Trusts and Succession

Trustee duties in farm succession planning

The Act also codified trustees’ duties to beneficiaries, with the guiding principle set out in section 21:

‘In performing the mandatory duties set out in sections 23 to 27 and (except to the extent modified or excluded by the terms of the trust) the default duties set out in sections 29 to 38, a trustee must have regard to the context and objectives [our emphasis] of the trust.’

The mandatory duties are pretty self-explanatory. These are a duty to:

• Know the terms of the trust
• Act in accordance with the terms of the trust
• Act honestly and in good faith, and
• Act for the benefit of beneficiaries or to further permitted purpose of the trust.

Those duties would all seem self-evident, but practice suggests that many trustees have difficulty in knowing the terms of the trust or acting in accordance with the terms of the trust, particularly without advice.

In that situation, a trustee’s duty is to ensure that they are appropriately advised so that they can carry out their duties properly.

Default duties bring the most angst

It is the default duties that are likely to cause trustees more difficulty. These duties can be modified by the trust deed and virtually all new trust deeds since the Act has come into force modify these to the maximum extent permissible. Older trust deeds may impliedly modify some or all of these, but not by specific reference to the Act (for obvious reasons).   

There are 11 default duties but the ones most likely to cause trustees difficulty in terms of succession or future planning are the duties to:

• Not exercise power for their own benefit
• Not bind or commit trustees to future exercise of discretion
• Avoid conflict of interest, and
• Act impartially.

Affecting farm succession planning

If trustees are considering a succession plan for a trust-owned farm property that may not result in an equality of treatment between beneficiaries, the first step is to have a thorough review of the trust deed. The review will ascertain exactly who the beneficiaries are; in the case of the older trusts this could be a wide group. From this, trustees can establish what restrictions there are on their power to act, particularly where there is some element of favouring one beneficiary over another (common in a farm succession scenario), or acting in the favour of one or more beneficiaries who may also be trustees.

Many trust deeds have been reviewed, or are under review, since the Act came into effect on 30 January 2021. Where possible, trust deeds are being modified to ensure that, as far as possible, these default duties are excluded. Some older trust deeds, however, don’t have a power to vary the terms of the trust. In this situation, trustees are faced with having to act within the terms of the existing trust or, where there is a power of resettlement, exercising their power to resettle the entire trust capital on a new trust, although this can be an expensive exercise and have tax implications. Another option is court orders.

Who are the beneficiaries?

The other area that trustees are looking at is the definition of beneficiaries. Older trust deeds tend to have an extremely wide beneficiary pool. 

One way to limit the exposure of trustees to challenges from disaffected beneficiaries is to reduce that beneficiary pool to core family members, and to exclude the wider family such as spouses, stepchildren, etc.

Why is this all important?  

In the context of farm succession, families often have the difficulty of having significant capital assets but insufficient cash or borrowing capability to enable absolute equality between children if one child is going to have the farm.  

Often the other children are asked to accept a lesser share of the trust to enable  the farming operation to be carried on by one sibling. By reducing the beneficiary pool, and by excluding the trustees’ default duties as far as possible, there is greater protection for the trustees when making decisions about which some beneficiaries may be unhappy.  

Risks

There is, however, always a risk in amending a trust deed by excluding certain beneficiaries and excluding trustees’ default duties. The risk is that by making those decisions, the trustees can leave their actions open to challenge – on the basis that they weren’t exercising their power to exclude beneficiaries or vary the trust for a proper purpose; this is one of the mandatory duties that cannot be excluded. If, for example, a group of trustees exclude all the settlor’s children except for one and then remove all their default duties in order to leave the trustees free to benefit that beneficiary solely, the previous decision (to exclude beneficiaries, and varying the trust) would be open to challenge.

Have a plan all can live with

As always for succession matters, the best answer is to come up with a plan that all of the core beneficiaries can live with and buy into. This would ordinarily take some time to plan so that the farming operation is in a position to enable the desired succession to take place and also to accommodate siblings who are not involved in the farming operation. 

Sometimes, however, this isn’t possible. If the trustees are faced with making difficult decisions that may be unpopular with some beneficiaries, they must be very careful to understand what they can and cannot do and to seek (and take) professional advice.

 Read the full issue here