At the end of last year, New Zealand’s Supreme Court delivered two significant trust law judgments that appear to follow different trajectories regarding self-dealing trustees.
Cooper v Pinney [2024] NZSC 181 and Legler v Formannoij [2024] NZSC 173, while both addressing trustee fiduciary obligations, reveal subtle but important differences in approach that merit closer examination.
In Cooper, the Court emphasised the fiduciary constraints on powers of appointment, finding Mr Pinney’s powers were meaningfully limited. Conversely, in Legler, the majority concluded on factual grounds that Ms Formannoij had not appointed a corporate trustee she controlled with improper intent, despite the Chief Justice’s dissenting view that such an appointment inherently contravened trustee obligations.
These divergent outcomes reflect an unresolved tension in New Zealand trust law. Unlike jurisdictions where trusts typically manage dynastic wealth or complex investment portfolios, New Zealand’s landscape is dominated by modest family trusts whose only asset is the family home.
This site-specific adaptation of an ancient equitable device presents some difficulties.
“New Zealand trusts operate in a fundamentally different context from their historic counterparts,” observes Richmond Chambers’ Josh McBride, who represented the respondents in Legler. McBride notes:
When a trust’s sole significant asset is the settlors’ residence, and they are also trustees, the classical separation between legal and beneficial ownership becomes increasingly difficult to maintain in practice, and poses all sorts of problems for the fiduciary trustee.
This tension has only intensified with the Trusts Act 2019, which codifies trustee duties into mandatory and default categories that sit uneasily with how family trusts operate in practice.
The Act’s mandatory duties require trustees to “act for the benefit of beneficiaries” and “exercise powers for proper purposes” — principles that become increasingly strained when settlor-trustees use trust assets primarily for themselves.
Rachael Woods, who was junior counsel for the respondents in Legler, notes:
The Trusts Act creates a significant challenge for ordinary family trusts. The default duty not to exercise powers for self-benefit contradicts how most ‘mum and dad’ trusts actually function, where settlor-trustees living in trust-owned homes are essentially exercising powers for their own benefit daily.
While the Act permits modification or exclusion of default duties, including the critical duty not to self-benefit, this leaves trust settlors entirely at the mercy of their solicitor’s choice of precedent.
“The quality of protection afforded to settlor-trustees varies dramatically depending on which trust deed template a solicitor happens to use,” notes Rachael Woods. She comments:
Many trust deeds drafted before the Act did not expressly permit self-dealing, likely because it simply wasn’t considered necessary to spell out a common practice.
Attempting to amend a trust deed to expressly permit self-dealing creates its own perilous dynamic. “Subsequent modifications to trust deeds risk challenge from other beneficiaries on the grounds that the power of variation itself is not being used for a proper purpose or is being used partially,” McBride cautions. He further notes:
This creates a catch-22 where trustees need to modify duties to align with practice, but the very act of modification may breach those same duties.
Perhaps most problematic is the default duty to act impartially. “When settlor-trustees are explicitly intended to be the primary beneficiaries during their lifetime, with children’s interests deferred until after death, the concept of impartiality becomes almost impossible to meaningfully apply,” McBride observes. “Yet these arrangements represent the overwhelming majority of New Zealand family trusts.”
The Court’s approach in both Cooper and Legler reflects a longstanding judicial reluctance to overtly penalise “mum and dad” economic settlors who have settled trusts with their own funds. New Zealand Courts have historically shown considerable restraint when asked to strictly enforce self-dealing prohibitions against those who created the very wealth the trust now holds.
“What we’re witnessing is a practical recognition by the Courts that punishing economic settlors for benefiting from their own assets would upend the foundation of most New Zealand family trusts,” Woods explains. “The courts understand this pragmatic reality, even as doctrine pulls in the opposite direction.”
Yet the Trusts Act 2019 has now armed disgruntled beneficiaries (including former spouses) with a formidable arsenal of new statutory rights and remedies. The expanded powers of review, the mandatory duty to act for beneficiaries’ benefit, and the default duty against self-benefit create multiple avenues for challenge that were not previously defined with such precision.
“The gap between judicial restraint and statutory opportunity creates a precarious position for settlor-trustees,” McBride cautions. He notes:
While courts may continue their traditional reluctance to intervene, the Act provides powerful tools for beneficiaries to force the issue —potentially destabilising thousands of ordinary family arrangements across New Zealand.
New Zealand finds itself at a crossroads where orthodox equitable doctrine, codified trustee duties, and the practical realities of family trust arrangements appear fundamentally irreconcilable. What emerges from Cooper and Legler is the uncomfortable truth that the statutory framework, whatever its merits in theory, does not align with how New Zealand family trusts actually operate in practice.
Until this dissonance is addressed, we can expect further uncertainty, increasingly Byzantine structures to circumvent orthodox fiduciary duties, and a growing divergence between law in the books and law in action.
Disclaimer: This analysis is intended to provoke thought and debate, and does not represent the official position of chambers, or legal advice.
