McLaren v McLaren: family trusts continued
Family trust disputes are providing a good source of interesting cases at the moment – unfortunately they do of course come at the expense of the family relationships in question. In our previous article we commented on the case of Erceg v Erceg which involved questions about when a beneficiary of a trust is entitled to obtain trust information from the trustees. This article concerns the case of McLaren v McLaren which was a case brought by parents against their son regarding the operation of a family trust.
In the McLaren case, the parents had operated a mussel farming business in the Marlborough Sounds for a number of years and gradually introduced their son to the business. The parents and son had formalised their operating business into a partnership in 1996 on a 50/50 basis and then in 1999 a family trust was established (the BDM Trust) and the assets used by the business partnership were transferred to that trust.
The trustees appointed by the BDM trust deed were the parents, the son and the parents’ accountant who had recommended the formation of the trust. Importantly, under the terms of the trust deed (and apparently unbeknown to the parents or else not fully appreciated by the parents) the son was given the power (as “appointer”) to appoint new trustees and to remove any of the discretionary beneficiaries of the trust. This was a fundamental power given to the son at the parents’ expense.
In 2015 the relationship between the parents and the son deteriorated when the parents advised that they were proposing to sell the mussel farms that were owned by a separate entity. That apparently meant that the BDM Trust would lose the farm servicing work that it had previously carried out. The son didn’t react well to that news as he appointed two new trustees to the BDM Trust and also executed a document to remove his parents as discretionary beneficiaries of the trust. In response, the parents bought legal proceedings against the son essentially seeking to overturn the son’s actions.
In deciding the case, Justice Dobson had to consider the extent to which the son owed “fiduciary obligations” to his parents as the “appointer” and whether he was in breach of those obligations. The son’s defence was that the power of appointment (giving him the power to appoint trustees and remove beneficiaries) was a power that was vested in him personally and was separate from the position of a trustee and therefore was not constrained by any fiduciary obligations.
The Judge considered all the circumstances and decided that certain basic fiduciary obligations were binding on the son in the exercise of his power to remove his parents as beneficiaries. They were obligations not to act in bad faith or for an improper motive, to act responsibly, to act reasonably and to not take into account irrelevant, improper or irrational factors. The Judge decided that the son’s action in 2015 in removing his parents as beneficiaries of the BDM Trust was disproportionate and entirely in the son’s own interest. Therefore that decision breached the son’s fiduciary obligations to his parents as it was a decision having regard to improper factors and was unreasonable and the Judge therefore ordered that the parents were to be reinstated as beneficiaries.
In relation to the appointment of the additional trustees by the son, the parents had criticised those appointments as they considered that it was intended to create a voting block with the son that would successfully oppose the parents’ views for the ongoing governance and administration of the BDM Trust. However, the Judge decided that the two additional trustees were acting as legitimate independent trustees, they were mindful of their obligations to act in the interests of all beneficiaries and that the son’s appointment of those trustees was reasonable in the circumstances of the family rift which had occurred in 2015. The Judge noted that the removal of trustees by a Court should only occur in situations where trust property is endangered, or the trust’s proper administration in the interests of the beneficiaries is seriously adversely effected. The Judge did not accept that was the situation in this case and in fact he made a comment that the new trustees have a critical role to play in bringing all aspects of the family disputes to an acceptable conclusion.
The opening words of the Judge’s decision in this case were “This is a sorry tale of what can occur when a family adopts an inappropriate form of trust deed …”. We agree -- if the parents had been properly advised on the trust deed and the role of the “appointer” properly explained then this dispute may have been avoided entirely.