Parameters of Deeds of Family Arrangement

Vicki Ammundsen, Director of Vicki Ammundsen Trust Law, discusses the scope of Deeds of Family Arrangement with reference to recent case law. Each family arrangement is specific to the relevant family or families and the circumstances that have driven the requirement for a compromise between the parties, she writes.

In substance a deed of family arrangement is a variation of the terms of a trust (in many cases a will or estate trust, although deeds of family arrangement can also be entered into inter vivos), agreed to by beneficiaries and enforceable by a court. It is a potentially useful tool to enable either a reorganization of the estate for the purposes of distribution or to facilitate the settlement of a family dispute over an estate and avoid more expensive litigation that may, in some circumstances, materially diminish the residuary estate for all beneficiaries.

Put another way, a deed of family arrangement is a formalisation of a variation of trust made under the rule in Saunders v Vautier[1].

When can a deed of family arrangement be entered into?

Deeds of family arrangement can be inter vivos, or they can be entered into after the death of a will-maker or intestate.  The underlying premise is generally one of compromise by the ultimate beneficial owners.

What are the requirements for a deed of family arrangement? 

There are no mandated requirements for a deed of family arrangement.  As a general observation it is unwise to rely on a precedent other than for the provision of guidance.  Each family arrangement is specific to the relevant family or families and the circumstances that have driven the requirement for a compromise between the parties.

However, by way of general guidance matters that might be considered include:

• Comprehensive background by way of recitals that may or may not form part of the terms of the Deed
• Defined terms
• Record of all relevant parties
• Confirmation that all parties are of age and have capacity
• Reference to supporting information – this may be by way of schedules to the deed
• A scheme of settlement or provisions relating to the scope of the deed
• Consideration of any tax consequences that might apply
• Indemnification and limitations of liability
• Governing law
• Provision for court orders if relevant and for termination of the deed in circumstances where pre-conditions (such as court orders) are not able to be satisfied
• Agreement regarding legal costs
• Provision for signing in counterpart
• Acknowledgment of independent advice or that this has been declined / waived
• Certificates of independent advice

It is important to consider the extent to which a deed of family arrangement be used to “contract out” of statutory provisions.  The case law appears to distinguish between arrangements entered into inter vivos(during the will-maker’s life) and those entered into following death[2].  The rationale of the Family Protection Act 1995 and its precursors is based on public policy dictates. This emphasizes a will-maker’s “moral duty” at the time of death, but it should be emphasized that there is also a benefit to the state that a spouse, for example, is appropriately provided for and not left homeless and destitute.

To be able to properly enter into a deed of family arrangement it is necessary for all of the beneficiaries to be of age and not under any disability[3].  It is also necessary for the interests to be absolute or vested.  That is, the beneficiaries’ interests must comprise the entirety of the trust estate.[4]

Is the consent of the court required to enter into a Deed of Family Arrangement if all parties are of age and consent?

Where the parties to a Deed of Family Arrangement represent the totality of the beneficial interests in an estate, a Deed of Family Arrangement has the effect of bringing the trusts created pursuant to the will to an end.  Accordingly, the executors are not acting contrary to the terms of the will, but properly following the directions made on account of the totality of the beneficial interests.[5]  This is in accord with the rule in Saunders v Vautier.

In Heylen v Keene[6] a recent High Court decision of Woolford, all actual and potential beneficiaries signed an “amended direction” directing the executors of the estate of Paul Heylen to distribute the estate, not in accordance with his will, but rather as directed by the beneficiaries (in accordance with the rule in Saunders v Vautier). However, the two professional executors were reluctant to implement the directions without the protection of a Court order due to the uncertain status of one potential beneficiary.   As a result, the third executor applied for a direction that the executors were required to distribute the estate in accordance with the amended direction, in circumstances where they had not received indemnities from all parties.

The court was ultimately of the view that the amended direction was a sensible pragmatic compromise in circumstances where there was uncertainty that was addressed through the amended direction.  The concerns of the two “dissenting executors” was considered but addressed by reference to the indemnities that were provided and by the over-riding view that the rule in Saunders v Vautier essentially provided a complete answer due to the totality of the beneficial interests that were represented notwithstanding the uncertainty regarding all of the interests – the court sagely noted that either all the beneficiaries were party or, if they weren’t all beneficiaries, then all of the beneficiaries were nevertheless party to the amended direction.

As a consequence, orders were made pursuant to s 66 of the Trustee Act that the executors and trustees were required to distribute the estate in accordance with the amended direction.

Conclusion

Deeds of Family Arrangement can allow timely and cost-effective resolution of matters, including disputes in respect of wills and variation where parties are in agreement.  However, it is important to appreciate the parameters within which a Deed of Family Arrangement is appropriate.  While in Heylen v Keene the court was nonplussed by an application that did not require the court’s sanction, the case highlights the need for executors to be on the mettle and to appreciate and identify steps that could be taken where they are not properly directed by the entirety of the beneficiaries and could be subsequently liable for the consequences of doing so.

Vicki Ammundsen, BSc BCom LLB TEP, is Director at Vicki Ammundsen Trust Law. Vicki’s approach to trust law is practical but also grounded in a good understanding of trust law principles, related legislation and case law. As the author of a number of texts including Taxation of Trusts, the Trustee’s Handbook and Trustee Liability, Vicki is well placed to provide advice on all areas of trust law. Vicki also delivers a number of webinars for CCH and blogs at Matters of Trust. Contact Vicki via vicki@vatl.nz or connect via LinkedIn.