no limit to the number of Property Managers that can be appointed at one time (although this should be thought through when making an application as co-ordinating too many Property Managers may be a logistical nightmare).  If there are multiple Property Managers appointed, they will need to act and make decisions jointly.

Like with the Welfare Guardian application, there is an expiry date on Property Manager orders.  A Property Manager’s appointment will be up to three years from the grant (the Court will determine this date when making the grant).

The Court will only grant an application for a Property Manager when:

  • The subject person either wholly or partially lacks the capacity to understand the nature and to foresee the consequences of decisions in respect of matters relating to property; or
  • The subject person has the capacity to understand the nature and foresee the consequences of those decisions, but wholly lacks the ability to communicate these decisions.

The Court will not grant an order for a Property Manager if the person applying simply thinks the subject person is not managing their money the way the applicant thinks is the “correct” way.  The Court will also ensure there is no undue influence in the management of the subject person’s property affairs.

Responsibilities of a Property Manager:

  • The paramount consideration of a Property Manager must be to use the property in the “promotion and protection of the best interests” of the subject person.
  • Property Manager must, where possible, encourage the subject person to manage their own property affairs.
  • Consult with the subject person regarding property matters.
  • If a Welfare Guardian has been appointed, the Property Manager must consult with the Welfare Guardian on a regular basis to ensure the interests of the subject person are not prejudiced.
  • As far as practicable, Property Managers must also consult with:
    • Other persons who, in the Property Manager’s opinion, are interested in the welfare of the subject person and are competent to advise in relation to the management of the subject person’s property; and
    • A representative from a not-for-profit group that provides services and/or facilities for people such as the subject person who, in the Property Manager’s opinion, would be competent to advise the Property Manager in relation to the subject person’s property.

We understand these types of orders can be somewhat confusing.  We recommend that you make contact with a lawyer to assist you through the process of making any of these applications.

If you would like further information please contact Amanda Hockley on 07 958 7451.

Testamentary promises

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What is a “testamentary promise”?

A testamentary promise is a promise made by one person (“Person A”) to another (“Person B”) that Person B will receive compensation for providing services to Person A.  For example, Person B might mow Person A’s lawns every week on Person A’s promise that Person B will be repaid out of Person A’s estate when they die.

If Person A were to neglect to provide for a promise in their will, Person B can bring a testamentary promises claim under the Law Reform (Testamentary Promises) Act 1949 (“the Act”).  If, after evaluating all of the facts, a Court is satisfied that Person A made a testamentary promise to Person B in return for services received, the Court can order the executor/administrator of Person A’s estate to pay the claimant a reasonable amount (having regard to a number of factors in that particular circumstance).

Testamentary promises can be made in writing or orally. When a promise is made orally, it can be more difficult to prove that a Promise was made.  Nevertheless, the Court will consider all of the facts of the case before making a decision.

There is a time limit to make a testamentary promises claim.  A potential claimant has only 12 months from the grant of probate to bring a claim (however, this time limit can be extended by the Court if the estate has not been distributed).

How do you prove a testamentary promise exists?

There are four requirements to prove a testamentary promise exists. There must be (incorporating Person A and B from the above explanation):

  • Work or services done by Person B for Person A;
  • An express or implicit promise from Person A to Person B;
  • A causal link between the promise made and the work or services done; and
  • Insufficient remuneration.

Tawhai v Govorko & Anor [2015] NZHC 2874 expands on these four requirements to aid understanding.

“Work or services” encompasses both the normal definition of the terms and wider constructions including companionship, affection, and emotional support.  In such cases, what is provided must go beyond what would normally be expected of a family member/friend.

“An express or implied promise” must amount to an intention to reward in the form of a testamentary provision for the claimant.  Such an intention could be an express statement or implied – this has been interpreted widely where a plain case is presented.

The ‘causal link’ required is that the promise must be intended as a reward for the work or services provided.  Where there is a promise to make some testamentary provision for the claimant, but there is no link to the work or services provided, the claim will fail.

The final requirement of insufficient remuneration means the claimant could not have been otherwise compensated for the work or services provided.  For example, in Tawhai there was a promise to “get the lot”, yet the claimant only received approximately half of the estate.  This was considered a failure to fulfil the promise made.

What will the Court consider?

In addition to the four requirements above, the Court will also consider a number of other factors specific to the particular circumstances.  Factors the Court will consider include:

  • The situation in which the promise was made;
  • The work that was carried out;
  • The value of the work that was carried out;
  • The value of the promise made;
  • The value of the deceased’s estate; and
  • Whether there are any other claims against the estate (and if so, the nature and value of those claims).
So how does all of this apply to you?

Due to the strict requirements that a Court must prove in order to satisfy a testamentary promises claim, it can be very difficult for someone to access the money that you have promised them.  In some instances, there is not enough evidence to prove the claim existed and the claimant received nothing.  The process of making a testamentary promises claim can also be quite an expensive and time consuming process.

If there is a specific person that you would like to leave money to when you pass away, whether it be for providing services or otherwise, the best option is to reflect this in a will and to discuss your options with a lawyer.

If you would like further information please contact Amanda Hockley on 07 958 7451.

Invalidity of Wills

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Recent cases have outlined important considerations regarding the requirements necessary to prove a Will to be invalid.  There is some confusion around the grounds upon which a Will can be challenged, leading to unnecessary costs in questioning the validity of a Will.

There are several ways a Will can be challenged.  In brief:

  • If the Will has not been made in accordance with the Wills Act 2007 (including disputes regarding the Will-maker’s capacity);
  • If a family member was not provided for under the Family Protection Act 1955;
  • If a promise was made to provide for someone under the Law Reform (Testamentary Promises) Act 1949; and
  • Where a surviving spouse or partner is not satisfied with what they have been given under the Property (Relationships) Act 1976.
Wills Act 2007

Under this Act, the validity of a Will might be challenged on the following grounds:

  • The Will was not properly signed and witnessed;
  • The Will-maker did not have full mental capacity;
  • The Will-maker did not know what was in the Will when they signed it; and/or
  • The terms of the Will have been affected by fraud or undue influence.

Mumby v Mumby sets out the considerations that the Court will take into account when assessing the validity of a Will.  In this case it was argued that prior to her death Mrs Mumby was not pleased with the contents of her Will, however level of satisfaction is not a relevant consideration in determining validity.  It is important to note that the testator’s happiness with the provisions of the Will are not valid grounds upon which to challenge a Will – only the testator’s understanding of the provisions.  A lack of understanding of the provisions of the Will constitutes valid grounds to challenge the Will as it indicates that the Will-maker did not have full mental capacity – this is not the case with a lack of happiness relating to the provisions.

Family Protection Act 1955 (FPA)

Under the FPA a person is responsible for the proper maintenance of certain family members.  This includes:

  • Spouse/partner;
  • De-facto partner;
  • Children;
  • Grandchildren;
  • Stepchildren maintained wholly or partly; and
  • In some cases, parents.

If proper provisions are not made in the Will for the proper maintenance of those mentioned above, they can make a claim in the Courts asking for provision to be made for them out of the estate.

Courteney v Courteney stresses the importance of recognising the moral duty you have to your children to provide for them following your death.  Where children are deliberately and wrongfully excluded from a Will due to clouded judgment on behalf of the Will-maker, constituting a lack of capacity, a breach of moral duty will be found.  For this reason, it is important to understand to whom you are obligated to provide for in your Will, and if you decide to exclude any such people, to seek legal advice to minimise the risk of a dispute in the future.

Moon v Public Trust shows that a de-facto partnership is not limited to couples who have lived together for three years or more.  Whether or not a relationship is de-facto will depend on the nature of the individual circumstances – for example, a couple who have been together for 27 years is likely to give rise to a moral duty to provide for one another, even when they have never lived together.  It is therefore relevant to consider significant relationships that may give rise to a moral duty even if the relationship does not strictly qualify as a de-facto partnership.

Law Reform (Testamentary Promises) Act 1949

Under the Testamentary Promises Act, where a promise was made by the deceased while they were alive but failed to be recognised in the Will, a person may seek provision for this promise from the estate.  It must be found that:

  • Work or services were provided to the deceased;
  • There was a promise of reward;
  • There is a link between the work/services and the promise; and
  • That no reward was ever given.

McBeth v Morrison (Wendt Estate) showed that where there is no link between the work and the promise of a reward, the application will fail.  As such, where the work/services provided were given with no expectation of reward, there cannot be sufficient nexus between the work/services and the promise.  A testamentary promise will only be upheld where, among the above factors, the work/services were provided with the knowledge that a reward would be received.

Kaylee is a Law Clerk in our Asset Planning Team.

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New Zealand

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