By Kimberly Lawrence

The future of the percentage-based approach

Percentages have long dominated the approach lawyers and judges take to assessing claims under the Family Protection Act 1955. However, the recent case of Carson v Lane [2019] NZHC 3259 squarely addressed the limitations of such an approach, and in particular, whether percentages should determine awards for adult children claiming against an estate of $17 million.

Carson v Lane – the facts

David Wayde Carson (Wayde) died leaving an estate worth $17 million derived from a Lotto win in 2009. After bequests, his residuary estate of about $15 million was left to the Carson Family Trust, a discretionary trust with a range of beneficiaries. His four adult children, from whom he was estranged, were discretionary beneficiaries of the trust but were not otherwise included in his will. His six grandchildren were discretionary and final beneficiaries of the trust but also received no direct provision in the will.

The trustees of the Carson Family Trust were Wayde’s niece and solicitors’ trustee company. A memorandum of guidance explained that, for as long as possible, Wayde wanted the trust assets to be held for research and development of the Galloway breed of cattle. He also wanted his wider family to benefit. On winding up Wayde wanted the trustees to consider gifting some of the trust assets to Lincoln University or a similar training and research facility.

The trust essentially had two purposes: to further Wayde’s interest in research and development of Galloway cattle, and to provide for his wider family members. His children and grandchildren were members of a large and varied class of discretionary beneficiaries, and enjoyed no preferential status. The children were, variously, in difficult financial or personal circumstances. Their mother was alive but they were unlikely to inherit from her.

The children and the grandchildren therefore made a claim against the estate for further provision under the Family Protection Act 1955.

The competing arguments

It was accepted that Wayde breached his moral duty by failing to provide for his children directly in his will. The question was how his failure should be remedied. The children claimed that they should be awarded 20% of the residuary estate each, or about $3 million per child. The trustees of the trust said that the children should be awarded $1 million each, and that any future needs could be considered by the trustees. The main question was whether a percentage-based approach should be used to determine the awards to the children.

The history of the percentage-based approach

The modern approach to awards under the Family Protection Act 1955 developed from the Court of Appeal decisions in Williams v Aucutt [2000] 2 NZLR 479 (CA) and Auckland City Mission v Brown [2002] 2 NZLR 650 (CA). These cases established the following general principles:

1. When making awards under the Family Protection Act, the court is not to be generous with a will-maker’s property, beyond what is required to repair any breach of moral duty;
2. Beyond what is required to provide for the proper maintenance and support of those who are entitled to it, testamentary freedom should prevail;
3. The court is not authorised to rewrite a will simply because it is perceived as being unfair; and
4. A beneficiary is not required to justify the share which has been left to them in a will.

In Williams v Aucutt, Blanchard J referred with disapproval to the “expansive” view courts had been taking toward rewriting wills in the 1980s and 1990s (at [68]). The claimant, who was comfortably situated, was awarded 10% of her mother’s estate. Shortly thereafter the adult daughter claimant in Auckland City Mission v Brown, who was neither well off nor in financial need, was awarded $870,000, or 20% of her father’s estate.

The Court of Appeal further emphasised what it termed the “conservative approach” in Henry v Henry [2007] NZCA 42. However, despite its shortcomings, the trilogy of cases has subsequently been used to justify percentages being used as a kind of tariff in estates of all sizes. A financially stable adult child can often expect to receive 10-20% of their parent’s estate (see the discussion in Ormsby v Van Selm [2015] NZHC 2822 at [45], then, for example, Prouse v Grieve & Tipene [2016] NZFC 4970, Waine v Tigg [2018] NZHC 1976, Cousine v New Zealand Guardian Trust Company Ltd [2019] NZFC 1318, and Scott v Garnham [2020] NZFC 678).

In the recent case of Kinney v Pardington [2019] NZHC 317, a needy child was awarded 70% of her father’s estate. That case sparked some commentary about the possibility of higher awards under the Family Protection Act than had previously been understood to be available. However, a previous decision in the same litigation indicated that:

1. Undisclosed assets had passed to the deceased’s widow by survivorship;
2. The deceased’s sons had received significant benefits from the family trust;
3. The gross estate (from which significant liabilities were still to be deducted) was worth only $615,000; and
4. It was accepted that the claimant should receive at least 50% of the estate.

The reference to 70% of the estate in that case made some sense in light of the fact that the residue had not been fully ascertained. However, it illustrates the dangers of taking a percentage award on its face: the real question will often be “a percentage of what?”.

Similarly, in the often-cited Moon v Carlin (HC Auckland, CIV-2010-404-5496, Woodhouse J, 23 February 2011), a group of adult children received $150,000 each or 75% of their father’s estate in total. However, in that case, significant assets were held in a trust of which the claimants were not beneficiaries. The award amounted to only around a third of their father’s total asset pool when the trust assets were considered.

Percentages are therefore not overly helpful when dealing with small estates, or any situation where there are additional assets held in trust or which otherwise remain outside of the estate in question. The question in the Carson case was whether percentages should be applied to determine the award in a very large estate.

The Carson decision

Justice Thomas considered that the arguments in favour of a percentage-based approach – particularly where a higher percentage was awarded – were most compelling in small estates and estates where there were a number of disadvantaged claimants. She did not accept that such an approach was appropriate in the context of an estate worth $15 million, and observed that a percentage-based approach had previously been rejected in an $11 million estate (Wightman v Public Trust [2014] NZHC 3124). She found that a percentage-based analysis can create a misleading impression where, for example, there are assets held in an inter vivos trust, as there were in Moon v Carlin. She found that “percentages should not be treated as placing either a cap on awards, nor used as a means to inflate an award in the case of a large estate” (at [94]).

Instead of using percentages to determine the award to each of the children, the court considered the factors relevant to repairing the specific breach of moral duty in the Carson case. The children argued that the award should place them each in a position where they could acquire mortgage-free homes, attend to their health needs, repay their debts, support themselves in future, and adequately recognise Wayde’s neglect. The court found that while Wayde’s lack of provision for the children during his lifetime was relevant, the Family Protection Act 1955 does not operate to punish a deceased person for unacceptable behaviour during their lifetime.

Ultimately, the court decided that appropriate provision for the children was $1.25 million each, and they would remain discretionary beneficiaries of the Trust. This sum was said to be “life changing”, and was slightly more than the $1 million each that the trustees had submitted was appropriate.

The relevance of the trust

The trustees’ position was that more limited provision could be made for the children on the basis that they were discretionary beneficiaries of the trust, and their interests would still be considered by the trustees over the long term. The court accepted that could be the case if the trust’s only purpose was to provide for Wayde’s family, but that particular trust was likely to be administered in accordance with Wayde’s wishes, which were, first and foremost, to focus on research and development of Galloway cattle. The decision did, however, confirm the position as set out in Flathaug v Weaver CA237/02, 13/05/03, that a discretionary trust managed by independent trustees may, in the usual course, constitute meaningful provision for the purposes of assessing a claim under the Family Protection Act 1955.

The position of the grandchildren

Submissions were made on behalf of the grandchildren but ultimately their claim was rejected. The judgment traversed the history of grandchildren’s claims and noted that following the enactment of the Family Protection Amendment Act 1967, grandchildren could claim in more expansive circumstances than simply when their parent was unable to provide for them directly.

However, s 3(2) of the Family Protection Act 1955 provides that the moral duty to provide for grandchildren will be determined with regard to any provision made by the will-maker (or the court) for the grandchild’s parents. The court declined to make any further provision for the grandchildren, saying that:

“Where both grandchildren and their parents are claimants under the Act, and adequate provision can be made for the proper maintenance and support of all parent claimants, there should be some particular circumstances identified before it would be appropriate to grant provision directly to the grandchildren.” (at [103])

In the Carson case, there was nothing to suggest that the grandchildren would not benefit as a result of provision made for their parents. The court found that “[w]hile a loving grandfather might well make some provision for his grandchildren in his will, that does not mean he fails in his moral duty toward them if he does not do so” (at [124]). The grandchildren also, however, remained beneficiaries of the trust.

Where to from here?

The Carson case may have wide-ranging implications. Percentages are routinely used as a tariff or benchmark for whether proper provision has been made for an adult child, irrespective of the size of the estate. Percentages can also constrain awards which are made out of smaller estates. This decision may give judges more confidence when awarding higher percentages to address the needs of claimants against smaller estates, and lower percentages when dealing with larger estates. It encourages a less artificial approach to awards under the Family Protection Act.

Kimberly Lawrence kimberly.lawrence@trustlaw.co.nz is an Associate with Greg Kelly Law Ltd in Wellington.