Make it clear in the trust deed
In the recent case of Re Merona Trustees Ltd1, the High Court was asked to determine who the beneficiaries of a trust were as it was not clear who was intended by the phrase the ‘children of the settlors’ that was in the trust deed.
The trust settlors, Merv and Rona, had two daughters together - Lilly and Miffy. Rona also had two sons from a previous marriage when she was very young - Rob and Ray. When Rona’s first marriage broke down, and in the absence of social welfare benefits, she could not afford to keep her sons, and they both went to live with different extended family members. Rob had occasional contact with Rona and, after Rona’s marriage to Merv, Rob was raised by them both. Ray, however, was raised by extended family and had no contact with Rona. It was only as an adult that Ray came to know Rona and the wider family.
Interpreting the trust deed
Rona died in 2013. Merv died in 2020. After Merv’s death, a question arose as to who were the beneficiaries of the trust they had settled.
The question for the High Court was interpreting the trust deed that referred to ‘the children of the Settlors’. Did it mean:
The two natural children of Merv and Rona together, being Lilly and Miffy
The two natural children of Merv and Rona, as well as Rona’s son Rob, who was raised as a member of Merv and Rona’s family, or
The two natural children of Merv and Rona, as well as both of Rona’s sons, Rob and Ray?
High Court hearing
The court heard two main competing arguments.
The trustees primarily argued that ‘the children of the settlors’ meant Rob, Lilly, and Miffy; the ‘children’ did not include Ray. They said that the context in which the trust was established was highly relevant to the interpretation of the trust deed. In particular, a predecessor trust had been established in 1986 before Ray connected with Rona as an adult. The trust in question was settled in 2002, when Rob, Lilly and Miffy were in their forties and fifties.
Even in 2002, after coming to know Ray, Merv and Rona presented to their professional advisors as a couple with three children - Rob, Lilly, and Miffy. Their accountants recorded Merv, Rona, Rob, Lilly and Miffy as the beneficiaries of the trust. The family’s lawyers also understood Rob, Lilly and Miffy to be Merv and Rona’s three adult children. Merv and Rona also signed memoranda of guidance in relation to the trust, that were effectively instructions to the trustees as to their wishes. These memoranda recorded their wish that ‘our children’ benefit from the trust; Rob, Lilly, and Miffy were named, but Ray was not.
Finally, Rona’s will left a bequest each to Rob, Lilly, and Miffy as her children, and an equal but separate bequest to Ray who was described as her ‘birth son.’ She also left him a letter which asked that he be content with this bequest. The court found that by implication, she did not see him as eligible to benefit from the family wealth which was otherwise held in the trust.
On the other side, Ray’s lawyers argued that Ray was also a beneficiary of the trust. They said that once Ray had been reunited with Rona, they developed a close relationship with each other and the wider family. Although Ray was not close with Merv, Ray was included in family gatherings including at Christmas and birthdays. Ray was treated equally with Rob, Lilly, and Miffy in Rona’s will, and he was a part of the family.
The High Court considered that Merv and Rona had brought Rob up as a child of their own, and that it was ‘inconceivable’ that they would have intended to exclude him as a beneficiary of the trust. The documents signed at the time, and subsequently, showed that Merv and Rona thought that Rob was a beneficiary of the trust. In the context of their family, ‘the children of the settlors’ plainly included him. The only question was then whether Ray was also included.
The court found that the language of the trust deed could be interpreted to include Lilly and Miffy as natural children of the settlors, as well as Rob, who was raised within the family unit as though he was a natural child of both Merv and Rona.
The wording of the trust deed, however, could not be interpreted to include Ray. While Ray enjoyed a good relationship with the family when they reconnected, he was not raised as a part of Merv and Rona’s family unit.
Care must be taken
This decision emphasises the importance of clarifying who is intended to be a beneficiary of a trust at the outset. This is particularly necessary in the context of blended families where there may be reasons to differentiate between classes or groups of children.
In this case, the lawyers and accountants were not necessarily aware that Rob was not a child of Merv and Rona. It is possible that if they had known at the outset, the trust deed would have been drafted in a way that made it clear who the beneficiaries were.
If you are concerned about the wording of your trust deed and how it may affect your children, please be in touch to review your trust deed.
1 Re Merona Trustees Ltd  NZHC 1971.