Settlor inadvertently fails to create trust

It is uncontroversial and settled law that to create an express trust there must be "the three certainties." These are:

• Certainty of intention: It must be clear that the settlor intended to create a trust.
• Certainty of subject matter: The property that is the subject of the trust must be identified.
• Certainty of objects: The beneficiaries (or purpose) of the trust must be identified or identifiable.

These principles were developed under the common law and recently codified in section 15 of the Trusts Act 2019.

The High Court has just released a judgment in relation to a failure to achieve the third certainty, certainty of objects.

Re Application by Hoglie Trustees Limited (as Trustee of Larry Robertson Family Trust)¹ concerned various applications made by Hoglie Trustees Limited (Trustee) in respect of the Larry Robertson Family Trust (Trust). However, the judgment does not discuss the orders sought in detail due to the decision the judge made at the outset regarding the validity of the Trust.

Mr Larry Robertson sought to create the Trust for creditor protection purposes by executing a trust deed on 14 August 1992 (Trust Deed) between himself as settlor, and his business partner and his lawyer as original trustees. The original trustees retired by deed dated 7 November 2019, and the Trustee (of which Mr Robertson's lawyer is the sole director) was appointed as the sole trustee.

The Trust Deed contains various discretionary powers that the trustees may use to benefit the "Beneficiaries."

The Trust Deed defines "Beneficiaries" as "any person who receives or may receive any interest in the Trust Fund."

The Trust Deed also defines "Discretionary Beneficiaries" as being a number of people linked to the settlor and to the "Final Beneficiaries." However, "Discretionary Beneficiaries" does not appear anywhere else in the Trust Deed. "Final Beneficiaries" (by reference to which many classes of the "Discretionary Beneficiaries" are defined) is not defined.

The only phrase that is defined and is used in relation to trustee powers and discretions in the Trust Deed is "Beneficiaries." However, the definition of "Beneficiaries" is circular. The Trust Deed allows the trustees to benefit the "Beneficiaries", being those who benefit or may benefit from the Trust Fund.

The judge found that due to the lack of identifiable beneficiaries of the Trust, there was no certainty of objects and, accordingly, the Trust had never been created. As a result, the Trust's assets were and had always been held on resulting trust for Mr Robertson as the settlor.

Clearly the failure to create the Trust was caused by deficient drafting. The decision highlights the importance of drafting trust instruments carefully and ensuring that the three certainties exist. If they do not, then the trust will not be created and the settlor's objectives in attempting to create the trust will be undermined.

In this instance, failing to create an effective trust could have creditor, relationship property or other adverse implications for Mr Robertson. Given the significance of such consequences, it is vital to seek advice from an experienced and competent trust law practitioner when planning to establish a trust

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

1. [2024] NZHC 2832.