CAN YOUR TRUST BE BUSTED?

Trust law in New Zealand is changing and trusts are no longer the stronghold they have been.  Many people form trusts and transfer their assets to the trust believing that the assets are then safe from a claim by their spouse in the event of separation and divorce.  (There are other reasons for forming a Trust).

The Supreme Court of New Zealand, our highest Court, recently delivered a decision which is ground-breaking and is likely to change the legal landscape for trust and relationship property law.  Clayton v Clayton deals with a couple who were married in 1989 and separated in 2006.  During the marriage Mr Clayton built up a successful and substantial sawmilling business.  He formed a number of trusts to own various assets.

Mr Clayton had organised his trust affairs in such a way that he was the settlor and sole trustee of one of the trusts and had the power to add and remove beneficiaries, the power to appoint and remove trustees and the power to distribute capital.  He did not need to consider the interests of all the beneficiaries.  It has long been acknowledged that there can be no trust if the sole trustee is also the sole beneficiary.  In effect Mr Clayton retained so much control that the powers he retained were held to be property.  Because the powers were to be treated as property they were available for division between Mr Clayton and Mrs Clayton thereby defeating the effect of ring-fencing the assets in a trust.

The Supreme Court quoted Lord Templeman as saying:

“The manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.”

In certain circumstances it is also possible to make a claim to trust assets if the parties’ marriage has been dissolved, i.e. they have divorced.  The Supreme Court has indicated that such a claim is likely to be looked upon more favourably than once was thought.

When considering trusts a distinction must be made between those who must act selflessly and those who are entitled to act selfishly.  Where the trustee(s) must act selflessly the Courts will hold that there is a trust in place. However where the trustee is entitled to act selfishly (in other words benefit him or herself solely) the Courts may hold this to be a property right which then makes it possible to order that the property is divided between the parties.  The effect of the trust is then lost.

The moral of the story is that if you have a trust or are considering settling a trust you should always have two trustees or an independent trustee.  Ideally one trustee should not be a beneficiary.  To ensure your trust is as safe as possible from being busted by an aggrieved spouse, consult an experienced trust lawyer.  A trust will only be effective if it is well drafted and administered properly with the beneficiaries’ interests in mind.  If the purpose of a trust is solely to ring fence assets from a spouse or partner the more effective approach would be to enter into a contracting out agreement (a pre-nup).

 

 


By: , Legally Speaking with Nicolette Bodewes, Schnauer & Co.
nbodewes@schnauer.com

Issuu 66 June 2016