Anthony Grant reveals pitfalls for passive solicitor trustees, when clients drop the ball on their tax obligations

This article originally appeared in LawNews (ADLS) and is here with permission.

By Anthony Grant

Today’s article is not based on a recent decision but on one that was given a few years ago. It’s about the liability of ‘passive’ trustees.

The case is Selkirk v McIntyre [2013] NZHC 575.

A solicitor, David Phillip Selkirk, accepted appointment as an ‘independent professional trustee’ of a client’s trust. Selkirk was a trustee together with his client, Donald Alexander McIntyre. They bought a farm, sub-divided it, sold the sections and incurred liability to pay GST and income tax.

The client trustee failed to file several GST returns and the IRD turned on the solicitor trustee. Selkirk blamed the client, saying the client trustee undertook day-to-day responsibility for managing the trust and the solicitor’s role was essentially ‘passive’. 

The solicitor trustee had not been aware that his co-trustee had failed to file the trust’s GST and income tax returns and told the court he assumed his co-trustee had taken care of these obligations.

Own money

The IRD wasn’t impressed. The outstanding tax had ballooned, with interest and penalties of more than $500,000 and it wanted to be paid.

The solicitor, being forced into a corner, had to negotiate to achieve the best outcome he could. He managed to reach a settlement with the IRD by paying $200,000 of his own money in satisfaction of the outstanding debt.

He then turned on the client trustee and sued him for the $200,000 he had paid to the IRD.

The High Court ordered the co-trustee to pay $105,337.44. So the solicitor trustee ended up having to pay about $100,000 of his own money in addition to all of the unrecovered costs involved in dealing with the IRD and litigating in the High Court.

I write about this case because so many family trusts have a solicitor trustee who might be described as having a relatively passive role and some of these people may not understand that trustees are subject to joint and several liability. 

This is what Grant MR said about two passive trustees in Lingard v Bromley, a case that was decided in the early 1800s:

• “The Defence is of a Kind, which a Court of Justice is very unwilling to listen to: that, having undertaken a Trust, they abdicated all Judgment of their own in the Performance of it; and did whatever the Plaintiff desired: “without examining” (as they say in so many Words) “into the Matter, or Ground, of the Proceeding”. Nothing could be more mischievous than to hold, that Trustees may thus act; and avoid Responsibility by throwing the Burthen upon the Person, in whom they have reposed this blind Confidence.”

It was held in the Selkirk case that Grant MR’s statement ‘remains good law to this day’. A ‘passive’ trustee cannot escape liability by relying on a client trustee to manage a trust’s business affairs satisfactorily.

A solution 

I had to look at the Selkirk case recently in the context of a case where a trustee was reliant on a
co-trustee to provide him with information and the co-trustee failed to do so, leaving the co-trustee exposed to liability.

Many lawyers will be asked by clients to act as an independent professional trustee and they will often want to accept appointment, rather than lose the client to another firm. 

The Trustee Act 1956 had a default mechanism whereby all trusts were required to have two trustees unless one trustee was specified when the trust was created or unless a trustee corporation was appointed a trustee. 

The Trusts Act 2019 has changed this. There is no longer a requirement for a trust to have two trustees except in circumstances where the trust was expressly permitted at the outset to have one trustee. 

One solution for solicitors who wish to avoid having to pay substantial sums from their own resources because a client trustee may prove to be ‘unreliable’ is for them to agree to accept appointment as a special trust adviser – the new name given to the people who were called advisory trustees in the Trustee Act 1956.

A special trust adviser in Selkirk’s position would not have ended up facing a liability to pay $500,000, or any sum, to the IRD. 

Anthony Grant is an Auckland barrister specialising in trusts and estates law.  This article originally appeared in LawNews (ADLS) and is here with permission.