topic 9 - Trusts and fiduciary obligations

Question 1

Two types of judge-made law

Answer 1

common law

rules of equity

Question 2

what is a fiduciary

Answer 2

A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.

Question 3

3 parties to trust

Answer 3

trustee
settlor
beneficiary

Question 4

Trustees

Answer 4

owe fiduciary duties to the beneficiaries
hold legal title to the property
control and are responsible for the property (eg payment of rates)
must follow terms of trust
trusts not separate entity for irds (show deed, own return)
secrecy around trusts - no public registers or notification requirements

Question 5

beneficiaries

Answer 5

enjoy fruits of the property ie the income, capital and other beneficiaries
must pay their own taxes eg on bank interest or divided from shares
interests of beneficiaries survive insolvency of the trustees
assets held on trust by trustees cannot be taken by the official assignee to pay the trustees debts

Question 6

why use trusts?

Answer 6

supporting charities
tax planning. - spread tax burden among beneficiaries
protecting assets from creditors
sharing family assets between family member - eg capital income
giving effect to a persons wishes after he or she dies

Question 7

trust as business structures

Answer 7

trustees personally liable for debts trustee is incurring debt not ‘the trust’ so personal assets at risk
common for trustee to be a limited liability company
trustee does not have to be a natural person

Question 8

what is a settlor?

Answer 8

a person who establishes or “settles” trust
settlors gives up right to control assets to trustees
settlor do not have to be involved with trust once assets transferred
settlors. can also be a trustee and or beneficiary
can retain the power to appoint future trustees

Question 9

discretionary trust

Answer 9

eg family trust where trustees have discretion to pay things like hospital expenses or uni fees
contrast fixed trust where share of beneficiary certain eg one third share of the income capital

Question 10

3 main ways to create a Trust

Answer 10

created by legislation
intentional express trusts created by deeds or a will
trust implied or presumed by court

Question 11

international trusts

Answer 11

inter vivos trust set up while seetlor alive
doesnt need written document but it is usually set up by. Deed (formal contract where consideration is unnecessary)
once trust set up the settlor no longer owns the assets , the trustees does (and trustee has to handle assets for beneficiaries)

Question 12

content of deed / will

Answer 12

• name of trustees and how replacement ones appointed

- trust property

Question 13

what is the duration of trusts ?

Answer 13

they cant last forever

rule against perpetuities

Question 14

mechanisms

Answer 14

can be property sale to trust with gift back / forgiving debt
gift duty abolished in 2011
outright gift

Question 15

business purposes

Answer 15

many businesses put business assets into trusts - good idea to keep family home in trust

Question 16

charitabale trusts

Answer 16

not subject to perpetuities (A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever.)
must have charitable purpose eg cant set up a trust to fund ur children’s education
the promotion of religion
the relief of poverty
other purposes of benefit to the community such as plunket foundation

Question 17

invalidating trusts

Answer 17

illegal trusts

Question 18

Claw back

Answer 18

insolvency act 2006

s204 - gifts made up to 2 years before bankruptcy may be ‘clawed bacl’ by the official assignee

Question 19

Trusts act 2019

Answer 19

comes into force January 2021
generally attempts to update the law
codifies mandatory trustee duties
sets out what trustees must keep and for how long

Question 20

Fiduciary Obligations… what are they?

Answer 20

like torts, they do not depend on a contract
- equity is concerned with what is fair and just
ensures fiduciary does not abuse position for personal gain
- must instead serve another interests
- one party acts with loyalty and in good faith towards somebody and serving their interests, rather than their own

Question 21

are fiduciary remedies more powerful than common law?

Answer 21

yes, unlike contract law they do not have to suffer loss, instead they strip fiduciary of wrongful profits

Question 22

What must a fiduciary not do

Answer 22

cannot use position for private advantage
cannot enter into engagement where; personal interests conflicts with duty to the other person
may possibly conflict with duty to other person
obligations will be tailored by circumstances of the specific relationship

Question 23

identify a fiduciary relationship

Answer 23

one party is in a position of trust and confidence

one party has influence over someone in a vulnerable position

Question 24

Two types of fiduciary

Answer 24

statues based fiduciary relationship

fact based fiduciary relationship

Question 25

status based

Answer 25

trustee / beneficiary

equity later extended by analogy the fiduciary principle to persons in other relationship

Question 26

fact based

Answer 26

a relationship may be found to exist outside of the established range, where there is a special relation ship of trust and confidence; where there has been an undertaking act in someones best interests and a reliance on that undertaking

Question 27

how to comply with fiduciary obligations

Answer 27

• make sure there is no conflict - avoid conflicts of interest between own and beneficiary interest
• no profits - avoid making secret profits from position
• No competitions- avoid competition with his/her principle
• no misuse of principals property - making profits y principals property

Question 28

categorising conflicts

Answer 28

seperate matter conflicts
same matter conflicts
fair dealing conflicts

Question 29

same matter conflicts

Answer 29

where the same person or members of the same firm act for both parties to a transaction; eg when a law firm acts for the vendors and the purchasers of a business

Question 30

seperate matter conflicts

Answer 30

a compay or firm in the course of dealing with client A in one matter obtains information which has some bearing in another matter in which the firm is acting for another client B

Question 31

fair dealing conflicts

Answer 31

occurs where the fiduciary has a personal interest in the outcome of a transaction in which he or she is involved

Question 32

Witten - Hannah v Davis 1995

Answer 32

solicitor in personal relationship with with client (davis) they had an affair with twins being born
davis asked for advice on mortgage
witten-hannah owned 1/3 of the house
solicitor had personal interest must keep client informed and client must consent
house got taken off them - davis took witten hannah to court for not ensuring debt was paid off

Question 33

Reading v Attorney General

Answer 33

soldier used army property to make black market profit

- profits went to the army even tho the army couldn’t have made the profit

Question 34

What is a duty of confidentiality

Answer 34

breach of confidence is seperate legal obligation - can be owed by those who are not fiduciaries
can overlap withfiduciary obligations

Question 35

Consent

Answer 35

in fair dealing conflicts the fiduciary may avoid the consequences of a conflict situation by making full disclosure and obtaining consent