A landmark Supreme Court case, known as The Alphabet Case, explores the boundaries of parents' legal duties to their children, particularly when family trusts are used to shield assets from Family Protection Act claims.
Family conflict comes in many forms and sometimes results in parents wanting to exclude some or all of their children from benefitting under their will.
The Family Protection Act 1955 imposes obligations on a will maker to make adequate provision for the maintenance and support of certain family members in their will. If this requirement is not met then those people, including the deceased person's spouse, de facto partner, children, grandchildren, stepchildren and parents may have a right to make a claim against the deceased person's estate.
One way that people have avoided such claims is to transfer their assets to a discretionary trust with the preferred recipients of the deceased’s estate as the beneficiaries.
In the recent case of A, B and C v D and E Limited as Trustees of the Z Trust [2024] NZSC 161, the Supreme Court confirmed the decision of the Court of Appeal regarding the extent of fiduciary duties owed by a parent to an adult child.
This case arose after Robert, the father of Alice, Barry and Cliff, transferred most of his assets to a Trust during his lifetime to deprive Alice, Barry and Cliff of his assets after his death. The adult children were not beneficiaries of the trust. The assets remaining in Robert’s estate, which could be subject to a claim under the Family Protection Act 1955, were modest.
Alice, Barry, and Cliff argued that:
- due to Robert physically and emotionally abusing them, and sexually abusing Alice when they were children, he owed them fiduciary duties that extended into their adulthood. That abuse had a significant adverse impact on them, both as children and into their adult lives.
- he breached those duties by transferring most of his assets to the trust in order to prevent them from benefiting from those assets on his death.
They argued that as a result of Robert’s breach of duties, the assets should revert to his estate to satisfy Family Protection Act claims they had made against the estate.
The Court held that fiduciary duties do exist between a parent and a minor child while the child is in the parent’s care. Those duties cease once the child reaches adulthood or the caregiving responsibility ends. The Court left open the possibility that those duties may continue into adulthood in certain circumstances, such as when an adult child has disabilities.
In this case, the Court found that Robert did owe duties to his children during their childhood but that those duties did not extend into adulthood, notwithstanding their vulnerability due to the abuse they endured from their father. The fiduciary relationship between Robert and each of the children ended when he ceased to have caregiving responsibilities for them.
The Court noted that a fundamental feature of fiduciary relationships is that there must, in fact, be a relationship. In this case Robert and the children had not had a relationship of any kind for many years. The Court held that to impose a fiduciary duty to remedy past wrongdoing where there was no ongoing relationship would be “reverse engineering” a remedy. The Court refused to impose fiduciary obligations based upon the vulnerability of adult children despite Robert being responsible for their vulnerability. The Court noted that to do so would result in “great uncertainty in the law”.
The Court also refused to treat assets held by the trust as part of Robert’s estate on the basis that the trust was used to avoid a Family Protection Act claim by the adult children. The Court noted that the Family Protection Act does not contain an anti-avoidance provision of the type it was being asked to apply.
The Court also noted that this case shows the need for such a provision in any replacement of that legislation in the future. The Law Commission proposed a law change in 2022 (Review of Succession Law: Rights to a person’s property on death (NZLC R145, 2021) that would allow a court to ‘unwind’ property dealings in a broad range of situations, including situations such as this.
The takeout from this case is that while a family trust can currently be an effective tool to defeat Family Protection Act claims against an estate by adult children, the long-term effectiveness of such actions is not guaranteed.
Contact our experienced Trusts & Life Planning team who can advice you on your obligations or rights.