In October 2023 the Supreme Court heard the appellants Laila Legler Klaui and Ken Legler on the question of whether the Court of Appeal was correct to dismiss their appeal against their stepmother, Marina Formannoij, and Kaahu Trustee Limited (KTL). The case considered whether Marina was acting for an improper purpose when she appointed Kaahu Trustee Limited as the sole trustee of the Trust. 

In its decision released on 18 December 2024¹ the majority of the Court (Glazebrook, O’Regan, Williams and Miller JJ) dismissed the appeal and held that the evidence failed to prove that Marina had the intent, at the time she appointed KTL as trustee, of benefitting herself at the expense of the Legler children. Winkelmann CJ dissented and would have allowed the appeal. 

This long-awaited case is relevant for the large number of New Zealand trusts, in particular those who may be considering the appointment of a sole corporate trustee. However, we suggest caution is required as proper purpose cases are often very fact specific, and we continue to recommend that trust integrity is preserved by including some independence in trust decision making. 

Background

Together with their brother Li, Laila and Ken are the adult children of Ricco Legler from his first marriage. Ricco married Marina in 2009 following a 20-year relationship. Ricco’s father was a successful businessman who died in 2002 and left Ricco a significant inheritance. This inheritance ultimately led to the creation of two family trusts; the Horowai Family Trust (Horowai) and the Kaahu Trust (Kaahu). Ricco died in a gliding accident in 2017.

The evidence at trial was that Horowai was intended primarily to benefit Ricco’s children, while Kaahu was intended to provide for Ricco and Marina. Ricco (and by association, Marina) were removed as beneficiaries of Horowai during Ricco’s lifetime, leaving the Legler children to benefit from that vehicle. Horowai’s assets include a significant forestry block, farmland and a fund of at least $3m.

At the outset Kaahu’s beneficiaries were Ricco, Marina, their issue (including the three Legler children) and any trust whose beneficiaries included a beneficiary of Kaahu. Ricco and Marina were the final beneficiaries. Kaahu’s assets included Ricco and Marina’s family home near Russell, and managed funds (worth multiple millions), which provided passive income.

When Ricco died Marina and BOI Taxation Trustee Co No 2 Ltd (BOI) were left as Kaahu’s trustees. In 2019 Mr Tyler (the accountant for Horowai and Kaahu and a director of BOI) decided that BOI should resign as trustee, leaving Marina as the sole trustee. Kaahu’s trust deed required Marina to appoint a new trustee.

She approached Mr McBrearty of the law firm that acted on the creation of the two trusts, but his firm did not provide those services. Marina approached Perpetual Guardian but thought its fees were excessive. On the recommendation of the trust’s investment adviser she then consulted WRMK Lawyers, who informed her that the Kaahu trust deed allowed her to appoint a sole corporate trustee, of which she could be a director. Marina was attracted to this plan, as she wished to “simplify matters” in relation to Kaahu.

Mr McBrearty had concerns with this approach, but WRMK Lawyers confirmed their advice and Marina accepted it. On 27 November 2019 KTL became trustee of Kaahu and Marina resigned. KTL’s shares are owned by Marina and WRMK Trustees (2019) Ltd.

In March 2020 KTL:

• excluded Horowai and the Legler children as beneficiaries of Kaahu;
• distributed trust funds to Marina; and
• appointed her as the beneficiary for whom the trust would be held on vesting day (the March 2020 Decisions).

The lower courts’ decisions

The High Court ruled that the evidence did not establish that Marina had appointed KTL with the purpose of preferring her own interests.² Downs J noted that circumstances out of her control made Marina the sole trustee of Kaahu, and she tried to appoint a second trustee but eventually acted on advice that another course of action was permissible. He held that Marina was informed of her fiduciary obligations and sought information relevant to discharging those obligations. In the Judge’s view the trust deed did not preclude control by a single corporate trustee with a beneficiary director and Marina did no more than what was envisaged by the trust deed.

The majority of the Court of Appeal (Brown and Brewer JJ) dismissed the appeal.³ They held that Marina neither committed fraud on a power nor an ultra vires act, being an act beyond the scope of the instrument creating the power.

Marina’s purpose in appointing KTL as trustee was not held to be improper. The majority reiterated that the test for establishing fraud on a power is subjective and the relevant point in time for consideration is the date of exercise of the power. They noted Marina’s wish to “simplify” Kaahu included making her living arrangements more agreeable and this would not have been an improper purpose. Their view was that strict compliance with the terms of the trust deed could not amount to fraud on a power, absent some further evidence of intention to act improperly. Marina understood and accepted the advice from WRMK Lawyers regarding her fiduciary duties. The majority did not consider that subsequent decisions (i.e. the March 2020 Decisions) should be taken into account in determining Marina’s subject motivation at the date of exercise of the power of appointment. The March 2020 decisions have never been challenged.

Cull J dissented on the basis that:

• the appointment of KTL as sole trustee was not compliant with the terms of the trust and the intention evidenced in the Trust Deed;
• Marina was motivated by an improper purpose, to gain control of Kaahu for her benefit exclusively; and
• the March 2020 Decisions cannot be evaluated separately from Marina’s exercise of the power of appointment.

The Supreme Court’s decision

The majority did not consider that it was proven that KTL’s appointment had the purpose, at the time it was made, of allowing Marina to take control of the assets of Kaahu for her own benefit at the expense of the Legler children. They did not comment on the validity or otherwise of the March 2020 Decisions.

While they agreed that the March 2020 Decisions could have supported an inference that it had been Marina’s purpose at the time of appointing KTL to take those actions, they believed that there were major factors weighing against that conclusion, including:

• that Marina became sole trustee because of happenstance;
• she had made efforts to find a replacement trustee; and
• contemporaneous documents showed that she was concerned to fulfil her legal obligations.

They found nothing to suggest that they should depart from the High Court’s finding that Marina was a credible witness.

The majority noted that Ken and Laila conceded that the appointment of KTL was consistent with the terms of the trust deed.

Given these findings the majority noted that there was no need for them to decide whether or not, or in what circumstances, Marina’s purpose in appointing KTL would be improper.

Winkelmann CJ dissented. She considered that the appointment of a company which was exclusively controlled by a trustee/beneficiary was not authorised by the trust deed – this would be to exercise a power in favour of that trustee/beneficiary (i.e. Marina). However, this was not argued by Ken and Laila. The Chief Justice found that the provisions of the trust deed, construed together, required that there be independence brought to bear in trustee decision making.

She concluded that an exercise of the power of appointment by Marina to deliver decision making control to herself to be an improper use of that power, contrary to its fiduciary nature and the provisions of the trust deed, which were designed to ensure some independent input.

In the Chief Justice’s view, since taking control of KTL was itself an improper purpose, Marina’s intention to take control was all that was required to be proved. But regardless, she recorded that she also would have found in the appellants’ favour on the basis that Marina had appointed KTL to benefit herself at the expense of the Legler children.

Comment

Corporate trustees can be a very tidy solution for family trusts – offering additional protections in terms of limited liability for directors and simplifying the administration associated with transferring ownership of trust assets. However, it is important to ensure that their governance and administration is up to scratch, and in line with the purpose and intent of the trust deed (not least to avoid arguments like this case).

While the Court found that Marina was entitled to act as she did, as a matter of best practice we recommend that a corporate trustee includes some independent decision makers (like an independent director), or that there is independence elsewhere in the trust structure, for example, through the use of a protector.

It was also disappointing that the Court did not comment more broadly on the Privy Council’s decision in Wong v Grand View Private Trust Co Ltd,⁴ which was released the day after the Court of Appeal’s decision, and which had a number of parallels with this case. Both cases speak to situations where a decision maker was empowered by the trust deed to exercise their powers, but the substantive question to be addressed was whether that decision maker had acted with proper purpose when complying with the trust’s terms.

Proper purpose cases tend to be fact dependent and can often be limited in their wider applicability. It is still helpful to have some commentary and analysis from our highest court on the proper purpose rule, but we would caution against any suggestion that the use of a sole corporate trustee with a single beneficiary decision maker is a prudent structuring option.

This alert was written by Jessie Rose, a Senior Associate in our Private Wealth team.

1. Legler v Formannoij [2024] NZSC 173 ↩
2. Legler v Formannoij [2021] NZHC 1271 ↩
3. Legler v Formannoij [2022] NZCA 607 ↩
4. Wong v Grand View Private Trust Co Ltd [2022] UKPC 47 ↩