Family businesses can be complicated, especially when succession is involved.
To illustrate the complexities, imagine this scenario.
A mother and father own a large family farm. They have children together and live a typical farming lifestyle.
Throughout their lives, the children are told that, if they work on the farm, they will ultimately inherit it.
Their adult children work on the farm with their parents for minimal, or no, wages for many years (or decades) on the basis that their parents have told them that they will eventually inherit the farm.
Then, one of two scenarios unfold:
The parents decide to sell the farm to fund their retirement and move to Noosa (notwithstanding the years of telling the children that it is their inheritance), thus depriving the children of the property they have worked on for many years on the belief that they would ultimately receive that property.
OROne of the adult children separates from their partner, who has also worked on the farming property throughout the relationship. The separating couple have very little by way of property in their own name, but have both worked the parents farming property for a significant time for no, or minimal, wages. Unsurprisingly and not unreasonably, the partner who leaves the relationship seeks some acknowledgement and recognition for their years of labour.
The above is a sad but all too frequent occurrence, particularly in relation to family farms but can be equally applied to any ‘family business’.
What can follow on from the above scenario (or similar) is an argument that a trust has come into existence even though there may not be any documents specifically creating or referring to a formal trust.
The existence of a trust means that a property (or a portion of a property) held by one person, such as the registered owner, is held on behalf of another. So even though the second person may not have a legal interest in the property as they are not the registered owner, they have equitable interest as a consequence of the surrounding circumstances.
At its most simple, a trust prevents one party from unconscionably benefiting from the efforts, funds, or contributions made by another party.
If we bring this concept back to the example above it could, potentially, be asserted that the parents (as the farm owners) hold some, or all, of the farming property ‘on trust’ for the adult children (and possibly their partners) who have worked on the property for negligible pay over an extended period of time. If that work was done in reliance of representations which were made to the adult children by their parents, or the parents were aware that the adult children were labouring under a misapprehension but did nothing to correct that and continued to benefit from the efforts of the adult children, that adds weight to the argument that equity should intervene and the existence of a trust should be declared.
The creation, or declaration, of a trust can come about in various ways:
- the most common is via a trust deed. In those circumstances the existence of the trust is not in doubt; or
- by a court declaring that there has, due to the circumstances, come into existence a:
- Constructive trust;
- Resulting trust; or
- Implied trust.
However this is not an exhaustive list, and the ultimate decision comes about through an application of equitable principles as opposed to reference to any specific legislation.
Whilst each case turns on its own facts, when determining whether a trust has come there are typically three key considerations:
- Has a representation or assurance been made by one party to the other which led to an expectation on the part of the second party.
- The second party has reasonably relied on that representation or assurance.
- As a consequence of that reliance, they have suffered a detriment.
The tests can vary depending on the specific type of trust that is being asserted. An example of a variation to the above is if one party is aware that the other has a misunderstanding as to the nature of a particular situation, but the first party does nothing to correct that misunderstanding and, instead, continues to allow that party to proceed under that misunderstanding, there may a basis for declaring a trust.
It should be noted that whilst the specifics of each case determine the outcome, the exercise of declaring a trust is not based on a subjective or idiosyncratic notion of what is ‘fair’. Whilst equitable remedies such as trusts are not necessarily guided by specific pieces of legislation, they are still bound by well-established concepts and doctrines.
Seeking relief in equity can be exceedingly complicated, and cases can turn on what may initially appear to be a minor point. Additionally, time limits can apply when seeking such relief and advice should be sought at the earliest opportunity.
If you, or someone you know, is in a situation such as above seeking advice at the earliest opportunity is advisable and the team at HopgoodGanim are happy to assist.