Category: Asset Planning

Family Protection Act 1955 and the concept of moral duty

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Introduction

The Family Protection Act 1955 (“the Act”) gives the Court a discretion to order that provision be made for the “proper maintenance and support” of certain family members out of the deceased’s estate.  The Act is embedded in the social landscape of the day, and the extent to which the deceased owes a “moral duty” to provide for the claimant will vary considerably.

Relevant factors

Currently a spouse, de facto partner, or a child may lodge a claim against an estate, and in limited circumstances grandchildren, stepchildren or parents have the ability to do so.  Section 4 of the Act requires the Court to decide whether the deceased has provided for the “proper maintenance and support” of the claimant.  This stage involves a high degree of judicial discretion.

Vincent v Lewis (2006) provided a summary of the case law until 2006, looking at all the factors the Court will take into account when assessing whether there has been a breach of a moral duty owed to the claimant.  The key consideration in each case is whether, objectively considered, taking into account all the circumstances of the particular relationship, the deceased breached the moral duty owed to the claimant.

This duty is not owed simply because of the existence of the relationship, but due to the strength of the relationship.  Periods of estrangement and family rifts will weaken the moral duty owed, while dependence on and care for the deceased will strengthen it.

The Court of Appeal in Williams v Aucutt stated that “support” is an additional and wider concept than maintenance, which entails “sustaining, providing comfort”.  Ethical considerations are relevant when assessing whether adequate provision has been made for the support of the applicant, as opposed to “maintenance”, which is directed at the claimant’s economic (or financial) needs.  The two are assessed concurrently however, and factors under both may strengthen or weaken a claim.

The following are factors which are relevant to assessing the strength of a claim, although they do not constitute an exhaustive list; all circumstances of the particular case will be relevant.

Nature of the relationship with the deceased

Section 5 of the Act allows the Court to “refuse to make such an order in favour of any person whose character or conduct is or has been such as in the opinion of the court to disentitle him.”

There are two categories of misconduct that will justify exclusion:

  • Outrageous conduct by the applicant to the deceased; and
  • Distinct and meaningful periods of estrangement brought about by the claimant.

The level of misconduct required to be disqualified however, is serious misconduct.  In MAVM v Public Trust (2009), the claimant had physically and verbally abused his father and had exploited the father’s “good nature” most of his life.  Similarly, Horton v Wakeham (2007), stated disentitling conduct required “deliberate malice directed toward the testator or committing serious criminal offences with no remorse”.

The Horton and MAVM cases illustrate that the threshold to be disqualified requires conduct with a high degree of malice.  Estrangement or conduct that does not amount to disentitling behaviour will however still be relevant, and will not preclude relief entirely.  In Re Green the Court of Appeal found that conduct of the testator’s daughter had weakened the relationship with the deceased, due to taking up residence overseas and having little contact; however it did not warrant a complete exclusion. The estate in question in that case was a relatively large one, a factor that will encourage Courts to be more liberal in an award.

A key consideration when the Court is deciding whether or not to exclude an applicant is always where the fault lies.  If the fault is purely on the deceased, this may in fact increase the moral duty that is owed to the applicant, for example, if the deceased neglected or failed to provide when he or she had the means to.  If the fault is on the claimant, the question is whether the conducted amounted to a level that would exclude an application, as noted in the cases above. The time elapsed for the period of estrangement will always be relevant in assessing the level of the conduct.

Other factors relevant when the court is assessing the nature of the relationship with the deceased will be the duration of the relationship, the conduct of both parties, and the intention of the testator.  All factors will be weighed differently depending on the circumstances of the particular case.

Strength of competing moral claims

The strength of a claim will always be dependent on the actual form of the relationship between the deceased and the claimant.  For example, there is a “paramount duty” firstly to the widow of the deceased, and Courts will always be more liberal when assessing a claim to a widow than, say, a niece or nephew.  This is one way a Court will distinguish between competing moral claims from various parties.  A moral duty may be increased to one applicant over another due to the closeness of the relationship; in Re Cairns one child brought support and comfort to a parent in her declining years, and the Court was justified in favouring that child over another.  Relevant circumstances will include whether the claimant has dependent children, and the financial position of each party relative to the other parties.  The financial need and position of a claimant is discussed further below.

Financial need/position

The financial need and position of a claimant will include the value of the claimant’s assets, their income, and any other relevant financial considerations such as whether the claimant is receiving welfare payments or income from other sources. The number of financial dependents the claimant has will also increase the person’s “needs”, and increase the likelihood of the finding of a moral duty to provide adequately.  When assessing the financial position of the claimant, the Court will look at the current and expected future financial position of the claimant, even though the moral duty is traditionally assessed at the date of the testator’s death.  The Court may also take into consideration factors such as the current or future health needs of the claimant, or for a claim by a partner the maintenance of the lifestyle enjoyed during the relationship may be relevant.

Size of the estate

The size of the estate will always be a vital consideration, as it will determine the extent to which the deceased can satisfy his or her moral duty to eligible claimants.  Larger estates allow more leeway for the testator to distribute the estate as they see fit, so long as those to whom he or she owes a moral duty are catered for.  In smaller estates, the role of the Court will be to ensure all moral duties are met so far as possible.

Contributions

Contributions made to the deceased’s assets or to the relationship are highly relevant when assessing the strength of the moral duty owed to the claimant.  Such an example is B v Adams (2005), where a widow had contributed significantly to the husband’s farm.  The Court in that case increased the strength of the moral duty owed to the claimant. Alternatively, a contribution to the relationship may be sufficient to increase the moral duty, as in Re Wilson, where the wife had “performed outstandingly the services of a loving wife”.

Trend and current position as to quantum of reward

What constitutes “proper maintenance and support” has varied significantly since the first family protection legislation, the Testator’s Family Maintenance Act 1900.  The initial approach was exceptionally conservative, aimed at ensuring claimants were given only enough to prevent the burden of maintaining the claimant falling on the state welfare system.

This restrictive approach was followed by a long period of generous orders through the majority of the 20th century, characterised by the rising liberal movement.  Courts began to have a wider regard to the nature and circumstances of each claimant’s position with a key consideration being whether the testator had breached the “moral duty” owed to the claimant.

The notion of a moral duty and assessment of whether it has been breached is still central to the Court’s methodology when determining a claim under the Act.  However, recognising the increase in frequency and size of awards that were being made, a return to conservative principles was prompted, the turning point being the Court of Appeal’s decision in Williams v Aucutt.  Justice Blanchard cautioned “it is not for the Court to be generous with the testator’s property beyond ordering such provision as is sufficient to repair any breach of moral duty”.  This more conservative approach has been reiterated in subsequent decisions and the number of cases where the Court has found a breach of the moral duty has declined in the past decade.

The Court of Appeal in Williams v Aucutt stressed that it is not the role of the Court to rewrite the testator’s will.  Because of this, claims have diminished since the turn of the millennium and Williams v Aucutt is still the leading authority used to quantify a claim under the Act.

Conclusion

In summary, the Court is required to look at all of the relevant circumstances in a particular case when deciding whether or not there has been a breach of a moral duty by the deceased.  The moral duty is assessed at the date of the death of the deceased, however the future financial position of the applicant may be considered.  Although estrangement will be a relevant factor that may decrease the moral duty (or, if due to the fault or neglect of the deceased, increase the duty), it will only extinguish a duty in cases of serious misconduct or estrangement, taking into account all of the relevant circumstances.

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

What’s mine is yours, right?

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Introduction

The Property (Relationships) Act 1976 (“the Act”) sets out the law governing the distribution of relationship property on separation.  The starting point in any relationship property dispute is equal sharing between the two parties.  However, a contracting out agreement may be entered into by the parties and this will take priority over the Act (historically known as a “prenuptial agreement”).  That said, entering into such an agreement demands caution; there are strict rules and conditions that must be satisfied in order for the agreement to have any legal footing.  If the correct procedure is not followed, the agreement may well be set aside.

Requirements for a valid agreement

For an agreement to be valid regardless of what it may be trying to achieve, a specific procedure must be followed when the agreement is drawn up:

  • The agreement must be in writing and signed by both parties;
  • Each party must have independent legal advice;
  • The signature of each party must be witnessed by a lawyer;
  • The lawyer who witnesses the signatures must certify that the implications of signing have been explained to both parties.

As these factors indicate, an agreement drawn up at the kitchen table will not be enforceable regardless of the intention or agreement of the parties.  This is to ensure that both parties understand and agree to exactly what they are signing, because often it can be overlooked when parties are caught up in the emotion of the relationship.

You have a valid agreement – but is it enforceable?

Assuming the procedural requirements above are followed, on the face of it the agreement will be valid.  However the question then becomes will it stand the test of time?  Relationships are not static and the assets and liabilities of each party will continue to develop.   A contracting out agreement should be treated as a living document, constantly evolving, and therefore should be updated as you would your will.

An agreement made in light of current circumstances will not necessarily be relevant five years later if the position of the parties has changed so that it would be a “serious injustice” to uphold the agreement.  As earning capacity, assets and debts change, the agreement may become less and less fair, which may give rise to a serious injustice.   However the passing of time in itself will not invalidate an agreement; other circumstances must be taken into account.

In making an assessment of whether the agreement will be upheld the court will have regard to:

  • The provisions of the agreement;
  • The length of time since the agreement was made;
  • Whether the agreement was unfair or unreasonable at the time it was entered into;
  • Whether the agreement has become unfair or unreasonable in light of changes in circumstances;
  • The fact the two parties wished to achieve certainty with the agreement;
  •  Any other matters the Court considers relevant.

Taking into account all of these factors that may be relevant, if the Court is convinced that the provisions have given rise to a serious injustice then the agreement will be set aside and the equal sharing provision under the Act will apply.

One particularly common consideration is whether the agreement has become unfair or unreasonable since the agreement was entered into.  Whether or not the change in circumstances was foreseen will also be relevant.  Not every injustice will entitle a Court to set aside an agreement.   There must have been at the time of entering into the agreement, or subsequently because of a change of circumstances, unfairness or a lack of equity of a substantial kind.

What is a “serious injustice”?

When undertaking its assessment the Court is essentially looking for a significant change in circumstances of one party compared to the other, thus making the agreement that was entered into significantly unfair at the time of separation.  A common example is where one party is unduly forced to sign an agreement that the party is not happy signing, that is to their own detriment or the others benefit.  There must be a mutual agreement between the parties.

An example is the Family Court decision of M-LA v AVW.  In this case, due to the agreement to keep all assets separate, the result would have left the wife with $4,387.00 in assets and the husband with $289,903.00. The reason was because the wife had given up work in order to care for a child.  The Court held the agreement caused a serious injustice, as the agreement “went too far in depriving the wife of any realistic opportunity of accruing relationship property”.   The structure and changes to the relationship over its course invalidated the agreement, showing the importance of keeping the agreement updated and relevant over the course of the relationship, regardless of how long the relationship is expected to last.

Conclusion

Continuing to update a contracting out agreement over the course of a relationship is vital.  Although it may seem costly, as a percentage of the assets you are protecting, the legal fees are minimal and it is best to be safe and not risk having the agreement pulled apart at the mercy of the Court.   The agreement should be updated every few years or whenever there is a significant change in the dynamic of the relationship.

If you would like further information please contact Renika Siciliano on 07 958 7429.

Residential care subsidy applications and trust reversals

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Introduction

The 2011 abolishment of gift duty means that property or money of any value can be freely gifted by natural persons without any duty imposition.  However, gifting limits allowed under the Social Security (Long-term Residential Care) Regulations 2005 remain unchanged and therefore gifting property to a Trust or third party (or company) must be done with caution.  In some instances, where a home has been transferred to a Trust, the question is whether an applicant’s home should remain in the Trust, or be returned to the settlor prior to the application for the rest home subsidy.

The gifting limit

These limits are $6,000 per 12 month period in the five year gifting period before the date of assessment for a residential care subsidy, and $27,000 per year for each 12 month period prior to this. Where an applicant for a subsidy has previously gifted more than either of these limits, eligibility may be affected when applying for a subsidy.

The Court of Appeal in B v The Chief Executive of the Ministry of Social Development [2013] held that these gifting limits apply per couple.  That is to say, if a couple gift a total of $54,000 ($27,000 each) to a Trust or third party, half of this may be included (i.e. “added back”) in an assessment by the Ministry of Social Development (MSD) if the gift is made outside the five year gifting period.  A gifting programme in the five years prior to the application being made can be entered into.  The yearly (12 month) limit imposed here is $6,000.

A failure to accurately disclose all gifting may well result in a finding of “deprivation”. The MSD will take deprivation into account in an assets assessment, so it is vital that assets are disclosed. Deprivation may also be found where assets are sold at undervalue, finance is restructured so as to reduce the income or assets of the applicant, or ownership of property is transferred from the applicant to a third party.

Threshold and eligibility

Current Government policy is very much along the lines that if an individual has the resources to support him/herself in relation to residential care then he/she will not receive assistance from the State.  The MSD will assess each person on the basis of the value of his/her assets and his/her ability to pay.

There are currently two asset value thresholds for an applicant aged 65 years or older, which will render an applicant eligible for a residential care subsidy:

  • Threshold A is $218,423 (including the value of the applicant’s house and car), and may apply if the applicant is single, or if both the applicant and partner are in long-term residential care;
  • Threshold B is $119,614 (not including the value of the applicant’s house and car), and may apply for a couple if only one spouse is in long-term residential care.  A couple eligible under threshold B will however, have the option of opting for threshold A instead, if they wish.

Certain assets are always excluded from an MSD assets assessment: personal belongings, such as clothing or jewellery; household furniture and effects; and pre-paid funeral expenses up to $10,000 in a recognised funeral plan.

Effect on a trust

These gifting limits create the anomaly that a settlor of a Trust may end up in a worse position having his/her home in a Trust, than that which would apply if they had never gifted away the property in the first place.  If the value of the gifting is above the limits set out above, this will be added to the applicant’s asset value when the assessment is conducted.  If the value is above threshold A, the applicant will not be eligible for a residential care subsidy.  An applicant in this situation is also unable to claim under threshold B for the personal home exemption, as the home is owned by the Trust.

There is however a silver lining: if “but for” the gifting of the home to the Trust, the applicant would have been below threshold B, a Trust reversal may be initiated.  This means ownership of the property in the Trust will be distributed back to the settlor of the Trust.  The settlor will be in the same position he or she was in prior to the gifting.  Such a situation will only arise if the applicant would have otherwise been under the threshold B value ($119,614), when totalling the value of his/her assets excluding home and car.

Trust income

Aside from the assets assessment of the individual, MSD will also consider the income of the applicant in an income assessment.  Income from a trust is considered to be a form of deprived income. “But for” the Trust – the income would have been available to the settlor(s) of the Trust.  The current income thresholds for the year 1 July 2014 to 30 June 2015 are:

  • Single applicant: $963 per year;
  • Couple, if both are in care: $1,925 per year;
  • Couple, if only one is in care: $2,887 per year.

MSD will look at the deprivation by the applicant settlor and may (and in most cases will) “add it back” to the financial means assessment.  This means that Trust income will usually be taken into account in any income assessment.  The MSD position is that an applicant should take all reasonable steps to maximise his/her income.

Conclusion

It is crucial that every applicant understands the range of choices available, and the implications of each of those choices, not only in the short term but in the later stages of life. Before deciding to gift property to a Trust, it is important to consider the size of the gifting, and how gifting will affect eligibility for a residential care subsidy. It is important to seek legal advice on the best approach to gifting assets, as future planning is essential, taking into account the implications of each option.

If property has already been transferred to a Trust, legal advice should again be sought to ascertain whether a Trust reversal should be commenced.  A number of factors need to be considered, including: what assets (other than the house) the Trust has; what assets the applicant has in his/her personal name (for the purpose of a threshold calculation); wider trust obligations; and the other implications of reversing the Trust. Other benefits in retaining a Trust may of course be relevant. All of these factors need to be taken into account to ensure that an informed decision is made.

If you would like further information please contact Gerard Rennie on 07 958 7422.

Joint tenants or tenants in common?

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Introduction

When property is bought by more than one individual, the parties can own the property as either tenants in common or as joint tenants.  It will depend on the parties’ circumstances as to which type of ownership will best suit them.  The two different types of joint ownership are described in more detail below.

Tenants in common

A tenancy in common is where two or more people purchase a property together and have defined shares in the property.  For example, if A paid 25% of the purchase price for a property and B paid the remaining 75%, the parties could choose to own the property as tenants in common to reflect their individual shares.  A would own a quarter share in the property and B would own a three-quarter share of the property.  The individual shares would be reflected on the certificate of title to the property.

Furthermore, when either party passes away, their share in the property will not pass to the other party.   The shares are dealt with according to the parties’ Wills.  For example, if B passed away before A, his three-quarter share would not pass to A, as it would if A and B were joint tenants.  Instead, his three-quarter share would pass to whoever he has chosen to leave it to in his Will.

Joint tenants

A joint tenancy is where two or more people purchase a property together and do not have or want defined shares in the property.  This type of ownership is common between a husband and wife.  When one person passes away, their share will automatically pass to the other party through “survivorship”.  For example, if the husband passes away, his share will automatically pass to his wife who will then have full ownership of the property.

A joint tenancy can be severed and in some circumstances it may be beneficial to do so.  In the case of Harvey v Gateshead Investments Ltd the High Court looked at how a joint tenancy can be severed and how caution should be applied in some circumstances.

Background facts

Mr and Mrs Harvey owned a property in Auckland (“Auckland Property”) as joint tenants.  Mrs Harvey ended up with a number of personal debts, and with that in mind, the couple decided to enter into a contracting out agreement under the Property (Relationships) Act 1976 (“PRA”) in December 2009.  Essentially this was so that not all of their assets and liabilities would be shared equally.

Under the agreement Mrs Harvey agreed to transfer her share of the Auckland Property to Mr Harvey, however, the transfer never took place as certain documents that needed to be signed to give effect to the transfer were not signed.

Summary judgment was entered against Mrs Harvey in respect of one of the debts she owed and a charging order was registered over the Auckland Property on 9 February 2010.  On 15 February 2010, Mr Harvey changed his Will to leave his estate to a trust for the benefit of his children and a life interest in the Auckland property to his wife.  However,  Mr Harvey was unable to transfer the Auckland Property to the trust due to the registered charging order.

Mr Harvey died in February 2011 and shortly after his death, the couple’s son, who was the executor named under Mr Harvey’s Will, registered a notice of claim on the title to the Auckland property, which reflected his father’s interest.  Mrs Harvey was subsequently bankrupted in December 2012.  A dispute arose between the couple’s son and Mrs Harvey’s creditors over the Auckland Property.

Summary judgment application

A further summary judgment application was brought by Mrs Harvey’s creditors, in which they argued that:

  • In accordance with section 47(2) of the PRA, the contracting out agreement was void.  Section 47(2) of the PRA states that any relationship property agreement that has the effect of defeating creditors will be void against those creditors during the period of two years after it is made;
  • The notice of claim entered on the title to the Auckland Property by Mr Harvey’s executor should be removed; and
  • Upon Mr Harvey’s death, the Auckland Property should fall to Mrs Harvey through survivorship.

The High Court granted the orders set out in the first two bullet points above however, the Court held that there were arguable defences to the claim that Mr Harvey’s joint interest in the Auckland Property had passed to Mrs Harvey by virtue of survivorship.

Severing a joint tenancy

A separate High Court proceeding took place to determine whether the joint tenancy between Mr and Mrs Harvey had been severed.  The High Court noted that where the right of survivorship (under a joint tenancy) potentially gives rise to an injustice, the Courts will often attempt to avoid this by severing the joint tenancy.

In this case the High Court found that severance had not occurred at law as the required documents, to transfer Mrs Harvey’s share in the Auckland Property to Mr Harvey, had not been signed.  Therefore, the issue was whether there was a justifiable or ‘equitable’ severance of the joint tenancy prior to Mr Harvey’s death, based on the facts of the case.

The High Court looked at two methods of severance of a joint tenancy that relate to this case:

  • Severance by mutual agreement; or
  • Severance by any course of dealing sufficient to show that the interests of all were mutually treated as creating a tenancy in common.

It was found that there was a common intention between the parties to sever the joint tenancy, even though Mrs Harvey was facing insolvency.  The High Court found that the changes made by Mr Harvey to his Will were inconsistent with any belief or intention that the Auckland Property was held jointly.  The Court also accepted Mrs Harvey’s evidence that she held no beneficial interest in the other half share of the Auckland Property and that she had agreed to terminate the joint tenancy as shown in the contracting out agreement.

In referring back to the summary judgment decision and in considering Felton v Johnson [2006] 3 NZLR 475 (SC), which also discussed section 47(2) of the PRA, the High Court stated that there must be a reduction in the amount available to a creditor before any defeating of a creditor’s interest can arise.

In this case, the transfer from Mrs Harvey to Mr Harvey was void against creditors as it reduced the amount of Mrs Harvey’s assets that were available to satisfy her debts as at the date of the agreement.  However, the severance of the joint tenancy did not prejudice creditors as at the date of the agreement or prior to Mr Harvey’s death as the creditors had no recourse to Mr Harvey’s interest prior to his death.  The joint tenancy would have severed upon the bankruptcy of Mrs Harvey or upon any sale order made in respect of the Auckland Property.

The High Court ordered that Mrs Harvey’s creditors were entitled to her share in the Auckland Property. However, the Court decided that the reversal or voiding of the agreement to sever the joint tenancy was not required to give effect to the order.

Conclusion

It is important to consider the different types of joint ownership when  purchasing property with another party and what type of arrangement is best suited to your current situation, taking into account any future plans you may have.  This is highlighted in the Harvey v Gateshead Investments Ltd case.  For example, if Mr and Mrs Harvey had originally bought the Auckland property as tenants in common, this would have allowed them to deal with the property in defined shares.

There are a number of factors to consider before deciding on whether to own property as tenants in common or as joint tenants.  We recommend seeking legal advice when purchasing property to ensure you are fully informed of your options.

If you would like further information please contact Dale Thomas on 07 958 7428.

Erceg v Erceg: A balancing act between trustee and settlor

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Case law has established that a beneficiary of a trust has a clear right to seek information relating to the trust to enable that beneficiary to ensure trustee accountability.  However, one of the main obligations of a trustee is to satisfy the intentions of the settlor.  When a settlor intends the matters of the trust to remain confidential, the rights of the beneficiary and the obligations of the trustee may no longer be compatible.

The recent case of Erceg v Erceg highlights this conflict and provides guidance in balancing the obligations of a trustee to fulfil a settlor’s intentions, and the rights of beneficiaries to have access to information.

In 2004 Michael Erceg, the founder of Independent Liquor NZ Limited, settled the Acorn Foundation Trust.  Michael was both settlor and trustee, and the Acorn Foundation Trust was one of a number of trusts settled by Michael.

The Acorn Foundation Trust deed contained a confidentiality clause which stated:

“Without prejudice to any right of the trustees under the proper law to refuse disclosure of any document or information, the trustees shall not, unless required by law, be bound to disclose to any person any document or information relating to this Trust, the Trust fund or any Trust property, the beneficiaries or any document setting forth or recording any deliberations of the trustees as to the manner in which they have or should exercise any power or discretion, or the reasons for any particular exercise of any such power or discretion, or any other related documents including this instrument”.

Michael was killed in an accident in November 2005.  Following Michael’s death, his widow and the second defendant, became the trustees of the Trust.

The plaintiff, Millie Erceg, was Michael’s mother.  She was named as a secondary beneficiary of the Trust.

The Trust sold its shares in Independent Liquor NZ Limited for a substantial sum.  The Trust was then distributed.  Millie Erceg did not receive any distribution.

Millie sought an order from the Court that she was a beneficiary of the Acorn Foundation Trust and requested copies of documents relating to the Trust.  These included copies of the Trust Deed, financial accounts for the Trust, the agreements for the sale of the Trust’s shares in Independent Liquor NZ Limited and the minutes of all trustee meetings.

Millie argued that it was her right as a beneficiary to have access to certain information to ensure that the trustees were accountable for their actions.  She requested copies of the Trust’s resolutions and financial statements which would have shown the distributions made to the beneficiaries.  In order for her to be properly advised of her rights and position by her counsel, disclosure of the documents was necessary.

In response to Millie’s argument the trustees claimed that they were bound by Michael’s intention as settlor that the Trust and its affairs remain confidential.  It is an established principle that trustees, when exercising a discretionary power, are not bound to disclose  any information to beneficiaries.

The Court acknowledged that there was a conflict between Millie Erceg’s right as a beneficiary to have access to certain information to ensure the accountability of the trustees, and the principle that the trustees were not bound to disclose the reasons behind their decisions, which had been the intention of the settlor.

Case law

To assist him in reaching his decision, the Judge considered the two leading trust law cases on the issue.

One of those cases was the 2003 UK case Schmidt v Rosewood Trust Ltd.  In that case the Court found that it was not a beneficiary’s proprietary right to have the trust documents disclosed to them, rather it is within the Court’s jurisdiction to supervise, and in some cases, intervene in the administration of trusts.  In a case involving personal or commercial confidentiality, the Court may have to balance competing interests of different beneficiaries, trustees and third parties in deciding whether or not to do so.

The Court also considered the New Zealand case of Foreman v Kingston.  Similarly to the Erceg case, the beneficiaries in this case requested the disclosure of certain trust documents and argued that the trustees were under a duty to disclose these to the beneficiaries. The Court in this case determined that the beneficiaries have the right to receive information which will enable them to ensure the accountability of the trustees, however, that this right is subject to the discretion of the Court.

Erceg v Erceg decision

In relation to Millie Erceg’s first claim, the Court determined that an order declaring her as a beneficiary was unnecessary.  The Acorn Foundation Trust deed named Millie as a secondary beneficiary.

When the Court considered Millie’s second claim, it acknowledged that there was a conflict between her right as a beneficiary to have access to certain information, so as to ensure the accountability of the trustees, and the principle that the trustees were not bound to disclose any reasoning behind their decisions.

The Court agreed that there should be disclosure of the documents requested to allow Millie to be properly advised of her rights and position.  This was, however, to be limited by Michael Erceg’s intention that the Trust remain confidential.  The trustees had an obligation to fulfil Michael’s intention as settlor, subject to their legal obligation to comply with directions of the Court.

Because of this, the Court ordered that the Acorn Foundation Trust Deed and the valuation the trustees received for the Independent Liquor NZ Limited shares were to be made available to Millie Erceg.  Millie and her counsel were also to have access to the financial accounts and resolutions of the Trust, however these were to be subject to redactions to ensure that the names of other beneficiaries and the amounts of individual distributions and loans were to remain confidential.

Case law both internationally and in New Zealand has shown that a beneficiary of a trust has a right to seek information relating to the trust to enable that beneficiary to ensure accountability.  The extent of this right however is subject to the discretion of the Courts, and may be limited by the intentions of the settlor.  Erceg v Erceg provides guidance as to how the Court may balance competing rights and obligations.

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

“What’s mine is mine and what’s yours is mine”

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Introduction

Thompson v Thompson  [2014] CA 117 is a case about relationship property and specifically relates to a post-separation payment made to one spouse under a restraint of trade covenant in a business sale agreement.  The Court of Appeal had to determine whether that payment was to be treated as separate property or as relationship property.  The case considers the nature of the restraint of trade covenant and, in doing so, the question of to what extent the post-separation payment reflected business goodwill or whether it was compensation for personal skills and attributes.

Facts of the case

Following the dissolution of their marriage in 2005, Mr Thompson, (the appellant), and his wife, Mrs Thompson, (the first respondent), agreed on the division of their considerable assets.  These included the family home, a holiday home, various chattels, and the proceeds of the sale of the business, Nutru-Life Health & Fitness (NZ) Ltd (Nutra-Life) and its holding company, Health Foods International Limited (HFI). Both companies had been transferred to the M L Thompson Family Trust (the MLT Trust) some 10 years earlier.  The second respondents were the trustees of the MLT Trust.  The parties were unable to agree on their respective entitlements to a payment of $8 million, made to Mr Thompson under a restraint of trade covenant entered into in December 2006.  This payment was made over four years after the parties first separated in 2002.

Upon their separation in August 2002, Mr and Mrs Thompson had been married for nearly 31 years and had five children together (now all adults).  Mr Thompson had many years experience working in the health foods/dietary supplements industry. In December 2006, the trustees of the MLT Trust sold the business assets of HFI and two other entities to companies associated with Next Capital Health Ltd (Next). The purchase price was $72.3 million. The sale agreement was conditional upon, among other requirements, Mr Thompson entering into a restraint of trade covenant.  Upon entering into the covenant on 21 December 2006, Mr Thompson received a payment of $8 million. It is common ground that the sale of HFI Group was at a very good price, and a significant factor in achieving that price was Mr Thompson’s agreement to enter into the restraint of trade covenant.

The Family Court decision

Mrs Thompson’s claim to half of the $8 million payment was first determined in the Family Court.  The Family Court held that the payment was the separate property of Mr Thompson because the payment was received some four years after the parties had ceased living together as husband and wife.  Therefore the Court found that it was not just to treat any portion of the payment as relationship property.  Mrs Thompson appealed to the High Court.

The High Court decision

According to the High Court, the restraint of trade covenant and the payment raised two separate considerations.  Firstly, the Court considered whether the restraint of trade covenant was given to protect the value of the HFI business.  Therefore it was necessary to focus on the value of restraining Mr Thompson from certain activities for a specified period.  The second consideration was that the covenant restrained Mr Thompson from using his personal skills and attributes.  The Court held that, as the payment for business goodwill was incorporated in the total purchase price, the payment for the restraint of trade covenant had to have been for Mr Thompson’s personal goodwill.

The High Court agreed that the payment was the separate property of Mr Thompson, however the Judge still decided to use her discretion under s9(4) of the Property Relationships Act 1979 to treat part of the restraint of trade payment to Mr Thompson as relationship property. The Court considered that there was a connection between the restraint of trade payment and efforts made during the marriage.  However the evidence before the Court was insufficient to allow the Court to apportion the payment between the amount pertaining to Mr Thompson’s business performance during the relationship and the amount of compensation for the loss of Mr Thompson’s future earnings. The Court held that if the parties failed to reach agreement on apportionment, additional evidence would be required at a further hearing.   Mr Thompson appealed to the Court of Appeal.

The Court of Appeal decision

The two main issues for the Court of Appeal were as follows:

Is the $8 million payment relationship property or separate property?

The Court of Appeal considered that the sum of $8 million as consideration for the restraint of trade covenant reflected the loss of Mr Thompson’s future business opportunities along with the other burdensome commercial obligations he undertook as part of the agreement.   The Court of Appeal held that the payment of $8 million was Mr Thompson’s own separate property and accordingly there was no basis for concluding that part of the business goodwill could be said to be attributable to Mrs Thompson and be available as an item of relationship property.

Should any portion of that payment be treated as relationship property under Section 9(4) of the Act?

The Court of Appeal stated that the starting point for the ascertainment of property resulting from a marriage partnership is the date of separation.  Property acquired after that date is usually considered the separate property of the acquiring spouse.  The key factor in deciding whether such property should be shared is to determine whether there is a link between the relationship and the benefit or burden of changes in assets and liabilities after separation.  There are strong policy reasons behind the differentiation between changes in the relationship property and changes brought about by the actions of one of the parties after separation.  The Court of Appeal held that “we see no principled basis upon which it would be just to treat any part of the $8 million separate property as relationship property”.

Implications of decision

The Court of Appeal decision of Thompson v Thompson endorses the “clean break” policy behind the Property Relationships Act that separate property is not required to be shared with the non-owning spouse. If a spouse could claim against future efforts or attributions of the other spouse then each party would continue to have a stake in the conduct and fortunes of his or her ex-partner, despite the dissolution of the relationship.  It could also unnecessarily promote the malicious post-separation consumption of relationship property, while discouraging the “energetic party” from acquiring or improving assets and repaying debts after separation.  This is because the benefits of these efforts would then have to be unfairly shared with the other party.  The recognition of and the giving of effect to separate property is as much a policy of the Property Relationships Act as the general policy of equal division of relationship property. In other words, the Property Relationships Act recognises that, in some cases, what’s mine is mine and what’s yours is yours.

If you would like further information please contact Daniel Shore on 07 958 7429.

Where there is a will – is there always a way?

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Introduction

In 2007, the new Wills Act (the Act) came into force.  The primary aim of the new Act was to give better effect to a will-maker’s intentions by simplifying the law, expressing it in plain language and modernising aspects of the law.

As before, the Act only partially regulates the law of wills.  Much of the law governing wills is left to the Courts.  Since the Act came into force, there have been many High Court declarations that particular documents are valid wills, which documents previously would not have met the required standard of a final will and testament of a deceased.  These include:

  • Unsigned draft wills;
  • A collection of documents that, when read together disposed of the will-maker’s estate;
  • An unsigned will prepared on a will kit form where the will-maker had discussed her wishes with her surviving children at different times; and
  • A letter named as a will, left with a daughter and a brother to be opened on the “will-maker’s” death.

Set out below are summaries of recent cases in which certain documents have been held to be valid wills.  Some of the restrictions on one’s ability to dispose of property by will are also noted, which show that, even where the Court finds that there is a valid will, there is not always a way.

In the Estate of Lawrence

The 2014 case of In the Estate of Lawrence dealt specifically with an application for validation of an unsigned draft will prepared for the deceased.

The deceased was diagnosed with a terminal lung disease in late 2009.  By mid-February 2013 she was very unwell.  On 1 July 2013, Ms C, a Solicitor, received instructions from the deceased about finalising the terms of her will.  A will was prepared in accordance with those instructions and taken to the deceased in hospital.  In the presence of the deceased’s daughter, the deceased confirmed that she was happy with the contents of the draft will.  Unfortunately, the deceased’s condition rapidly declined and she died before executing the will.  The deceased’s partner and daughter applied to the High Court for validation of the unsigned will.

The Court was satisfied that there was no previously executed will for the deceased and that the deceased’s wishes as set out in the draft will should be given effect to.  The Court made a declaration under section 14 of the Act that the undated and unsigned document was the valid will of the deceased.

In the Estate of Su-Yun Chiang

Another 2014 case, In the Estate of Su-Yun Chiang,dealt with “correction” under section 31 of the Act.  This provision allows the Court to make an order correcting a will if the Court is satisfied that the will contains a clerical error or does not give effect to the will-maker’s intentions.

In this case the will-maker was a Buddhist nun with a modest estate and limited family.  She made a will herself using a pre-printed form, without seeking legal advice.  The will appointed two executors and trustees, directed the payment of debts and expenses from estate funds, and provided that the residuary estate was to be held by the executors and trustees.  The will did not give any directions as to the distribution of the residuary estate (the rest of her estate).   However, at the time the will was signed, the will-maker told witnesses, including the executor, that she wanted the residuary estate to be distributed to a Tibetan monk who was a resident of the United States of America but a periodic visitor to New Zealand.

The issue for the Court to decide was whether the omission of any direction in the will to distribute the residuary estate to the Tibetan monk was a clerical error or an oversight capable of being corrected by the Court.  The Court was satisfied by the evidence that the omission of a direction regarding distribution was an oversight and made an order under section 31(2) of the Act correcting the will so that the will-maker’s expressed intentions could be given effect to.

Restrictions on testamentary freedom

It is important to note that, although the primary aim of the Act is to give effect to the ascertainable intentions of will-makers, there are still substantial restrictions on a person’s ability to dispose of his or her property by will in whatever manner he/she chooses.  The Family Protection Act 1955, the Property (Relationships) Act 1976 and the Law Reform (Testamentary Promises) Act 1949 (the Acts) have proved to be successful “tools” used to override the testamentary wishes of will-makers.

Under the Family Protection Act 1955, a spouse, partner, child, grandchild, and in some cases stepchild and step-parent, are entitled to make a claim against an estate where they have not been provided for in a will.  The Testamentary Promises Act 1949 provides for persons who have provided services to a will-maker in the expectation that payment would be provided for in the will.  The Property Relationships Act 1976 allows the revocation of gifts in a will to a spouse or partner who elects to apply for the division of relationship property under the Property Relationships Act 1976 on the will-makers’ death.

These Acts are arguably at odds with the primary aim of the Wills Act 2007 to give effect to the intentions of will-makers.  Therefore, as far as a will-maker’s intentions go, where there is a will there is not always a way.

Conclusion

Although the approach being taken by the Courts in applying the Wills Act is to ensure as far as is possible that a deceased’s wishes are fulfilled, it is advisable to seek legal advice to ensure execution of a compliant will to avoid your  family the costs, delays and uncertainty of an application to the High Court.  Furthermore, there is no guarantee that the Court will validate a will.  Additionally, in light of the restrictions imposed by the Acts mentioned above, seeking legal advice at the outset is even more imperative to ensure that, where there is a will, there is an inexpensive, simple way to give effect to your wishes.

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

What you need to know if you are an executor under a will

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Who is an executor?

An executor is the person (or persons) appointed under a will to carry out the terms of the will. Executors are often referred to in a will as trustees or personal representatives.

Being an executor is an important role and it is essential that you are aware of the legal requirements and duties involved.

This information is provided as a general guide about an executors’ role. Please note this is not an exhaustive list and circumstances will vary depending on the particular will, estate, property and persons involved. If you require further information on your particular situation, please seek specific legal advice.

Funeral arrangements and costs

One of the first steps with an estate is the funeral arrangements, which are generally up to you as executor to decide. Executors are usually guided by any wishes set out in the will, together with the wishes of the immediate family.

In most cases, the will authorises payment of all funeral costs to be paid by the estate, which is to be arranged by the executor. You need to ensure the estate has enough money to pay for the funeral and other expenses.

If the estate is “cash poor” (for example, if the assets are tied up in property), the executor may pay the funeral expenses personally and be reimbursed from the estate later.

The requirement for probate

As an executor you may be required to obtain probate for the will. This depends on the value of the estate assets and is required if the deceased owned land (except jointly owned land, which passes by survivorship). Some estates with minimal assets do not require probate.

Probate is a certificate from the High Court approving the will and authorising the executor to deal with the estate assets in accordance with the will.

The lawyer involved will prepare the necessary documents for you. The executor signs a document swearing that they will carry out his or her duties as executor.

Listing the assets and liabilities of the deceased

You will need to compile a list of all assets and liabilities that the deceased had at the date of death.

Assets could include property, shares, investments, bank accounts, term deposits, bonus bonds, personal items, vehicles etc. The liabilities of the deceased will include any debts owing by the deceased, mortgage payments, loans, power, phone and other every day bills and debts.

Part of your role as executor will be to close bank accounts, pay debts and cancel power, phone and other applicable accounts.

If you are unsure about what assets and liabilities the deceased had, we suggest you talk to the deceased’s family, lawyer or accountant.

Keep accounts

An executor is also required to keep proper financial records and, in some cases, file tax returns. If the deceased had an accountant, we suggest you involve the accountant in this process.

The Court has the right to require financial records to be produced, so it is important these are accurate and up to date.

Distribute the estate to the beneficiaries

An important part of your role is ensuring the assets of the estate are distributed (paid out or transferred) to the beneficiaries of the will.

If the will includes legacies (specific gifts of cash to certain people) to be paid, these legacies are to be paid first. Once all debts and legacies have been paid, the remainder of the assets are paid to the beneficiaries as set out in the will.

As an executor, you also need to be aware of any potential claims against the estate. As a general rule, the executor may distribute an estate six months after probate has been granted if no claims have been made. Executors should be careful if distributing before the six month period has lapsed, as they could then be held personally liable for any claims against the estate. In such cases, it may take much longer to distribute than the six month period.

Trusts and life interests

Under the will, you may be responsible to set up a trust. A trust is required where a beneficiary of the will is under 18 years of age or mentally incapable, or if there are specific instructions to establish a trust in the will. The role of the executor is to establish the trust required by the will and oversee the administration of that trust.

Also, if the deceased’s will grants a life interest to someone, the estate cannot be wound up until after that person dies. A life interest gives a person a right to benefit from the assets of the deceased for that person’s lifetime.

Claims against the estate

As mentioned above, an important aspect of being an executor is being aware of and dealing with any claims against the estate.

Depending on the circumstances, a claim could be made by a spouse, partner, children, other family members or people who are seeking to enforce a promise or gift for services. A claim must be resolved before the estate can be distributed otherwise the executor may be personally liable.

What happens if a person dies without a will?

Where a person dies without making a will, or if the will is invalid, the rules set out in the Administration Act 1969 will apply. In this case, there is no executor automatically appointed.

The usual situation is that the next of kin (spouse, partner, child etc) must apply to the Court for “letters of administration”. A person who is appointed as administrator has the same powers and duties as an executor. However, the assets of the estate will be distributed to beneficiaries according to the formula set out in the Administration Act 1969, rather than the will.

General Matters

The role of executor can be time consuming and you cannot charge for your time, unless there is a specific clause confirming you can (normally for professional executors, such as lawyers or accountants).

There are important legal requirements and duties imposed on an executor. If you require information on your particular situation, please seek legal advice.

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

Duties of trustees: What you NEED to know as a trustee

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Trustees and trusts

New Zealand has more trusts per capita than any other country in the world. New Zealanders want trusts. But do we really understand them?

In recent times, the creation of trusts has slowed but there has been an increase in beneficiary interest in trusts – in particular, requests for information from and claims against trustees.

In order to avoid disputes and defend claims, it is essential that trustees understand and comply with their duties.

Duties of a trustee

The key duties of trustees are:

  • To always act and make decisions in the best interests of the beneficiaries – this must be the main consideration of the trustees at all times;
  • To remain impartial between beneficiaries – this does not necessarily mean that all beneficiaries receive an equal share, but the trustees must consider all the beneficiaries equally;
  • To benefit the correct beneficiaries – trustees will be liable if they wrongly benefit people who are not beneficiaries of the trust;
  • To act unanimously – unless the trust deed states otherwise, the trustees must make decisions together;
  • To actively participate – a trustee cannot “sit back” and rely on the co-trustees to make the decisions;
  • To invest and manage the trust assets with care, diligence and skill as a prudent business person would. Professional trustees have a higher standard and must exercise the level of care, diligence and skill that a prudent person in that profession would;
  • To not profit personally from their position as trustee – this requires trustees to act voluntarily and without payment for their services, except in specific circumstances;
  • To understand and comply with the terms of the trust deed, other trust documents, the Trustees Act 1956 and all trust property;
  • Not to delegate their decision-making powers, except in very specific circumstances (i.e. where a trustee is overseas or physically unable to participate);
  • To keep proper records and give information as required if that information is necessary to ensure that the trustees have acted properly.

The above duties apply regardless of whether you are a trustee of a family trust or an executor appointed under a will.

Proposed changes

The New Zealand Law Commission is currently reviewing the law of trusts in New Zealand. Part of that review has been the proposal of a new Trusts Act to replace the current Trustee Act 1956. The final report by the Law Commission is due to be released towards the end of 2013.

Conclusion

In summary, the times – and trusts – are changing. If you are a trustee and have any doubts about your duties or the way the trust is being run, you should seek legal advice.

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

You’re getting married! The legal “to do” list

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Introduction

On 17 April 2013 the New Zealand Parliament passed the Marriage (Definition of Marriage) Amendment Bill giving same-sex couples the right to marry. The result of this is that all couples, regardless of gender, now have the right to marry to express their commitment to each other.

Getting married or entering into a civil union is an exciting and life-changing experience and it is important to think about the effect marriage or civil union will have on your legal affairs.

Your will

Many people do not realise that if you have a current will, your will is automatically cancelled when you get married or enter in to a civil union.

There is an exception to this under the Wills Act

2007, if your will is “made in contemplation” of marriage or civil union. This means that if you want to create a will before you get married or enter a civil union, it needs to be made near the time of your marriage or civil union.

Your lawyer can advise you on the wording required to make a will in contemplation.

What happens if your will is void or you have no will?

As mentioned above, a will which is not made in contemplation of marriage or civil union will become invalid when you marry/enter into a civil union. An invalid will is the same as having no will and if you die, you would be treated as having died “intestate” (which means dying without a will).

Where a person dies intestate, the Administration Act 1969 will apply. This Act has rules that apply by default for how a person’s assets are to be divided where that person does not have a will. Usually this will mean that the spouse or partner will have to apply to the High Court for Letters of Administration, which is the authority needed to deal with the deceased person’s estate.

To avoid conflict and ensure your assets are dealt with in accordance with your wishes, it is important to think about creating or updating your will.

Property (Relationships) Act

The Property (Relationships) Act 1976 sets out how assets are blended and divided between people in a relationship.

Generally, where a couple are married, in a civil union or de facto relationship, the Act says that all property they own, unless they specify otherwise, is to be shared 50/50 in the event of a separation or death.

If you are in a relationship and you have assets which you believe should be/stay “yours”, then you and your spouse/partner can enter in to an agreement setting out that the Act does not apply to your assets. Please note that both you and your spouse/partner must have independent legal advice for such an agreement to be legally binding.

Another option to protect assets is to transfer assets to a family trust (see below), but this generally needs to be done in advance of the relationship starting and it is best to do this in conjunction with the agreement as set out above.

PLEASE NOTE: You do not need to be married or in the civil union for this Act to apply – it can apply to couples who live together or not, in many varied and wide situations. Talk to your lawyer if you have concerns about how this Act might affect you.

Blended families

As lawyers, we find that disputes often arise in the case of subsequent marriages where there are children from a previous relationship.

Every situation is unique, but if you are entering in to marriage or civil union and you have children from a previous relationship, you will need to think carefully about how to balance the interests of your children and your new spouse or partner.

Family trusts

Family trusts are often used by individuals or couples as a mechanism to protect assets for children in future. The benefits of a family trust are numerous and the suitability of a trust will depend on your particular circumstances.

Problems can arise where a couple separates due to a relationship break down and the bulk of their assets are held by the trustees of a family trust. As the trustees hold assets in a trustee capacity, the couple as trustees may have to continue to co- operate as trustees.

If you have a family trust, it is important to think about how your trust is structured to deal with future changes and whether it is appropriate for your current relationship.

Enduring powers of attorney

You and your future spouse or partner might also want to think about appointing attorneys to look after your property and welfare matters, if you become unable to do so.

There are two types of attorney that are able to be appointed:

  • An attorney(s) to act for you in relation to your property (land, bank accounts, shares, investments – anything you own in your personal name); and
  • An attorney to act for you in relation to your personal care and welfare matters (to make decisions about your medical care, health and wellbeing) if you lack mental capacity to make those decisions for yourself.

Often spouses or partners appoint each other, with alternative attorneys, to deal with these types of matters should one of them lose capacity.

Conclusion

Every person’s individual situation differs, but it is important to think about how your legal matters will affect your future spouse or partner. In order to enjoy your “big day” free of worry, we recommend you talk to your lawyer first.

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

Contact us

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New Zealand

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