Latest update on trusts from the New Zealand Supreme Court

Posted on April 01, 2016 in Private Client , Relationship Property , Trusts (Tags: Family Law, Relationship Property, Supreme Court, Trusts) Trusts.jpg

A landmark decision of the Supreme Court released on 23rd of March 2016 has clarified the circumstances in which assets held in a trust may be vulnerable to relationship property claims and potentially claims by creditors.

The case involved a property trust which had been settled by Mr Clayton around 13 years after commencing a relationship with Mrs Clayton.  Mr and Mrs Clayton separated after a 17-year marriage and had two daughters who are the final beneficiaries of the property trust.

Mr Clayton maintained that none of the assets in the trust were relationship property and that Mrs Clayton was not entitled to a division of those assets as part of the relationship property settlement.  The significance of this court decision is that the Supreme Court found that the various powers which Mr Clayton enjoyed under the trust deed gave him such a degree of control over the assets of the trust that those powers were effectively property for the purposes of the Property Relationships Act.  The value of those powers was equivalent to the value of the trust assets, and were relationship property and able to be divided equitably between Mr and Mrs Clayton.

This decision is significant in a number of ways.  First, it looks at the cumulative effect of the different provisions of the trust deed and concludes that those provisions give Mr Clayton the power to effectively deal with the trust capital and income in whatever way he chooses.  Mr Clayton is the sole trustee of the trust and is also the settlor.  He is a “Principal Family Member” under the trust deed which gave him the power of appointment of both discretionary beneficiaries and trustees.  He had the power to change any provision relating to the management and administration of the trust.

Most importantly, he had the power to pay or apply all of the trust capital to one or more discretionary beneficiaries (of which he was one).  He could also provide for early distribution of the trust capital including to himself alone.  The trust deed also contains a very broad resettlement power which means that Mr Clayton could establish a new trust for any one or more of the discretionary beneficiaries (including himself) leaving little or no capital in the property trust.

The cumulative effect of these provisions gave Mr Clayton such control over trust property that the Supreme Court treated the cumulative rights as property rights of Mr Clayton for the purposes of the Property Relationships Act which are equivalent to the value of the trust assets and available to be divided under that legislation.

It is possible that the same argument could be made where a liquidator is seeking to recover assets which have been settled on a trust and indeed one of the authorities relied on by the Supreme Court did arise in a liquidation case rather than a relationship property case.

This decision reinforces the importance of ensuring that a trust deed is well drafted and ensures that no one person is able to control the assets of the trust in the way that Mr Clayton was able to do.  It is advisable to have more than one trustee and at least one independent trustee who is not a beneficiary of the trust.  It is important to ensure that the powers to appoint and remove beneficiaries and trustees cannot be used to subvert the purposes of the trust which is to provide for the final discretionary beneficiaries.  In the Clayton case there were a number of provisions which removed the normal fiduciary obligations of Mr Clayton (that is the duties of good faith).  The nail in the coffin for Mr Clayton was that there was no effective means of preventing him from exercising the powers he was given in favour of himself.

In establishing a trust, the settlors do lose a degree of control over their assets.  In many situations, client resist losing control and choose not to have an independent trustee and to have provisions similar to those in the Clayton case.  This decision reinforces that such trusts are not impregnable to the claims of spouses and liquidators or other creditors.

Sally Peart