When people separate or end their marriage, relationship property issues are often the first to arise: How are we going to split our assets? Who keeps the family home? Who gets to keep the dog? But one issue that can seem less pressing is what happens to the family trust?
Many family trusts are established during a relationship, with both spouses or partners appointed as trustees. While that arrangement often works well during the relationship, problems can quickly arise following separation. In some cases, trustees simply struggle to communicate. In others, deep hostility develops or competing personal interests make it difficult to make objective decisions.
The issue becomes even more significant where the trust deed requires trustees to act unanimously. A trust that once operated smoothly can become effectively paralysed when trustees can no longer agree on even routine matters.
Family trusts and duties
Trustees are responsible for administering trust property for the benefit of beneficiaries. To do so, they must be able to make decisions, sign resolutions, engage advisers, approve accounts, and deal with trust assets. These tasks must be undertaken in light of the various duties that are required by the Trusts Act 2019 (Act) and the relevant trust deed.
Some trustee duties can be excluded by the trust deed. One duty that can be excluded (but frequently isn’t) is the statutory duty found in s 38 of the Act: the duty of unanimity. This requires trustees to act unanimously, or in other words, they cannot act on behalf of the trust unless all of the trustees agree.
In the situation where the trust isn’t functioning as required, a trust deed will contain the required method to remove a trustee. However, it usually requires agreement by all existing trustees for that removal to be accepted.
Following a separation, this can create a particularly difficult situation. Trustees may both recognise that they can no longer work together effectively, yet neither can remove the other or appoint a replacement trustee because those decisions themselves require unanimous consent. The result is a deadlock: the trust cannot function properly because the trustees cannot agree, but they also cannot resolve the problem because they cannot agree.
Court intervention
If the trustees are in a deadlock and cannot resolve it themselves, a trustee can apply to the Court to replace and remove their ex-partner as trustees of the family trust.
The High Court may remove a trustee where it is “necessary or desirable” to do so and where it is difficult or impracticable for the trustee to continue in office. The Court also has power to appoint replacement trustees.
The Court’s focus is not on punishment. Rather, the overriding concern is the welfare of the beneficiaries, the protection of trust property, and ensuring the trust can be administered efficiently and effectively. The High Court has confirmed that the removal jurisdiction exists to ensure a “faithful and sound exercise” of trustee powers.
When court intervention is necessary
Trustees are responsible for administering trust property for the benefit of beneficiaries.
Where trustees are unable or unwilling to work together, and in the interests of the trust’s beneficiaries, the administration of the trust may come to a standstill. This can affect everything from maintaining trust property and paying expenses through to making distributions and responding to opportunities or risks affecting trust assets.
Importantly, the Court is generally concerned not with the personal dispute between the trustees themselves, but with whether that dispute is preventing the trust from being properly administered for the benefit of the beneficiaries.
Separation and court removal of trustees
A separation does not automatically mean that one or both trustees should be removed. Former spouses can be capable of continuing to act together despite their relationship ending. However, the Courts have recognised that it is not unusual to seek the Court’s removal of trustees if they were spouses or partners and have become dysfunctional.
Recent cases demonstrate that the Courts are prepared to intervene where a deadlock or impasse prevents trustees from administering the trust.[2] The Courts have recognised that ongoing hostility, inability to communicate, failure to hold trustee meetings, and competing personal interests can all justify removal in appropriate circumstances.
The key question is often whether the hostility is actually impacting the administration of the trust. General ill feeling or animosity may not be enough. But where trustees are unable to make decisions required by the trust deed, particularly where unanimity is required, the prospects of a successful removal application increase significantly.
Does the court remove both trustees?
In some situations, the Court can remove both trustees. Where the problem is not confined to one trustee, and both trustees have become incapable of administering the trust effectively, the Court may determine that the most practical outcome is to remove both trustees and appoint one or more independent replacement trustees. This is particularly common where separated spouses are no longer capable of making decisions together and there is little prospect of the relationship improving.
Who should be the replacement trustee(s)?
The Court will generally seek to appoint replacement trustees who can administer the trust independently and in the interests of the beneficiaries. In separation cases, this will often be an independent professional trustee, such as a solicitor, accountant, or trustee corporation. Independent trustees can provide a practical solution by removing personal conflict from the decision-making process and allowing the trust to continue operating effectively for the benefit of its beneficiaries.
It is important to receive legal advice about which option may be right for your family trust before deciding.
Need help with your family trust?
For legal advice about your family trust’s circumstances following a separation, contact our Disputes Resolution and Litigation experts.
