September 26, 2018 Matthew Smith

KEEPING ON TOP OF THE TRUST – A CASE STUDY – PART 2

BY MATTHEW SMITH

Legal Counsel

In the last edition of INsight, we met the Fletchers and learned about the Cook Islands trust that Nate Fletcher had set up for the benefit of himself and his family, the Fletcher Family Trust (the ‘Trust’). For a reminder of how the Trust was set up and why it was faced with a number of difficulties 20 years after its establishment, click here.

The Beneficiary Issue:

The Trust was set up with five classes of beneficiary: (a) Nate; (b) Lisa; (c) their children; (d) the husbands of their children; (e) the natural-born descendants of their children. This setup causes problems both during Nate’s lifetime and following his death, at which point the Trust Fund fails to be distributed in full (80% to the surviving class (b) and (c) beneficiaries, with the remainder shared equally between surviving class (d) and (e) beneficiaries).

During Nate’s lifetime, only some of his grandchildren may benefit under the Trust. The Trust Deed provides that only ‘natural-born’ descendants of Nate’s and Lisa’s children are classed as beneficiaries, which excludes Maya’s adopted children.

Following Nate’s death, the fixed distribution to the surviving beneficiaries risks throwing up some inequitable results which are most likely very different from those that Nate envisaged for the Trust. Assuming Nate is survived by Lisa, Claire and Maya, 80% of the Trust Fund will be distributed to them in equal shares, even though Lisa is no longer married to Nate and is well provided for by her second husband. In addition, Claire’s share may end up being controlled by Keith and channeled towards his gambling addiction.

The remaining 20% is to be shared between the husbands of Claire and Maya and all of their natural-born children. This will result in Keith receiving a share of the Trust Fund, but not Maya’s wife, despite the latter having a much more positive role within the family structure than the former. Additionally, Maya’s adopted children will not benefit, but Claire’s will, including Kevin, despite Nate’s decision to publicly disown him. As discussed in the last issue, any changes or discretionary distributions to the beneficiaries require the consent of the Protector, Brenda, which is unlikely to be forthcoming given the breakdown in the relationship that has happened between her and Nate.

Where did Nate go wrong?

Many of the problems here arise from the drafting of the beneficiary provisions, which has resulted in an insufficiently flexible Trust Deed. In naming Lisa as a beneficiary, Nate has cemented her future interest in the Trust. It would have been advisable to identify her instead as ‘the Spouse of the Settlor’, and to define that role as anyone currently married to, and not engaged in divorce proceedings with, the Settlor.

Identifying Claire’s and Maya’s husbands as beneficiaries may have seemed sensible to Nate when he believed they would be marrying men of whom he was very fond, but it clearly failed to take account of the fact that those relationships might not endure. Nate and/or the attorney drafting the Trust Deed should also have been more open if they are in a same-sex relationship (even if the prospect of same-sex marriage may have seemed some way off being a reality in 1998), or choose not to marry or have adopted children. In this respect, the beneficiary provisions in the Trust can be regarded as being more reflective of attitudes in place at the time they were drafted and have not kept pace with the changing moral and social landscape.

The Trust Deed should have been drafted to ensure that beneficiaries cannot receive distributions where those distributions may end up being used for improper purposes, such as to fuel an addiction of some kind, or being misappropriated by a third party. This would have prevented Keith from benefiting under the Trust directly or by being able to control any distributions received by Claire.

It may well have been preferable for Nate to have set up the Trust to continue as a discretionary trust after his death, rather than providing for it to be distributed in full to the beneficiaries at that point. This would have provided greater flexibility and would have avoided the current situation where persons who Nate would not have wanted to benefit under the Trust stand to receive substantial distributions.

The Solution

It would be possible to make all of the and/or the attorney drafting above changes to the Trust Deed provided the Trustee could exercise their power of amendment – however, this relies on the Protector’s consent, which is unlikely to be forthcoming because of Nate and Brenda’s soured relationship. If that issue can be resolved, then it will be possible to amend the Trust Deed to change how the beneficiaries are defined and create fairer results which are more in line with what Nate wanted from the outset. Ultimately, however, this may involve bringing proceedings in the Cook Islands and asking the court to replace the Protector on the basis that her intransigence is preventing the Trust from functioning.

This scenario demonstrates not just the importance of clear drafting when a trust is established, but also how vital it is that a trust is ‘future-proofed’ as much as possible by catering for unexpected and/or undesired events. It also serves as a reminder that regular reviews of trust deeds are an essential way of heading issues off at the pass and fixing problems when they are still easy to fix. Even without knowledge of all the internal dynamics of the family, the Trustee should have alerted Nate to the possibility that the wording of the beneficiary provisions could be problematic and advised him to liaise with his attorney to review the Trust Deed.

If you would like to discuss this topic further or have an interest in setting up a trust please contact Southpac at enquiries@southpacgroup.com.

Matthew Smith

Matthew Smith joined Southpac in March 2017 and works as Legal Counsel based in the New Zealand head office. Matthew is a dual-qualified attorney, having been admitted as a Solicitor of the Senior Courts of England and Wales in 2008 and as a Barrister and Solicitor of the High Court of New Zealand in 2017
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