Johnston Lawrence

Trustees’ Role during Separation or Divorce: The value of an independent trustee

2 September 2008. by NZ Law Releases , tagged with NZ LAW Releases | Property | Trusts Estates and Wills

A chord was clearly struck by the article in the last edition of Trust eSpeaking (March 2008) that recommended keeping trust structures during a separation or divorce. We often see in both separation agreements and court orders a comment along the lines, “We will treat the parties’ own assets and those belonging to the family trust as a single pool of relationship property”. That often seems to result in the trust structure being ignored and indeed lost in the divorce process, and clearly people are discovering in hindsight that they are worse off because of it.

Trustees’ role

It seems often to be forgotten that the legal owners of property belonging to a family trust are the trustees, not the settlors, nor beneficiaries. That means that it is the trustees who must make the decisions about what happens to the property, not the settlors or beneficiaries.

Of course, often the settlors (usually the couple separating) are both beneficiaries and trustees in their own right. That in itself can lead to confusion in the roles, particularly if they are inexperienced in dealing with trusts.

However, there is often an independent third trustee of a family trust. Quite frequently that trustee’s rights and obligations as a trustee are overlooked when decisions are made about trust property during a separation or divorce.

It cannot, indeed must not, be assumed that the independent trustee will simply ‘go along’ with the decisions made by the couple as co‑trustees.

Other beneficiaries (such as the couple’s children) also have rights in respect of trust property. When trust property is treated effectively as the settlor’s relationship property, the rights of those other beneficiaries are ignored.

The trustees have obligations to all the beneficiaries of the trust, not just to the settlors. All the trustees are not entitled, and can be personally liable, if they allow the rights of the other beneficiaries to be trampled on, in favour of the settlors alone.

A neutral intermediary

An independent trustee can fulfil a very useful role during a separation or divorce. In particular, an independent trustee with professional or business experience can be an effective sounding board for the parties about options and possibilities for disposition or allocation of trust property.

They might also have good insight into the value of property, not just financially, but also emotionally to the family or some of its members. An independent trustee can provide the couples’ own lawyers with a calm and dispassionate opinion about the history of the trust, its property and the needs of the various beneficiaries.

A weak independent trustee

It is difficult when an independent trustee crumbles at the first hint of marital trouble among the settlors or beneficiaries. Such trustees normally ask to retire when called upon to vote against one of the parties or to consult with unhappy beneficiaries.

A strong independent trustee can add value to the family in a time of trouble, whereas a weak trustee can deprive a family of the opportunity for a voice of calm from someone who has no personal or professional involvement with the parties or their situation.

When establishing a trust, settlors should always consider appointing a strong independent trustee. Not only can an independent trustee give some balance to the management of a trust, but they can also provide some impartiality and stability to the beneficiaries if the settlors separate or divorce.

Print this page