High Court upholds exclusion by settlor of daughter from benefiting from trust on vesting

As Justice Lang noted in the opening paragraph of the recent High Court decision of Barrett v Osborne¹, the decision involved "yet another sad story involving the breakdown of the relationship between siblings caused by an uneven distribution of assets following the death of their parents."²

The decision concerned a trust settled by Lothar Herzog and his wife Roswitha Herzog. They settled the trust in 1997 for the benefit of themselves and their two daughters, Sonja Herzog and Silke Herzog.

Under the trust deed the date of distribution of the trust fund was the date of death of the survivor of Lothar and Roswitha, "or such earlier date as the Trustees appoint"³. On the date of distribution, the trustees were to hold the trust fund for such of the capital beneficiaries and in such shares as the settlors or the survivor of them appoints. In default of such appointment, the trustees were to hold the trust fund for Sonya and Silke (or, if they had died, their respective children) as tenants in common in equal shares.

Lothar and Roswitha separated, and Roswitha subsequently died, some years before the vesting of the trust.

Lothar and Sonja had a difficult relationship. Lothar clearly strongly disapproved of Sonja's behaviour as a young adult. The judgment also details several instances of verbal and written altercations between them in later years, partly involving money that Lothar had loaned to Sonja.

In 2020 Lothar, as the surviving settlor, exercised his power to appoint the capital beneficiaries for whom the trust fund would be held on the vesting day, appointing Silke to the exclusion of Sonya. At this point Lothar and Silke were the sole trustees and the trust's sole asset was the property in which Lothar was living. At the same time, Lothar and Silke exercised their power as trustees to bring forward the date of distribution, so that the property was distributed to Silke immediately. Lothar continued to live in the property, paying Silke a peppercorn rental and paying rates and insurance.

Lothar died in 2021. At that point Sonja discovered that the trust had vested and that she had been excluded. Lothar explained his reasons for excluding her in a letter to his solicitor which Sonja was given after his death. It was clear from that letter that Lothar had exercised his powers in the ways described as he "no longer regarded her with love and affection"⁴.

Not surprisingly, Sonja was aggrieved by her father's actions and filed proceedings in the High Court. She alleged that Lothar and Silke breached their duties as trustees, and that her father breached a fiduciary duty that he owed to her as settlor of the trust by appointing Silke to receive the trust fund.

The judgment considers Lothar's actions in appointing Silke in detail. Justice Lang ultimately found that the power Lothar exercised was not fiduciary and unconstrained by any obligations to Sonja (or anyone else). Justice Lang found that Lothar could exercise the power in the way he did, noting⁵:

It is obviously deeply regrettable when family dynamics produce an outcome such as the present. However, I cannot say that Lothar acted in bad faith, capriciously or irrationally when he decided to exclude Sonja as a capital beneficiary. In the absence of any fiduciary duty towards her he was entitled to exercise the power he retained under the trust deed to take that step once he reached the view that he no longer held Sonja in his love and affection.

The judgment does not discuss the trustees' actions in any detail, other than to comment that the trustees were bound to give effect to Lothar's appointment or risk being in breach of their duties. It is interesting that Justice Lang did not consider whether the appointment of an earlier vesting day by the trustees contemporaneously with Lothar's appointment of Silke could constitute a breach of duty.

However, delaying the vesting day would not have made a difference to Sonja benefiting (but may have meant that Silke's decedents would benefit instead of her). The trustees had no discretion about the distribution of the trust fund other than as to its timing.

A fiduciary relationship can arise depending on the nature of the relationship between the parties and the documents that regulate the relevant powers. If a power is fiduciary then the fiduciary is constrained in how he or she can exercise it, and must have the best interests of the principal in mind when exercising it. If a fiduciary breaches those obligations then the principal can seek redress from the court.

The case highlights the importance of being clear about the nature of powers under a trust deed. Whether a power is fiduciary will turn in part on the specific wording of the deed, so it is important that deeds are carefully drafted to reflect the settlor's intentions. While the result ultimately favoured the trustees, it is also wise to seek legal advice before making any significant decisions as trustees, particularly where those decisions involve the unequal treatment of beneficiaries.

This alert was written by Daniel McLaughlin, a Special Counsel in our Private Wealth team.

1. 2024 NZHC 1733.
2. At [1].
3. At [19].
4. At [39].
5. At [47].
6. A6 [50]

Public link

Please use the above public link if you want to share this noodl on another website.