Late last year, the Supreme Court confirmed the boundaries of New Zealand inheritance law and a parent’s duty of care to adult children.
While the details of the claim at the heart of the case represented an exception in the realm of estate planning, the matter itselfhas drawn a clear line from where parental fiduciary duty begins to where it ends, in the eyes of the law.
Robert chose not to provide for his adult children at all.
He had inflicted horrendous abuse on his family, with the judgment noting frankly, “It is not possible to overstate the adverse impact Robert’s abuse has had on the [adult children], both during their childhood and as adults.”
After he died, his children made a claim arguing their father had a fiduciary duty to provide for them even as adults, and even more so because of the harm he had caused them. They claimed he had breached that duty by transferring his assets to a trust, effectively giving them away, and leaving nothing for them to claim after his death.
This case was of particular interest to our specialists at Perpetual Guardian because it examines the reach of fiduciary duty and the concept of testamentary freedom (ie the right to distribute your own assets as you see fit).
This varies among jurisdictions – in France, there is very little testamentary freedom and children cannot be disinherited, while English and Welsh law gives people the freedom to leave their estate to whomever they choose in their will.
New Zealanders enjoy a significant degree of testamentary freedom, but this is balanced by the right of individuals to make a claim against an estate where they have been excluded from benefiting or feel the provision made for them was insufficient – as the adult children did in this case.
The case does serve as a profound reminder of the importance of open conversations in families about wills and trusts and their major differences, particularly regarding assets and inheritance.
As our group general counsel Henry Stokes noted in his review of the case: “It has been a long-accepted legal premise in New Zealand that the best thing you can do to prevent any claims against your estate is to ensure that your estate holds no or minimal assets by the time of your death, so there will be nothing to claim against. This case tested that, and the Supreme Court ruled against the children and upheld the premise. It found that the fiduciary duties the father owed to his children didn’t carry across into adulthood.”
In this case, the court came out firmly on the side of a person’s right to do with their property what they please, so long as it is done in accordance with avenues provided by the law.
This confirmed the principles which have long applied to estate planning continue to apply: transfers of assets to validly established trusts, with all loans gifted, do provide protection against successful estate claims, on the basis that there are few assets left in the estate on death.
Importantly, for the many other New Zealanders who have established family trusts, the case confirms the structure they have in place will continue to work as intended under the law, provided it is validly operating.
However, the case does serve as a profound reminder of the importance of open conversations in families about wills and trusts and their major differences, particularly regarding assets and inheritance and what different decisions may mean for members of the family.
Surprises in a will reading rarely enhance family harmony and often damage it irrevocably, and the costs of a legal challenge can be significant.
A will is a legal document that outlines how a person’s assets and affairs will be handled after they die. It becomes effective only upon death and goes through the court-supervised process of probate.
A trust, on the other hand, is a legal arrangement where a trustee holds and manages assets on behalf of beneficiaries. A person can set up a trust during their lifetime and can help avoid probate, providing more control and privacy over asset distribution.
A trust can also, as this case demonstrates, offer more ongoing control and flexibility than wills over how and when assets are distributed, which can work for people with specific wishes or complex situations who want a more long-term, structured asset management arrangement.
While trustees have an obligation to disclose basic information about a trust to its beneficiaries, no one else need be involved, as in this test case, where the children of the trust’s settlor had no rights in regard to the trust.
That is atypical in the New Zealand context. The great majority of the family trusts we administer are set up for the benefit of, at least in part, close family members of the settlers.
The adult children of a man who abused them lost a legal bid in the Supreme Court to gain access to $700,000 of his assets.
However, what families need to discuss is how trusts may change what can happen financially within a family after a death. If significant assets are held in a family trust and there is comparatively little left in an estate, the simple distribution of an inheritance via a will may not happen.
Being the beneficiary of a trust can also mean receiving monetary distributions, but it is a very different process and approach than simply being an inheritor through a will under an estate.
A trust will almost always involve a much higher level of discretion to be exercised by the trustees, and that is very different from an estate, where a will often sets out specific shares or amounts to be received by beneficiaries.
A trust can also run for 125 years, whereas an estate, in the absence of any minors being beneficiaries and no life interests being provided for in the will, are often fully distributed within one year of the grant of probate.
While there are saddening elements of this case, it constituted an important test of aspects of estate and trust law and the concept of fiduciary duty, and the outcome is relevant, in one way and another, to the majority of New Zealand families.
