By Kiri Williams

26 October 2023

Strategically planning the right vehicle to both build and preserve your assets for future generations has always been important. When doing so, you will also to want to ensure that the assets are managed, used or sold in a way consistent with your intentions.

The recent Court of Appeal case McLaughlin v McLaughlin [2023] NZCA 473 highlights the importance for settlors (the creators of a trust) who want to preserve assets for future generations, to make sure their directions or wishes are known to their professional advisors, including their lawyer as well as the trustees of their trust. The intention and purpose of the trust should be recorded at the time the trust is created.  This is important so that the trustees have the necessary tools and information to understand and reflect the settlor’s wishes to administer the trust in accordance with the purpose of the trust.

In McLaughlin v McLaughlin the settlors created a discretionary family trust and appointed their son, John, a trustee of the Trust. The discretionary beneficiaries were the settlors’ four sons along with any spouse, widow or widower of their sons, and any of the settlors’ grandchildren or great-grandchildren. A discretionary trust means that the trustees determine when a beneficiary may benefit from the trust and by how much. Conversely, the trustees of a fixed trust have little control, and the settlors specify who the beneficiaries are and what payments or benefits they will receive, at the time the trust is created.

The Trust owned a large block of land that adjoined a block of land owned by John. The settlors made it clear to the trustees that they wanted to subdivide land owned by the Trust and for John to play a major role in realising that goal, while being aware that John’s land would also benefit from subdivision at the same time. The trustees proceeded to subdivide the Trust’s block of land and John’s land, with John at the helm in a paid role as project manager.

Andrew and Mark, sons of the settlors, claimed in the High Court and then subsequently in the Court of Appeal, that the subdivision undertaken by the trustees was mismanaged and that the beneficiaries would have been better off had the trust land been sold as a whole and the proceeds invested. Andrew and Mark also claimed that John had benefited unfairly from the project and had earned significant fees as project manager and obtained benefits as the adjoining landowner.

In their decision the Court considered two well established rules that apply to all trustees:

• That trustees must not benefit from their trusteeship; and
• Trustees must not put themselves in a position where their interest and duty conflicts.

The exceptions to these rules allowing a trustee to ‘self-deal’ are:

1. If they are expressly authorised to do so by the trust deed; or
2. If the settlors impliedly authorise the trustee to do so; or
3. If the trustee’s actions are sanctioned by the Court.

The Court agreed that both exceptions (a) and (b) above applied in the McLaughlin case. More significantly, the Court of Appeal clarified the legal position on when the ‘implicit authorisation’ exception can be used. Implicit authorisation may be inferred when the settlors convey and preferably record in writing at the time their trust is created, their intention as to why they are creating the trust, how they would like the trust assets managed and used and for what purpose.

The settlor’s express intentions can be seen to authorise the trustees to act in a certain way, even if a trustee would self-benefit from the decision they make and create a ‘conflict of interest’ scenario. The implicit authorisation exception is narrow and the Courts apply it cautiously and only to a specific set of circumstances where the intention was clear on the outset.

In McLaughlin it was shown that the settlors always intended the land to be developed and subdivided, and appointed John as trustee so that he could carry out their wishes. The evidence included a Memorandum of Wishes, evidence from the legal advisor at the time the trust was created and an affidavit from one of the late settlors supporting their intention. Further, the Trust Deed authorised a trustee (in this case John as the project manager who was shown to have previous experience in property management and subdivision) to charge for their services, as long as the fee was fair and reasonable.

This case demonstrates to settlors who want the next generation to use and manage their assets in a certain way, the importance of making their wishes known at the outset and to have them recorded in writing. If you would like to know more about how we can help you ensure your assets are preserved for you, your family and future descendants, while minimising the risk of inter-family and generational misunderstandings, please contact us at Pitt & Moore on 03 548 8349.

By Emma Marshall

29 August 2021

The Bright-Line Test (“BLT”) applies to sales of residential land making capital gain on sales taxable at the seller’s normal income tax rate if disposal occurs within a certain “bright-line period”.  Trustees need to be aware that transfers of residential property to and from family trusts are captured.

In March this year the Government extended the bright-line period for residential land to 10 years and made other significant changes.

The main home exclusion (“MHE”)

Under current rules the MHE will apply to trusts where the property was the main home of a beneficiary of a trust, if:

• the person disposing of the land is a trustee of the trust and a principal settlor of the trust does not have a main home; or
• if a principal settlor of the trust does have a main home, it is that main home which is being disposed of.

In this context a principal settlor means a settlor whose settlements to the trust are the greatest, or greatest equal, by market value.

However, the MHE does not apply if the person:

• has used the MHE two times or more within the two years immediately preceding the bright-line date (disposal date) for the residential land; or
• has engaged in a regular pattern of acquiring and disposing of residential land.

Under the 2021 amendments the MHE (whether in the trust context or otherwise) will no longer apply on an all or nothing basis. Instead, except for an allowed change of use buffer period, it will apply only for the period the property is used as the person’s main home.

Rollover Relief

To clarify the position regarding family trusts and the BLT, the Government has indicated it intends to provide rollover relief from BLT in certain instances where residential land is settled on a family trust, applicable to transfers of residential property on or after 1 April 2022. It is currently seeking submissions to determine how and when such rollover relief should apply.

Get professional advice

If you are considering making changes to the ownership of trust property, specialist legal and tax advice will be required to avoid unintended and costly tax consequences.

Talk to us

If you would like more in-depth advice or further information about the content of this article, please get in touch with the team at Pitt & Moore on 03 5488349, and ask to speak Emma Marshall, Partner.

As most of you will be aware, the Trusts Act 2019 (the Act) came into force on 30 January 2021. Now that the dust has settled somewhat and the Act is in force it is a good time to consider what practical steps are required under the Act for Trustees.

11 April 2021

Core Documents

Each trustee is now obliged to keep copies of the trust’s core documents, most importantly the trust deed and any document varying the terms of the trust among a number of other documents.

Trustees must either keep their own copies of these documents, or ensure that at least one of the other trustees holds all of the core trust documents and will make them available on request. If you are not confident in your fellow trustees’ ability with paperwork, it is prudent to keep these documents personally.

Trustee Duties

Under the Act, trustees are now required to comply with a number of mandatory duties and default duties if they are not specifically excluded in the trust deed. The mandatory duties merely state principles of trustee conduct that have long been acknowledged as being part of the law (such as acting honestly and in good faith).

If a default duty has not been modified this may mean that trustees cannot now do things that they have become accustomed to doing.

Trustees now have an express duty to actively consider what information they will give to beneficiaries. Trustees do retain discretion about what information they provide, but there are now two important statutory presumptions. These are that:

Disclosure of Trust Information

1. All beneficiaries should be told that they are beneficiaries, be given trustee contact details (updated as trustees change) and be advised that they have rights to request information; and
2. Trustees should provide other trust information to beneficiaries on request.

Trustees need to ensure that they have complied with the above two principles actively. Have you disclosed to all beneficiaries that they are in fact beneficiaries?

While trustees do not have an absolute obligation to disclose information to beneficiaries when asked to do so – there are various factors specifically listed in the Act that can be considered before making a final decision – the presumption is now more heavily weighted in favour of disclosure. Those factors include considerations such as the nature of beneficiary interests, beneficiary ages, any confidentiality obligations and the effect the release of information could have on family relations. It will be important to record where these factors are relied upon.

Talk to us

If you or your fellow trustees would like further information about any of these items, please don’t hesitate to get in touch with Emma Marshall, Partner, on (03) 548 8349 for advice.