There is a well-known saying that "the road to hell is paved with good intentions". When it comes to trusts, never a tru-er word could be said. For those setting up a family trust, note should be taken of two recent Court decisions which address the intentions of the person creating the trust, known as the settlor. While those cases found that the settlors' intentions should be respected and adhered to even after the trust is established, the decision of one case in particular has highlighted the tensions that exist between long- standing principles of trust law and the more modern interpretation of these principles.

What is a settlor?

A settlor is the person who creates a trust. They decide the beneficiaries, what assets will be included in the trust and the objectives for the trust. Once assets are placed into the trust, they are no longer owned by the settlor. The long established principle is that the settlor then loses the right to dictate how those assets are dealt with, because they have transferred ownership of those assets from themselves to the trust. Case law raises the question of whether, in conjunction with the Trusts Act 2019, the principle is evolving about how trustees and judges are to consider the settlor's intentions when they created the trust.

Case 1: Queenin v Queenin - Settlor still entitled to benefit of trust assets

In Queenin v Queenin, the Queenin parents, as settlors, set up a family trust for their home, a holiday bach and a rental property. The parents and one of their sons were the trustees. Following the introduction of the Trusts Act 2019, the parents, concerned with the increased compliance costs of managing and administering the trust, decided to dissolve the trust and return the properties to themselves. When their son, as the other trustee, did not consent to the dissolution, the parents removed him as a trustee.  

The son challenged his removal in court, arguing that the parents had breached their obligations as trustees. The son requested that an independent trustee company be appointed.

The Court considered the parents' purported original intention: to protect the assets and eventually pass them on to their family notwithstanding there was nothing either in the trust deed nor any extraneous material referenced in the proceeding to that effect. Significantly, the parents' interests under the trust deed as beneficiaries were no greater or lesser than the interests of the other beneficiaries including their children and grandchildren. Noting that purported intention (even in the apparent absence of any material to substantiate such intention), the Court held that the parents' decision to remove the son as a trustee had been made in good faith and was in line with their original intentions. The Court did not consider it appropriate to replace the parents with a professional trustee.

The Court said "I do not think it is reasonable for a trustee appointed by the settlors in a small family trust to ignore the essential context and the very reason the trust was established in the first place".  

Whether that decision would stand if appealed is a separate matter but what it highlights is the importance the Courts place on the original objectives of and the intentions for the trust. That being the case, best practice suggests that the original objectives and intentions for the trust are clearly recorded, perhaps ideally in the trust deed itself, rather than left to conjecture at some time in the future.

Case 2: Barrett v Osborne - Settlor choosing to distribute assets to children in unequal proportions

In Barrett v Osborne, the Court approved a decision to distribute trust assets to one child to the exclusion of the other.  

The Herzog parents created a trust and transferred their family home to it. The capital beneficiaries were their two children, Silke and Sonja. The Herzog parents had the power to decide which of their children should receive the trust's assets and in what proportions.  

In 2020, Mr Herzog, who was now the sole settlor after his wife's passing, chose to appoint Silke as the sole recipient of the trust assets, excluding Sonja. When Mr Herzog passed away, Silke received all the trust assets, while Sonja received nothing. Sonja claimed that her father breached a fiduciary duty owed to her when he appointed Silke to receive the trust assets.

The Court found that Mr Herzog had acted in accordance with the trust's purpose and his intentions. At the time of settling the trust, the Herzog parents had a difficult relationship with Sonja, and anticipated future conflicts, and wanted the flexibility to choose which child would receive the trust assets.  

Unlike the Queenin case, the purpose and intentions for the trust were clearly dealt with in the trust deed itself, thus eliminating the conjecture to which ambiguity or even generality can give rise.

Key takeaways

1. Respecting intentions: These cases highlight that courts value the original intentions of the settlor. Even if circumstances change, the settlor’s wishes are important.
2. Recording intentions: How and where the intentions are recorded may have significant impact in the case of dispute.
3. Clarity in trust deeds: If you plan to distribute assets unevenly among your children or beneficiaries, make sure the trust document clearly outlines your intentions and includes appropriate mechanisms and/or powers to give them effect. This can prevent future disputes and ensure that your wishes are honoured.

Setting up a family trust can be a valuable way to manage and pass on assets. By understanding and documenting your intentions clearly, you can help ensure that your wishes are respected and reduce the likelihood of disputes down the line.

If this article resonates with you, reach out to our Trusts and Private Clients specialists for tailored advice.

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