Estate Planning: A Three Part Series Preparing well for the road ahead - Part 3

This article is the last in the series of three which discusses estate planning. Our first two articles concentrated on Powers of Attorney and Wills. This article specifically canvasses the value of a Memorandum of Wishes and the types of provisions typically found in such a document. Read on to establish if you need a Memorandum of Wishes and how this all-important document fits into your estate plan.

The Humble Memorandum of Wishes

For a variety of reasons, people use Trusts to hold their assets and conduct business through.

The person establishing a Trust is referred to as a Settlor and the parties responsible for running the Trust are called Trustees. In the case of a discretionary family trust, the Settlor will also hold the position of a Trustee together with other persons such as their spouse and an independent Trustee.

When Settlors transfer assets into the Trust, they effectively place the management of those assets into the hands of the Trustees.

Whilst Trustees are governed by a plethora of equity maxims, legislation and common law, it’s helpful for Trustees to be in receipt of written guidelines from a Settlor noting how they should manage Trust assets under their control. The name of the document containing these written guidelines is known as a Memorandum of Wishes.

Common Provisions Found In Memorandum of Wishes

Other than describing how Trustees should handle the assets of the Trust, its common place for a Memorandum of Wishes to contain details in relation to:

• How Trustees are to apply funds towards particular Beneficiaries for specific activities such as education;
• How Trustees should exercise their powers when making decisions as to which Beneficiaries should receive distributions;
• Whether distributions should be sourced from capital, income or a mixture of both;
• When distributions should be made;
• The quantum of a distribution that should be bestowed on a Beneficiary;
• How particular assets such as properties are to be treated; and
• Other sensitive information Trustees should be aware of before assisting a Beneficiary such as ensuring funds are paid directly to a recipient rather than the Beneficiary themselves for certain reasons.

Guidance Value Only

When making decisions, Trustees must follow the law and the terms of the Trust imposed upon them. The actual exercise of their powers however, is a personal and conscious act. Thus, they must be free to exercise their powers without any fetter placed upon them. This means Trustees cannot be bound to blindly follow instructions issued by a Settlor to act in a particular way when exerting their powers, making decisions and enacting the Trust terms.

Given the above, it should come as no surprise a Memorandum of Wishes is not legally binding. Accordingly, Trustees are not legally obliged to follow the guidance this document contains. That said, in the main, Trustees will consciously consider the wishes expressed by a Settlor and indeed often follow those wishes, when making their decisions. At the end of the day however, the decision the Trustees make is their decision alone.

Ignoring A Memorandum Of Wishes

Settlors may feel uneasy that Trustees are under no legal obligation to follow the wishes they have expressed. Trustees however tend to ignore Memorandum of Wishes provisions only if there is good reason to do so. Furthermore, circumstances and events can transpire between the time a Settlor completes a Memorandum of Wishes and the time Trustees make decisions which render the wishes expressed redundant or downright dangerous to follow. Accordingly, it is beneficial for Trustees not to be legally obligated to act in strict accordance with the guidelines laid down by a Settlor.

Case Example

I personally was involved in a case a few years back where I did not follow the wishes laid down by Settlors in the Memorandum of Wishes they had completed.

The Settlors had established a discretionary Trust which held several properties for the benefit of their children. At the time of the Settlors deaths, the final beneficiaries consisted of their four adult children. The Settlors had left a Memorandum of Wishes which expressed their wish that upon their deaths, the Trust fund was be divided equally amongst the four Beneficiaries, with each Beneficiary’s portion being transferred to a Trust established for their benefit.

Before adhering to the guidelines expressed in the Memorandum of Wishes, I ascertained three of the Beneficiaries were New Zealand citizens and resided permanently in New Zealand. One Beneficiary had however become an Australian citizen and resided permanently in Australia. Accordingly, whist I followed the guidance contained in the Memorandum of Wishes in relation to three of the Beneficiaries, I declined to adhere to the Settlors wishes in respect of the Australian citizen Beneficiary on the basis that to follow those wishes would have caused them adverse taxation issues.

Confidentiality

From articles previously posted, Settlors and Trustees will be well aware new legislation entitled the Trusts Act 2019 (‘Act’) now governs Trustees behaviour and in particular, disclosure of Trust information to Beneficiaries. Given the provisions of the Act, a matter Settlors frequently contemplate is how confidential is a Memorandum of Wishes? Must a copy of it be given to Beneficiaries? From a reading of cases laid before the Courts it appears the answer to this question isn’t clear cut.

Courts have repeatedly said disclosure will depend on the Trust being examined and the circumstances surrounding the request for disclosure made by the particular Beneficiary. In carrying out their examination, a Court will decide what the nature of interest is the enquiring Beneficiary possesses. For example, is the Beneficiary a Primary Beneficiary or a Final Beneficiary? A Court will also examine the strength of expectation the Beneficiary has. This means they will decide what the likelihood is of the expectation actually being crystalised. Finally, a Court will weight up all the factors for and against disclosure including how disclosure might affect other Beneficiaries and family relations.

Summary

Clearly only those who have a Trust need put in place a Memorandum of Wishes. That said, a Memorandum of Wishes is not strictly legally necessary in order for a Trust to exist and operate . It is however an incredibly helpful document as it captures how a Settlor envisaged the Trust operating when they established the Trust which in turn acts as a guidance tool which Trustees are able to refer to when carrying out their functions. At Greenlion, we create Memorandum of Wishes when we establish Trusts for clients. As it is vital these documents are regularly updated, we also help Settlors review their existing Memorandum of Wishes and update them when necessary.

This is the last article in the three-part series on Estate Planning. For further information or assistance in getting your Estate Plan in place and up to date, including preparing your Will and Memorandum of Wishes, contact Trustee Services at Greenlion or your Greenlion advisor. We’d be happy to help.