Memoranda of Guidance – What’s the purpose?

When a Trust is set up the settlor usually has views on how they would like the Trust funds to be used and distributed. These views are typically recorded in a Memorandum of Guidance and provided to the trustees with the Trust deed.

However it is important to remember the Memorandum of Guidance is not binding on the trustees; it is simply guidance and a trustee’s decision may override the wishes of the settlor. For this reason it is not uncommon for the relevance of Memoranda of Guidance to be questioned.

The role of the settlor is to create a Trust. Once they do, the settlor no longer owns or has any rights over the Trust assets.The trustees are now the caretakers of the Trust assets for the benefit of the Trust’s beneficiaries and not the Settlor, and in fulfilling this role, they must act within the framework of the Trust Deed and legislation. So does a Memorandum of Guidance by the Settlor have little weight?

Even though a Memorandum of Guidance is not legally binding, the Trustees have a fiduciary duty to ascertain the Settlor’s wishes and take them into account when making decisions. However, there are some considerations. The Court of Appeal in Chambers v S R Hamilton Corporate Trustee Limited, said that:

“Wishes can only be taken into account if they are not inconsistent with the purposes of the Trust as appears from its written terms. Trustees should not blindly obey all settlor instructions. It is necessary for trustees to read and understand a memorandum of guidance to discern the settlor’s wishes, and then with those wishes in mind make an independent assessment of the appropriate course of action, taking into account not just the memoranda, but all relevant factors.”

Therefore it is important for trustees to have regard to all the circumstances when making a decision. This is particularly important as Trusts can last for 125 years and things the settlor considered important at the time may no longer be important or relevant, or may compromise a trustee’s obligations to act in accordance with the purposes of the Trust Deed or Trusts Act 2019.  

So what is the ‘take away’ from this? Overall a Memorandum of Guidance will continue to be a useful document for the trustees, with the knowledge that it is not binding. It can provide guidance on how the settlor would like the trustees to exercise their discretionary powers and include specific instructions, for example, to assist children with the purchase of a home, or pay for tertiary education for grandchildren or assist special needs beneficiaries. Settlors can also indicate who they would like the trustees to consult following their death, and who the settlor would like to be a replacement trustee. The trustees can take these wishes into account when making decisions.

On this basis, to keep the Memorandum of Guidance relevant, we recommend that the settlor regularly reviews and updates it. If you don’t have a Memorandum of Guidance or your current one needs updating then we would be happy to assist you to provide clear guidance to your trustees on how you would like the Trust to be managed.