Trustee Duties and Settlor Discretion Explained

Tuesday 18 March, 2025

Trustees’ Duties  

Trusts are a popular structure for holding assets in New Zealand, acting to protect assets from creditors or family claims. To establish a trust, the settlor/s transfer ownership of their personal assets to designated trustees, who will hold these assets on behalf of the beneficiaries. The obligations of trustees are outlined in the Trusts Act 2019, importantly, trustees are bound by mandatory duties to: 

• know and act in accordance with the terms of the trust set out in the trust deed (ss 23 & 24); and
• to act honestly and in good faith (s 25); and 
• to act for the benefit of the beneficiaries, or in the case where a trust has a permitted purpose, the trustees must act to further that purpose (s 26); and
• to exercise their powers for a proper purpose (s 27)

Importantly, the duty to act in the interests of the beneficiaries is subject to the terms of the trust, it may not necessarily be the case that the terms of the trust align with the interests of the beneficiaries.

Barret v Osborne [2024] NZHC 1733

Recently, the Court of Appeal (Court) heard a case involving the breakdown of the relationship between sisters caused by the uneven distribution of assets following the death of their parents. One of the sisters (Silke) received the sole asset owned by a family trust (Trust), whilst the other (Sonja) received nothing. Sonja alleged that her sister and father, as trustees had breached their duties as trustees of the Trust. She also alleged that her father (Lothar) breached a fiduciary duty he owed to her as settlor of the Trust when he appointed Silke to receive the only asset owned by the Trust, a house on the outskirts of Hastings. 

Background 

The sisters’ parents, Lothar and Rita, had settled the Trust and transferred the family home to it “in consideration of their love and affection for their daughters”. Initially, Lothar and his solicitor were the trustees; after the solicitor retired, Silke was appointed as trustee alongside Lothar. The capital beneficiaries were Sonja and Silke. Under clause 5 of the Trust, the settlors, or the surviving settlor, retained the power to appoint which daughter would inherit the Trust’s property and in what proportion. The settlors retained authority to distribute the Trust’s property to one daughter to the exclusion of the other, or to divide its value between them. If an appointment was not made, they were to receive equal shares.  

Lothar and Rita later separated, and Rita subsequently passed away. Rita’s estate was divided equally between the sisters. Lothar was left as the surviving settlor; he continued to live in the home owned by the Trust after the separation and after Rita’s death. The date of distribution of the Trust was to be the death of the survivor of Lothar or Rita, or an earlier date at the trustees’ discretion. Without Sonja’s knowledge, Lothar and Silke brought the date of distribution of the Trust forward and Lothar exercised his power to distribute the Trust’s property to Silke. Lothar continued to live in the Trust’s property until his death in 2021. Sonja was not informed about what had been done with the Trust’s property until the day before Lothar’s funeral. Sonja received some of Lothar’s personal assets, but the bulk of them were left to Silke.  

Reasoning and outcome

Issue one: Did Lothar as settlor, when exercising the power under clause 5, owe a fiduciary duty to the capital beneficiaries?

The Court found that Lothar did not owe a fiduciary duty to Sonja when deciding how to exercise the discretion granted under clause 5. The Court noted that a fiduciary relationship typically involves a vulnerability where the nature of the relationship imposes a reliance of one party on the fiduciary. In this case, although Sonja might have expected to receive a share of the Trust’s property, there was no indication that she was relying on this expectation.

Issue two: Had Lothar failed to act in good faith by acting arbitrarily and capriciously in excluding Sonja as a beneficiary?

Sonja argued that Lothar was required to act in good faith, for a proper purpose, on rational grounds, and for good reason when exercising his power not to appoint her to receive a share of the Trust’s property. Silke contended that there was no such restriction on the power under clause 5. However, the power was not entirely unrestricted: it could only be exercised in favour of the capital beneficiaries named in the Trust, and Lothar could not act capriciously or arbitrarily.

The Court noted that the Trust had no explicit purpose other than being settled out of the settlors’ love and affection for their daughters. Lang J considered Lothar and Rita’s intentions at the time the Trust was established. An important background in this case was Sonja’s rocky relationship with her father. The Court referred to evidence that Sonja and Lothar often ended up in arguments, and that the fraught relationship had lasted throughout Sonja’s teenage years and into adulthood. By the time of settlement, both daughters were well advanced in their respective careers. The Court determined that Lothar must have held Sonja in his love and affection at the time the Trust was settled. Lang J acknowledged that Lothar and Rita anticipated future disagreements between Sonja and her father, which is why they reserved the right to appoint either or both daughters to receive the Trust’s property.  Sonja and Silke would retain their status as beneficiaries so long as they retained their parents’ love and affection, or that of the surviving parent. If this affection ceased, they risked losing their beneficiary status. 

Lothar had written a letter to his solicitor explaining his decision to appoint Silke to receive the Trust’s property. The Court reviewed the letter and found Lothar’s reasons to be objectively unreasonable and lacking substantive justification. However, the Court did not impose a requirement that the power under clause 5 be exercised in an objectively reasonable manner, as the clause did not suggest such a qualification. The intention at the time of the Trust settlement, was that the power to appoint which daughter would receive the Trust’s property was to be unrestricted. Therefore, the Court concluded that Lothar did not act in bad faith, capriciously, or irrationally when he decided to appoint Silke to receive the Trust’s property, effectively removing Sonja as a beneficiary. Without any fiduciary duty owed towards her, he was entitled to exercise his power under the Trust Deed once he decided he no longer held Sonja in his love and affection. 

Issue three: Did Lothar and Silke breach their duties as trustees? 

Regarding Sonja’s other claim against Lothar and Silke as trustees, this failed because the Trust Deed did not give the trustees discretion to decide how the Trust’s property should be distributed, that power rested solely with the settlors or the survivor of them.

If you have any questions regarding any of the issues raised by this article, please contact one of our experts in the Family Team. Our thanks to Ella Burney, Summer Intern, for her contribution to this article.