The importance of strategically planning the right vehicle to both build and preserve your assets for future generations has always been important. When doing so, you are likely 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 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:
- if they are expressly authorised to do so by the trust deed; or
- if the settlors impliedly authorise the trustee to do so; or
- 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 to ensure your assets are preserved for you, your family and future descendants, while minimising the risk of inter-family and generational misunderstandings, please contact your lawyer.
 McLaughlin v McLaughlin  NZCA 473