A bitter family dispute challenging a widow's actions in appointing a corporate trustee to the family trust and subsequent exclusion of her step-children as beneficiaries and distributing the trust funds to herself has ended, with the Supreme Court finding that, in the circumstances, the appointment of the corporate trustee was not for an improper purpose and was therefore valid.  

While the majority of the Court was satisfied that the terms of the trust deed expressly allowed appointment of a corporate trustee in which a beneficiary had control, the case hinged on whether the widow acted with an improper purpose when exercising her power to appoint a replacement trustee.

Legler v Formannoij case summary

In Legler v Formannoij [2022] NZCA 607, three children (who were some of the discretionary beneficiaries) claimed that their stepmother (who was both a final and a discretionary beneficiary of the trust), Ms Formannoij, had committed a 'fraud on a power' [also now referred to as acting for an improper purpose] by appointing a company, Kaahu Trustee Limited (KTL), as the trust’s sole trustee. Ms Formannoij was both the sole director and a co-shareholder of KTL.  

The children's father, Ricco Legler, had settled the Kaahu Trust. The final beneficiaries of the Kaahu Trust were Mr Legler and his second wife, Ms Formannoij. The discretionary beneficiaries included Mr Legler and Ms Formannoij, and Mr Legler's children.

Following Mr Legler's death, and the resignation of the corporate trustee, Ms Formannoij became the sole trustee of the Kaahu Trust. The Kaahu Trust Deed provided that sole trustees (acting personally) could not benefit themselves. However, clause 27.2 (c) of the Trust Deed expressly allowed a corporate trustee to exercise all powers and discretions notwithstanding that such exercise may benefit a beneficiary who has an interest in that corporate trustee, whether as a director, officer, shareholder or otherwise. Essentially, this meant a corporate trustee, of which a beneficiary has a controlling interest (as sole director), could be a sole trustee.

Exercising a trust power for an improper purpose

It was however the circumstances giving rise to the appointment of a new corporate trustee that was under scrutiny. While it was clear from the trust deed that Ms Formannoij had the power to appoint a corporate trustee and that trustee could be a corporate of which she had control (as sole director), the question was whether, at the time she appointed the corporate as sole trustee, Ms Formannoij's intention was for an improper purpose (of benefitting herself).

The burden of proving the improper purpose, which fell to the children, was not satisfied.

Following the death of Mr Legler, Ms Formannoij and a continuing independent corporate trustee were the remaining trustees. That independent corporate trustee wanted to retire due to aspersions being cast on its sole director. A replacement independent – and cost effective – trustee could not immediately be found. Ms Formannoij received advice from independent lawyers that a company of which she was sole director and co-shareholder was permitted by the trust deed.

In reliance on that advice, and wanting to ensure all matters were dealt with lawfully, Ms Formannoij incorporated KTL, with her as the sole director and she and a professional advisor as the shareholders. KTL was appointed as the corporate trustee and Ms Formannoij resigned, leaving KTL as the sole trustee.  

Shortly after, KTL excluded the children as beneficiaries and distributed the trust assets to Ms Formannoij. The children argued that the power to appoint the trustee had been exercised for an improper purpose: that Ms Formannoij had appointed KTL as trustee to benefit herself, thereby preferring her own interests and breaching her trustee duties.

No improper purpose here

The Supreme Court disagreed. The Court held that viewed against the background of her prior attempts to find a replacement independent trustee, Ms Formannoij's action in appointing KTL was not for an improper purpose.  

While the Court accepted that KTL's actions (controlled by Ms Formannoij) post-appointment could have supported an inference as to Ms Formannoij's purpose at the time of appointment, the following factors weighed against a finding of improper purpose:

• Ms Formannoij became a sole trustee because of actions outside of her control (the previous corporate trustee's resignation);
• she had made efforts to find a replacement corporate trustee; and
• the records show she took considerable legal advice and was concerned to fulfil her legal obligations.

This case is fact specific – for example, the Court considered the issue against the background that the Kaahu Trust was set up in order to provide for the needs of Mr Legler and Ms Formannoij, while there was another trust to provide for his children's interests. This illustrates that the context in which a trust was created, together with the intent at the time the power (to appoint a trustee) was exercised, are key to the Court's decision on whether a power has been exercised for a proper purpose.  

Key takeaways

This judgment highlights a few things:

• It represents an increase in challenges to trustees' actions alleging that an exercise of a discretion, even if within the express terms of a trust deed, is invalid if it is for an improper purpose and/or contrary to the underlying purpose and objectives of the trust;
• The terms of a trust deed and the drafting of its clauses remains a matter of critical importance;
• Even drafting powers in the widest possible language does not prevent the Court's supervision of the exercise of a trustee's power;
• Faced with the risk of increasing challenges and scrutiny, a trustee would be wise to ensure all decisions are well-advised (with such advice recorded), well-reasoned and well-documented.  

As challenges to trustee actions become more frequent, it’s crucial to ensure that every decision is backed by sound legal advice and thorough documentation. If you require guidance navigating complex trustee duties and protecting your trust’s integrity, please reach out to our team of specialists.

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