Many contemporary (post 2021) trust deeds adopt an explicit ‘priority principle’ which confirms the settlors’ intention that the interests of certain beneficiaries (normally the eldest generation, or ‘Mum and Dad’) are to be preferred over the other beneficiaries (normally their children and grandchildren).

This reflects the typical position in New Zealand that the Mum and Dad settlors usually contribute the substantive assets to the trust and maintain and enjoy the benefit of those assets during their lifetime.

While most older trust deeds, on their face, place all beneficiaries into the same class of ‘discretionary beneficiaries’, the usual unwritten understanding was that Mum and Dad’s interests would be preferred during their lifetimes.

However, the Trusts Act 2019 (Trusts Act) which came into force in 2021 introduced various mandatory trustee duties, which apply to all trustees, and default trustee duties, which apply to all trustees unless modified or excluded by the express or implied terms of a trust.

The mandatory duty of impartiality in section 35 of the Trusts Act provides a trustee must not unfairly favour one beneficiary or group of beneficiaries to the detriment of the others.

While contemporary trust deeds can (and routinely do) expressly override the duty of impartiality and allow the interests of Mum and Dad to be preferred, there is uncertainty as to how to approach this issue with older trust deeds which do not provide for priority amongst beneficiaries.

Queenin** v Queenin [2024] NZHC 1035**

This case concerned a trust established by Bert and Diana in 2007. Bert and Diana, and one of their three children, were the trustees.

In 2022, following increasing compliance costs arising from the Trusts Act, Bert and Diana wished to wind up the trust and distribute its assets (their family home, a holiday home and a rental property) to themselves. The son who was a trustee did not support this decision, so Bert and Diana removed him as a trustee and appointed their accountants’ in his place.

The son applied to the High Court alleging that Bert and Diana had breached their obligations as trustees and sought to replace them as trustees with an independent corporate trustee.

The Court confirmed the removal of the son as a trustee noting “…as communications had completely broken down the removal of [son] as a trustee and his replacement by a trustee more amenable to [Bert and Diana’s] interests was the only logical response.”

The Court also made several comments regarding Bert and Diana’s position:

• Proposing to treat Bert and Diana the same as any other beneficiary “…ignores the undisputed context to these proceedings. The trust assets represent the capital accumulated by Bert and Diana over their lifetimes. […]. It was Bert and Diana that chose to place these assets in a family trust, as many New Zealand couples in their position have done, in order to protect those assets and as a mechanism to ultimately pass their assets to their family once they themselves no longer require them. The fact that Bert and Diana are, in terms of the trust deed, simply discretionary beneficiaries like their sons cannot diminish their contributions to the trust properties.
• In contrast, there is nothing to suggest that [son] or indeed any other member of the Queenin family has contributed any wealth whatsoever to the trust. Instead, [son] was appointed as a trustee by his parents as the settlor appointees, presumably to assist them in the management of those trust assets.
• It was clear the son’s approach “simply ignored any recognition of the context of the establishment of the trust and the reality that each of the assets held by the trust was critical to his parents ability to enjoy a comfortable retirement — following which, and upon their passing, the trust assets would presumably pass to [son] and the other discretionary beneficiaries through the trust and/or testamentary dispositions.”

Justice Powell stated he did not accept that “the Trusts Act has changed the landscape of small family trusts so fundamentally that those who have settled trusts for planning or asset protection purposes can no longer expect to control them for their own benefit. Although clearly the obligations for trustees are more explicit under the Trusts Act than hitherto, I do not think it is reasonable for a trustee appointed by the settlors in a small family trust to ignore the essential context and the very reason the trust was established in the first place in order to argue that the Trusts Act now means that settlors/trustees like Bert and Diana cannot expect to enjoy the fruits of their labours and must instead run the trust as though they are just two of a particular class of beneficiaries, with no greater claim to use of the trust assets than the other beneficiaries.”

While these comments may provide some comfort to Mum and Dad settlors, this is an area that is likely to see increasing litigation in the future. The outcome of the case might not have been so clear if the son’s contribution to the preservation or maintenance of trust property had been significant and this does not provide any certainty where the family members in dispute represented the second and third generation of the family (that is children and grandchildren).

This case is another timely reminder of the importance of reviewing trusts, particularly those established prior to the Trusts Act coming into force in 2021, and considering whether those trusts can or should be varied to address developments in trust law since they were settled, or indeed if they are still necessary or beneficial moving forward.

If you need advice on a trust, then Mortlock McCormack Law can assist. Please contact Jamie Stanton, Senior Associate (03 343 8588 or [email protected]), or any member of our trust law team.