A dispute involving a family trust has received some publicity in the last year in lawyer’s seminars, articles and blogs. The case is Queenin v Queenin, and Smith and Partners have a particular interest in this case as Nathan Tetzlaff, who wrote the following article, was the lawyer who represented the successful party, the Queenin parents.

This case is a good example of how disputes can arise in relation to a family trust, the obligations of trustees, the rights of settlors, and how the Court may sort out a dispute.

Background

The parents set up a trust to hold their assets – several properties, and the rental incomes generated from them. The key terms of the trust were that:

• The trustees were the parents and one of their sons;
• The main beneficiaries of the trust included the parents and all three of their children; and
• The parents, as settlors of the trust, had the right to add and remove trustees.

The trust was used for many years but its management was relatively minimal. Annual accounts were prepared and expenses were reimbursed, but there was little in the way of formal authorisation or written resolutions for smaller management decisions. Despite being a trustee, after a short time the son didn’t have a day-to-day management role for the trust.

After taking legal advice from their accountant and previous lawyer about new trust regulations, the parents considered winding up the trust. The previous lawyer prepared documents for the trustees to sign winding up the trust, and distributing the properties and cash back to the parents. The parents had discussed this with their children earlier in general terms; unfortunately, the trustee son wasn’t consulted about the specifics or timing. He was contacted when the documents were ready for signing by the trustees.

The other children, who were not trustees, supported the plan. However the trustee son became reluctant. He demanded documents and information to assess the situation. Concerned about this sudden and unexpected step from him, and his refusal to agree with their plan, the parents moved the trust’s limited funds into their own account for safe keeping.

At this point the parents changed lawyers. They decided not to wind up the trust after all, but to remove their son as a trustee and appoint a company run by their accountant as third trustee. Using their power as settlors, they signed documents to remove their son as a trustee.

In response the now ex-trustee son filed a claim in the High Court. He requested orders that his removal was void and asked the Court to remove his parents as trustees instead. He claimed (among other things) that their lack of consultation with him and the movement of trust funds to their personal account were breaches of their obligations as trustees which justified their removal. He also asked for orders that his parents (not the trust) pay his legal expenses personally.

The Judge’s decision

The Judge put a lot of emphasis on the context, particularly that the parents had contributed all the trust assets. Although they were trustees and discretionary beneficiaries just like their son – and in theory no trustee or beneficiary has any more rights than any other – the Judge was careful to keep the context in mind. After all, the parents had built up their assets and all of the trust assets were due to them.

The Judge observed that the parents had discussed their intentions with their children, but also noted some lapses in their decision-making in the past, and in relation to the proposed winding up. He commented that communication from the parents’ previous law firm to their trustee son left a lot to be desired, and unnecessarily exacerbated the conflict. He was critical of closing the trust’s bank account.

Nonetheless, the Judge refused all of the son’s claims, upheld his removal as a trustee, and refused to remove the parents as trustees or appoint a professional trustee company. (Although the Judge did order that the trust could not be wound up and the beneficiaries could not be changed, unless the Court consented to that.)

The Judge ordered that the parties should each pay their own legal costs.

Key takeaways

The fact that the parents won without having to contribute to their son’s legal costs shows the importance that the Judge put on the purpose of the trust and the fact that the parents were the sole contributors to its assets.

The outcome provides important guidance for trust management and dispute resolution. Summarising paragraph 74 of the Judgment:

• The obligations for trustees are more explicit under the new 2019 Trusts Act than they were previously;
• However, a trustee appointed by the settlors in a small family trust must take into account the essential context, and the reason the trust was established in the first place; and
• Settlor trustees, like the parents, can expect to enjoy the fruits of their labours. They don’t need to operate a trust as though they are just ordinary beneficiaries with no greater claim to the trust assets than the other beneficiaries.

This case has been quite controversial. Prominent lawyers (including at least one King’s Counsel) have correctly pointed out that when settlors of a Trust gift their assets to the Trust, they lose ordinary ownership rights to those assets. In most cases the settlors are discretionary beneficiaries of the Trust just like any other beneficiaries. Settlors can write a Memorandum of Wishes setting out how they would like the trustees to use the assets, however that is not binding on the trustees.

By putting so much focus on the settlors being the source of the Trust’s assets, the Judge in the Queenin case has favoured pragmatism over a pure, technical, understanding of trusts and property rights. Not all lawyers are happy with this, and it remains to be seen whether Judges in future cases are content to apply (or extend) this approach, or wind it back in favour of a more black and white view to property rights.

In the interim there are three broad lessons to learn from this case.

The first is Judicial Pragmatism. All the obligations of a trustee imposed by the trust deed and the law apply, but the law also gives Judges some flexibility. Where able, the Judge will consider all the context to reach a result that is appropriate and fair. In this decision the Judge decided strongly that the parents were entitled to control and benefit from the assets they put into the trust, even though their management of the trust was not perfect.

That has implications outside of trust law as well. Just because a law has technically been broken doesn’t necessarily mean that someone should go to Court about it. Judges have a measure of discretion in a range of situations, and most will try to ensure that the outcome of any dispute is just, fair and proportionate. A Judge will probably lack sympathy for a claimant who argues legal technicalities without being able to point to any real wrong or injustice that has happened as a result.

The next lesson is that Proper Trust Management Is Crucial. Trust decisions need to be documented and unanimously made. When they wanted to wind up the trust, the parents did the right thing by taking legal advice about their plans. Unfortunately, that advice from the previous law firm did not meet the legal requirements and this gave their trustee son a chance to cry foul, dragging the previous management lapses into the dispute as well. More careful management throughout, with more prudent legal advice, would have been very helpful for them. Smith and Partners were very happy to be able to resolve the situation to achieve this excellent result for our clients.

Finally, Effective Communication May Prevent Escalation. A badly worded email or a lack of communication can inflame a situation and make it far harder to resolve disputes amicably. Open and transparent discussions at an early stage, and possibly mediation, are options that might prevent a minor dispute from escalating into legal proceedings.

If you need assistance setting up or managing a trust, or if you have a trust dispute, we have the experience and expertise to offer high quality advice and representation.