The High Court decision Wallace v Naknok highlighted some difficulties that can arise when circumstances change following the formation of a Trust.
The essential facts of this case are as follows:
- Mr Wallace formed the Trust in 2006. He was the sole trustee, a discretionary beneficiary and the final beneficiary under the Trust.
- The Trust Deed conferred on Mr Wallace the power of appointment of new trustees.
- However, importantly, there was no power of removal of trustees in the Trust Deed.
- The Trust was formed by Mr Wallace after he had separated from his previous wife and his share of the relationship property was settled into the Trust.
- Subsequently, Mr Wallace married Ms Naknok.
- A few months after the marriage Mr Wallace appointed Ms Naknok a second trustee of the Trust.
- Shortly afterwards, the Trust purchased a property, in which both Mr Wallace and Ms Naknok lived.
- At that time Mr Wallace retired as a trustee, but in January 2008, Mr Wallace subsequently re-appointed himself as a trustee so that both Ms Naknok and he were then trustees.
- However, no transfer of the home property was registered following Mr Wallace’s re-appointment as a trustee, so that the property remained registered in the sole name of Ms Naknok.
- In November 2010 the parties separated. Mr Wallace sought the co-operation of Ms Naknok to resign as a trustee and to transfer the property into his name as sole trustee. Ms Naknok never responded and accordingly proceedings were issued in the High Court.
The application for removal of Ms Naknok was brought under Section 51 of the Trustee Act 1956. However the Court found that that section was not applicable as it conferred on the Court a power to appoint new trustees, not to remove trustees.
There is no power under the Trustee Act for a Court to remove a trustee.
However, the Court did find it had “inherent jurisdiction” to remove a trustee. The inherent jurisdiction is ancillary to the Court’s principal duty to see that a Trust is properly executed. The main guide in exercising this jurisdiction is the welfare of the beneficiaries.
In this case, the Court found there were no circumstances which would justify the exercise of the inherent jurisdiction. There was no evidence of misconduct on the part of Ms Naknok. She was not bound to agree to the request to resign.
There was also no evidence of any potential threat to the welfare of the beneficiaries which would justify the Court’s recourse to the inherent jurisdiction to remove Ms Naknok as a trustee.
As a result, the Court declined to remove Ms Naknok as a trustee.
This case underlines the importance of the careful drafting of Trust Deeds. Trust Deeds must be carefully drafted to take into account the particular circumstances of the settlor. Trust Deeds are not a case of “one size fits all”.
If you are contemplating forming a Trust, contact Willis Legal first so that we can discuss the advantages and disadvantages of Trusts and the considerations you need to take into account before deciding to proceed or otherwise.