Trustee Decision-Making

How much weight should settlors’ directions carry?

It is estimated that there are between 300,000 to 500,000 trusts in New Zealand, and it is often said that we have one of the highest numbers of trusts per capita in the world. Although the reasons for having a trust are not quite as compelling as they used to be, trusts remain a large part of the legal and asset planning landscape. Trusts arise in many contexts including property ownership, investments, relationship property, insolvency and estates – to name a few.

We explore some of the interplay between settlors and trustees of a trust, particularly in relation to directions given by the settlors to trustees. It is very common for settlors to provide a form of guidance to trustees as to how the trust should be administered. However, must trustees follow the settlor’s directions? Should they follow those directions? What effect, if any, do a settlor’s wishes have on the trustees’ administration of the trust?

Operation of a trust

It is useful to begin with a reminder of the core mechanics of a trust. When assets are settled on a trust, they are transferred from the ownership of the settlors to the trustees. The trustees manage those assets for the benefit of the trust beneficiaries, and in accordance with the purpose and terms of the trust.

A settlor can also act as a trustee, but trustees must exercise their powers independently and in accordance with their duties to the beneficiaries. This is often achieved by having an independent trustee. The role of an independent trustee is becoming increasingly important and a lack of separation between the settlors, trustees and beneficiaries may undermine the trust’s purpose and leave it vulnerable to challenge.

It is for this reason that a settlor may choose to give written directions to the trustees about how the trust’s assets should be managed, how various beneficiaries should be treated, how the assets should be distributed and when that distribution should happen.  These directions take various forms but are often referred to as a ‘letter of wishes’ or a ‘memorandum of guidance.’ They are typically separate from the trust deed and kept with the core documents of the trust. Settlors can update these documents over time and they are often referred to or repeated in the settlor’s will. It is common for these directions to take effect on the settlor’s death or incapacity.

Effect of settlor guidance in trustee decisions

Guidance of this sort is not legally binding on trustees, but it is still an important consideration. As discussed above, the role of a trustee is to administer the trust in the best interests of the beneficiaries. A trustee is not an agent – nor puppet – of the settlor.

Trustees must exercise their own independent judgement when making decisions about the administration of the trust. They must consider all relevant factors. A settlor’s expressed wishes are one such factor, provided those wishes are consistent with the purposes and terms of the trust.

There is some authority in case law to suggest that this guidance is a mandatory consideration for trustees, but it is clear that – as a minimum – trustees should read and understand the document. The Court of Appeal stated in the Chambers case, ‘It is necessary for trustees to read and understand a memorandum of guidance to discern the settlor’s wishes, and then with those wishes in mind make an independent assessment of the appropriate course of action, taking into account not just the memoranda, but all relevant factors.

Independent decision-making

Trustees should take particular care when exercising powers in a way that departs from the settlor’s expressed wishes, as these decisions are more likely to be challenged by beneficiaries.

Although trustees are not ordinarily required to give reasons for their decisions, if that reason is challenged, they may be required to show that their decision was properly reached. Where a beneficiary can convince a court that there is a genuine and substantial dispute about whether a decision was reasonably open to the trustees, the court may scrutinise the decision-making process.

In those circumstances, trustees will need to show that the decision was within their powers, was made for a proper purpose and was rational, that it took into account relevant considerations and ignored irrelevant ones, and that the decision was reasonably open to the trustees in the circumstances. This list is not exhaustive but illustrates that the exercise of trustee powers can be complex.

Other options for trustees

Where trustees propose to make a decision that departs significantly from the wishes of the settlor – or involves a particularly significant or ‘momentous’ decision regarding trust assets or beneficiaries – the trustees should consider applying to the High Court for a ‘blessing order.’ This type of application takes advantage of the High Court’s supervisory role in relation to trusts and asks the court to ensure that the trustees have properly formed their view and that the proposed decision is one that is reasonably open to them. If granted, the order can provide trustees with protection from later challenge.

Difficulties can arise where the settlor’s later wishes differ from the context and purpose for which the trust was originally established. Over time, a settlor’s intentions may evolve; guidance provided years after the establishment of the trust may sit uneasily with the trust’s original objectives. In such cases, trustees may conclude that the later expression of wishes carries less weight than the underlying purposes of the trust, given the trustees’ duty to administer the trust in accordance with those purposes.

If faced with this situation it would be worth discussing with us whether there are powers to vary the trust and to add/remove beneficiaries, and whether restructuring the trust through these means may achieve a more secure outcome. 

While it is common for settlors to leave written guidance for trustees, such documents are not binding but instead form part of the broader context that trustees should consider when making decisions. Trustees must ultimately exercise their own independent judgement. They should neither follow a settlor’s wishes blindly nor disregard them entirely.

Where significant decisions are required and uncertainty exists, it would be prudent to take legal advice and consider all available options including whether to seek the guidance of the High Court through an application for a blessing order.

DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.