Family Trusts: Memorandum of Wishes - how binding are they?
The growth in the number of discretionary family trusts currently being set up by families has made it more important for the trustees of those trusts to have some directions as to the settlors’ intentions regarding the distribution of trust assets.
The common use of 'Memoranda of Wishes' is one way the Settlors have chosen to identify for the trustees the settlors’ intentions by creating an additional document to be read alongside the trust deed. The Courts have reviewed a number of these memoranda in cases where beneficiaries have challenged the decisions by trustees in transferring and distributing assets from a trust. The Courts in those cases have looked at the status of the memoranda and the issue as to whether it is binding on trustees in all circumstances. The case of Charman –vs- Charman confirmed that the trustees should have regard to the Memorandum of Wishes in the exercise of their discretionary powers. Again, in the case of Pitt and Holt the settlors’ wishes were said to be a material consideration in the exercise of the fiduciary discretions of the trustees. Other trust commentators have stated that the trustees are bound to have regard to the Memorandum of Wishes and that no criticism can be given when trustees have followed them and paid close attention to the settlors’ intentions.
There are a number of exceptions in case law, particularly wherein arriving at their discretionary decisions the trustees have had regard to outside circumstances which cannot have been in the mind of the settlor at the time the memorandum was prepared. Likewise, where there is a question of capacity at the time the settlor has prepared a Memorandum of Wishes the Court has been prepared to review the memorandum.
It is important having regard to the case law summarised above that the settlors of a discretionary family trust make it clear in a Memorandum of Wishes to the trustees their intentions as to the ultimate destination of the assets or funds. Our trust lawyers can prepare a suitable memorandum at the time the trust documents are being prepared to clearing identify, not only the subject matter of the trust be it property, investments or otherwise, but also the settlors’ intentions during the lifetime of the trust and identifying the ultimate beneficiaries and how they are to share in the assets of the trust when the trust is distributed.
Guides to the law
Here are links to the New Zealand Law Society law awareness pamphlets.