How to create Trusts that will endure: Justice Fogarty

Justice Fogarty recently gave an address to NZICA’s Trusts Special Interest Group.

His topic was “Enduring Trusts.”

He admitted to having had a “very conservative education and training on trusts” and his recipe for trusts that will withstand judicial scrutiny is much more conservative than most Trust practitioners would care to contemplate.

This article is focused on one aspect of his speech. He said that “a very enduring trust will keep separate

·                                     the settlor

·                                     from the trustees

·                                     from the beneficiaries”

In other words, a settlor will be neither a trustee nor a beneficiary.

He said that “textbooks do say that a trustee can be a beneficiary” but that “does not mean that the Equity Judges like the practice, and will not put boundaries around what such persons can decide.”

            “… my impression is that judges are very cautious about trustees who are also beneficiaries. Judges do not usually agree that trustees can make decisions which affect them as beneficiaries. Even having another independent trustee may not work in a hard case. This year the Supreme Court of the UK cited with approval a dissent of Lord Denning MR, written 30 years or so ago, in which he treated the co-trustee to the beneficiary trustee [as being] compliant with the wishes of the beneficiary trustee.”

Some practitioners will treat Justice Fogarty’s comments with a scepticism verging on disbelief.

But there is substance to them. Take, for example, the case of R v Brazendale (2010) 3 NZTR 20-044, a decision that Justice Cooper delivered on 20 August 2012. The Crown sought to forfeit a property which was the subject of an agreement for sale and purchase by which Mr B sold the property to himself and Mr W. They were trustees of a family trust.

The rent from the property was paid into Mr B’s personal bank account and not into an account in the name of the Trust.

It was not a meritorious case. Mr B had been growing cannabis at the house. He used cannabis - so he said - to alleviate the “continuous pain” that he suffered from a motorcycle accident. But the Court concluded from the substantial quantity of plants that were grown hydroponically, and the absence of other means of income, that Mr B was, in fact, a dealer.

Section 58 of the Criminal Proceeds (Recovery) Act 2009 provides that if the Court is satisfied that a respondent has effective control over an item of property, it may order that the property is to be treated as though the respondent had an interest in the property specified by the Court.

That is in line with the elementary principle of Equity – as reinforced by the Court of Appeal in FMA v Hotchin [2012] NZCA 370 – that if a person has “effective control” over a Trust, it will be a sham.

Cooper J said;

“The clear intent [f the legislation] is to enable the Court to judge the realities of the situation, notwithstanding any formal arrangements that may have been made as to ownership…The provisions of the Deed of Trust are such that I am satisfied that the offender is in effective control. First, I note that ‘until the date of distribution’, the obligations of the trustees…are to allocate or pay (‘in their sole and uncontrolled discretion’) the capital and income of the trust to the beneficiaries, or one of them to the exclusion of the others for their ‘personal support benefit maintenance education or advancement in life.’ The beneficiaries are defined as to include…Mr B himself. Consequently, it would be in compliance with the trust deed if Mr B received all of the income of the trust.” [39], [40]

Did the existence of a co-trustee help Mr B? Not at all. Cooper J held that “His co-trustee is a friend. There is no reason to assume that he would adopt an independent role.” [40]

Justice Fogarty’s conservatism may be seen as being echoed in Justice Cooper’s Judgment.

Cases involving the so-called ‘Bundle of Rights’ were, I suspect, led by a similar, if unspoken form of reasoning.

Think back to the film sets that were used for Hollywood Westerns. The buildings had large and imposing facades – but behind there was often nothing.

The Courts can be expected to see if a Trust is like that – whether it is a building of substance or merely a façade – and if it thinks it is a façade, then by one means or another, the “Trust” may be undone.