Trusts are a popular way to protect property and manage assets in New Zealand.

Many family trusts, often holding the family home, are managed by "mum and dad" trustees who are also the primary beneficiaries. The trustee's duty to act for the benefit of all beneficiaries and not to "self-deal" can conflict with the practical reality of how these trusts are run and can affect the extent to which the trust can provide protection.

Recent case law

A recent Supreme Court judgment, Legler v Formannoij, sheds light on this common paradox. The Kaahu Trust was settled by Ricco Legler for the benefit of himself, his wife Marina Formannoij, and his children from a previous relationship. Following Ricco’s death, Marina appointed a sole corporate trustee (of which she was the sole director) after the previous trustee resigned. Her stepchildren challenged the appointment of the sole corporate trustee, alleging she acted for her own benefit. The case considered whether Marina was acting for an improper purpose when she appointed the corporate trustee company as the sole trustee of the Kaahu Trust.

The Court upheld the appointment, noting she had genuinely tried to find an independent trustee, acted within the trust deed’s terms, and took legal advice in good faith. The court's decision was also influenced by the evidence that the trust was originally established primarily to provide for Marina and Ricco’s needs, while another separate trust was created for the stepchildren's benefit.

The Chief Justice dissented, warning that appointing a corporate trustee under exclusive beneficiary control may undermine independent oversight, providing a reminder that fiduciary duties extend beyond mere technical compliance with the trust deed.

Why this matters:

• The court's decision is a pragmatic acknowledgment of the reality of "mum and dad" trusts in New Zealand and highlights the importance of clearly outlining the settlor's intentions in the trust documents. A trustee's actions, even if they appear to be self-serving, can be upheld if they align with the documented purpose and powers outlined in the trust deed.

• While the majority found in favour of the widow, the dissenting opinion by the Chief Justice highlights the importance of careful drafting and maintaining independence. While trust deeds can grant broad powers to a trustee, those powers must still be exercised in accordance with the fiduciary duties owed to all beneficiaries. It is a reminder for those drafting trusts to have clear discussions with clients about control, independence, and the potential for conflict - particularly where there are blended families involved.

If you are unclear about your responsibilities as a trustee, or thinking about establishing a trust, our Estates, Wills and Trusts team can guide you through the process.