Trustee accountability and liability

Trustee accountability and liability

There is a move on both a legislative and case law basis for increased accountability to be placed on trustees for their decision making.  While there certainly should be accountability, the implications of personal liability with potentially onerous financial outcomes for trustees might begin to “tip the balance” for those deciding whether to accept a role of trustee.

Case law support for trustee accountability

Trustees can be brought to court where their decisions as trustee are questioned by a beneficiary.  We see in the recent example of Unkovich v Clapham [2020] NZHC 952, a trustee was held to have breached a fiduciary duty by not using her discretionary decision-making power to distribute funds to a beneficiary on the request of the beneficiary’s parents.  A grandfather had provided in a testamentary trust that $65,000 be paid to his granddaughter when she reached the age of 21.  If she died before 21 the funds were to go elsewhere.  A secondary provision in the trust allowed for the funds to be paid earlier provided they were used for her “maintenance, education, advancement or benefit”.  Pretty standard stuff.

The beneficiary (or her parents) sought almost immediate release of the money to further her education in Australia to support the chance of tennis scholarship in the US.  At that date the beneficiary was 15.  The trustee refused to release all the funds due to concerns that a tennis career was too uncertain, alongside concerns about the financial stability of the beneficiary’s parents who were taking control of the money on her behalf.  The trustee had considered 40% of the fund might have been an acceptable distribution, and had received legal advice (later found to be incorrect) that the full amount of the trust fund could not be paid out before the beneficiary was 21.  While the matter was in dispute, the trustee’s legal fees escalated to more than $40,000 as she defended her decision and fought to retain her role as trustee.  Eventually, as the case proceeded to court, the trustee agreed to pay the beneficiary the majority of the money subject to covering the trustee legal costs.  The only remaining issue being decided before the court was who should bear the cost of the legal fees incurred.

Justice Whata concluded that while the trustee had acted honestly, she had “wrongly focused on the risks associated with a professional tennis career” and had an “erroneous assumption” that the beneficiary’s parents were financially imprudent and the trustee “did not use all proper care and diligence in obtaining all relevant information, especially relating to the financial stability and prudence of [the beneficiary’s] parents”.  The court found it was reasonable for the trustee to seek legal advice regarding the beneficiary’s request, but the trustee was personally liable for legal costs once litigation was underway challenging the decision not to distribute.

What can trustees take from this decision in the future when considering how to balance their responsibilities to beneficiaries with their “discretionary powers”?

Some issues this case highlights:

While there may have been family dynamics (and apparently some unhelpful exchanges between the beneficiary’s parents and the trustee) that fed the disagreement between the trustee and the parents, the decision reached in the case brings some unease.  Legal advice had been sought, and apparently relied upon in making the discretionary decision.  The parents were asked for additional information, including a breakdown of costs, which they refused to provide.  The trustee was prohibited from contacting the beneficiary directly, nor see any details of the arrangements being planned for the beneficiary’s training and career.  Despite this, it was still considered the trustee had breached their fiduciary duty.

The role of trustee is an unpaid role.  Yet, a trustee can be held personally liable for costs if a court disagrees with the decision reached.  When there is a trustee who is acting honestly and in good faith, it seems an extraordinarily harsh penalty to require financial accountability for acting on that discretionary power.

While of course a trustee should be accountable for their decisions, this decision seems to carve away at the discretionary decision-making ability of a trustee.  This exposure to the risk of litigation and costs may result in people seeing the risk as being too great, and not wanting to take on the responsibilities of trusteeship.

It would be interesting to know if an exemption clause in the deed (which can operate to protect a trustee from a claim by a beneficiary of a trust, so long as the trustee acts honestly and in good faith), would have resulted in a different decision in this case.

The new Trusts Act 2019

How will the new Trusts Act 2019 bear on decisions like this?  On 30th January 2021, the new Trusts Act comes into effect.  There are several significant changes in the Act that result in increased compliance requirements for trustees and that also increase the rights and protections for beneficiaries.

In summary, there are mandatory and default trustee duties that must be included in a trust deed.  Mandatory duties must be performed by the trustee and are not able to be modified or excluded by terms of the trust.  You can read more about these in our earlier blog here

Trustees will also have new duties around documentation including robust record-keeping and beneficiaries will have a right to request and access basic trust information.  One commentator states, “the key changes are aimed at making trust law more accessible to both lawyers and the public, strengthening the ability of beneficiaries to hold trustees to account.”  What remains to be seen is whether this “strengthening” will be balanced with the discretionary decision making power bestowed upon a trustee, and whether we will see more trustees being held personally liable for their decisions.  If the court’s decision reached in Unkovich v Clapham is an indicator of the consequences for trustees using their discretionary power, we may see less inclination for people to take up the role of trustee due to the increased personal financial risk.

Unkovich v Clapham is crying out for an appeal as there are too many unanswered questions about how much rights a trustee has to say no and under what circumstances.  But we don’t expect an appeal in this case.  We will have to wait and see if another court will ignore or overturn it in another messy family trust case. 

Conclusion

The cumulative effect of the new Trusts Act along with the recent decision in Unkovich v Clapham, would indicate there is going to be a tendency toward far greater expectations on trustees to justify and be accountable for their decision making than perhaps seen previously.  In turn, greater consideration will likely be taken by those being asked to take on the role of trusteeship due to the increased risks of personal financial responsibility for decisions made.  As stated by one commentator, this decision demonstrates that trustees need to keep in mind that they might need to justify their reasoning for a decision to a court’s satisfaction.

In the wise words of Uncle Ben (Spider-Man’s uncle), “with great power there must also come great responsibility”. What remains to be seen is whether the increased accountability compliance requirements for trustees might have the effect of fewer people being keen to take on the role of trustee.

 

Sources:

https://adls.org.nz/Story?Action=View&Story_id=128

https://nzbloglex.blogspot.com/

https://www.lawsociety.org.nz/practice-resources/practice-areas/trusts/the-new-trusts-act-2019-key-changes-to-consider

https://www.lawsociety.org.nz/lawtalk/lawtalk-archives/issue-881/a-trustees-guide-to-litigation-pitfalls

http://www.shellockconsulting.co.nz/blog/843774


Posted: Monday 22 June 2020