Category: Dispute Resolution

If you are appointed as an executor under a Will, a large amount of trust is placed in you. An executor has duties towards the beneficiaries, and beneficiaries have their own rights.  But what about when an executor is also a beneficiary under a Will? How do you balance those two roles and interests?

Executors have a number of duties:

• Act in the best interests of the Estate;
• Act impartially towards beneficiaries, and not be unfairly partial to one beneficiary or group of beneficiaries to the detriment of the others (although an executor is not required to treat all beneficiaries equally);
• Act unanimously (if more than one executor is named in the Will);
• Give basic information to beneficiaries when requested.

Executors have limits on their powers over and above the Will:

• Not to exercise a power either directly or indirectly for the executor’s own benefit;
• To actively and regularly consider whether the executor should be exercising one or more of the executor’s powers.

If you are the spouse, relative or close friend of a person making a Will, there is a good chance you will be appointed an executor, and possibly be named as a beneficiary under the Will.  Should that occur you will have two roles.  This can become difficult to manage when someone is challenging a Will such as a through a Family Protection Act claim (see Daniel Shore’s article Family Protection Act 1955 and the Concept of Moral Duty).  An executor has a duty to the Estate, whereas a beneficiary has a right to receive from the Estate.  In a Court proceeding, arbitration or mediation, an executor/beneficiary may have to switch between “hats”:

• As an executor: To act in the Estate’s best interest;
• As a beneficiary: To act in their personal interest.

The key distinction between the roles is that an executor will normally remain neutral (particularly if there are competing claims) and a beneficiary is an active participant.  The two roles interact simultaneously, but separate legal advice must be obtained for each role:

• As an executor: advised by the Estate’s lawyers;
• As a beneficiary: take independent legal advice.

The following diagram summarises the two roles and how they interact in a Family Protection Act claim when a claim is brought and opposed by another party:

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.

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.

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.

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.