TRUSTS – WHEN TRUSTEES CAN BENEFIT A NON-BENEFICIARY

The Court of Appeal’s decision in Wong v Burt [2005] 1 NZLR 91 is a leading case in New Zealand on the doctrine of “a fraud on a power”. By this doctrine Trustees must not use their powers for an “improper purpose”.

Trustees made a distribution of $250,000 to Mrs Wong in the expectation that she would advance the sum for the benefit of two children of her daughter Philippa. Philippa had died unexpectedly at the age of 43 from cancer. If she had lived, Philippa would have received income from the Trust that would have helped her to look after her two children. In the event, the income was diverted to other beneficiaries. The Trustees believed that the Settlor (Mr Wong) would never have contemplated that his two grandchildren would have been left without financial support in such circumstances.

The Trust contained a broad power to benefit Mrs Wong. The Trustees could make a distribution to her “for any … reasons whatsoever”.

The arrangements by which the Trustees advanced the sum of $250,000 to Mrs Wong had been recommended by her solicitors who cautioned that the distribution might be challenged.

Justice Hammond gave the Court of Appeal’s reasons. He said that:

The distribution was made to benefit a non-beneficiary.
The advice that Mrs Wong got from her solicitors was wrong.
It was a “startling” proposition that the Trustees could transfer monies to Mrs Wong without requiring the Trust to which she paid the monies to pay them back.
It was no excuse that she had relied on her solicitors’ advice.
It was “downright foolish” for the Trustees to have proceeded with the scheme “knowing that it could come under critical legal scrutiny as being an allegedly unlawful device”.
“an honest person” would have sought the directions of the Court.

And the Trustees were held to be personally liable to restore the monies to the Trust.

The first instance Judge had upheld the distribution to Mrs Wong on the basis that the distribution to her “soothed her moral qualms and … it allowed her to provide for her grandchildren without resorting to her own money”.

Was the decision too harsh?

The Court of Appeal’s decision seems harsh in a number of respects. The authors of the current edition of Lewin on Trusts (18^th Edition), 2008, think so. They say the submission that it was for Mrs Wong’s benefit that her grandchildren should be provided for “might perhaps have been treated more seriously” if the Court of Appeal had been referred to Re Hampden Settlement Trusts [1977] TR 177. In that case, an entire Trust fund had been distributed to a beneficiary for the benefit of non-beneficiaries and the Court had upheld the arrangement.

The decision in Re Hampden’s ST was not novel. There is authority to the same effect that was almost 100 years older in Re Turner’s Settled Estates (1884) 28 Ch.D 205 where the Court of Appeal said:

“It appears to us to be plain that the mere conferring of a benefit upon a person not an object of the power will not avoid the exercise of the power, if made with the approbation of the real objects of the power.”

If a beneficiary has a moral obligation to a non-beneficiary it ought not to be objectionable to make a distribution to the non-beneficiary. The distribution is not made to benefit the non-beneficiary but to benefit the beneficiary and relieve him of his obligation to the non-beneficiary.

As the Supreme Court has recently said (in Kain v Hutton [2008] 3 NZLR 589):

“An appointment which secures a benefit for a non-object is not for that reason alone a fraud on a power. The focus should rather be on whether the purpose of the appointment was truly to benefit an object. If that is so, it does not matter that a non-object also obtains a benefit.”

This area of the law need not therefore be viewed with the uncompromising language that the Court of Appeal used to describe it. The cases I have mentioned show that compassion can co-exist with principle so as to permit Trustees to confer benefits on non-beneficiaries. It is a pity that the Court of Appeal was not referred to them.

For information about Anthony Grant, go to www.anthonygrant.com