Could your trust be busted too?

For many years, trusts have been used as a form of asset management and/or asset protection.  They are still very much a useful tool for this, however, the recent Supreme Court case of Clayton v Clayton is a warning that trusts can potentially be “busted” in certain circumstances.

Clayton – trust issues

Clayton v Clayton was a case that centred on the division of the Claytons’ property after they separated and later divorced.  The Court had to consider a wide variety of issues, including issues regarding the validity of trusts and whether trust property was, in fact, relationship property. 

This was significant because, over the course of the relationship, Mr Clayton had built up a successful sawmilling business, which was owned and controlled by trusts and companies in New Zealand and the United States.  The underlying argument of Mrs Clayton throughout the Clayton proceedings was that certain trust property was in fact relationship property and should be part of the Claytons’ relationship property asset pool that was to be divided between them. 

Vaughn Road Property Trust

One of the trusts involved in the appeals before the Supreme Court was the Vaughn Road Property Trust (“the VRPT”).  The VRPT was somewhat unusual as Mr Clayton was the settlor, principal family member, sole trustee and discretionary beneficiary, and his powers as principal family member and trustee were broad and free from the normal fiduciary obligations in family trust deeds.  Those powers included one that allowed Mr Clayton to appoint or remove discretionary beneficiaries (“the power of appointment”).  Mrs Clayton and their two daughters were also discretionary beneficiaries and the daughters were the final beneficiaries.

Court of Appeal decision

The Court of Appeal had found that the power of appointment was relationship property.  This was on the basis of an incorrect interpretation (as held by the Supreme Court) of the power of appointment as allowing Mr Clayton not only to remove discretionary beneficiaries but also final beneficiaries.  If that had been the case, he could have essentially appointed the VRPT property to himself, and dealt with it as if it was his own personal property, bringing it within the Property Relationships Act 1976 (“PRA”) definition of property.  Given the VRPT was set up during the Claytons’ relationship, the Court of Appeal held that the VRPT property was relationship property. 

Supreme Court decision

The Supreme Court had to reconsider this, among other matters.  In the Supreme Court Mr Clayton contended that, as he did not actually hold a power allowing him to remove the final beneficiaries, he would always owe fiduciary duties to them and, on that basis, his powers under the VPRT Deed could not be relationship property.  The Supreme Court agreed with this and found that the power of appointment alone was not relationship property. 

However, the Supreme Court found that the power of appointment, when combined with other personal powers under the trust deed (including the power to allocate all of the trust capital to any one beneficiary, to bring forward the vesting date, to appoint and remove beneficiaries, and a broad resettlement power) amounted to relationship property, as they were not constrained by any fiduciary duty.  Despite the Court of Appeal’s error, the Supreme Court found that this “bundle of powers” still ultimately gave Mr Clayton the power to appoint all of the VRPT property to himself. 

On that basis, the Supreme Court held that the bundle of powers constituted an interest in personal property for the purposes of the PRA definition of property and that the value of the bundle was equal to the value of the VRPT assets.    

Could your trust be busted too?

This case makes it clear that certain powers provided for by a trust deed can be relationship property if the exercise of those powers is not constrained by a fiduciary duty or duties.  Put another way, if a trustee, for example, could exercise a power under a trust deed without due consideration for the duties owed to beneficiaries, that power is likely to be regarded as an interest in personal property for the purposes of the PRA. 

Although Clayton v Clayton involved the Supreme Court’s consideration of PRA principles, including the PRA definition of property, the Court’s decision also touched on principles relevant to the general law.  This leaves open the possibility of “trust busting” in other contexts based on this case, such as to make trust assets available to the creditors of a settlor and/or creditors of a trustee.  On that basis, it may be timely to have your lawyer review your trust deed to help guard against the risk of your trust being busted too.

If you would like further information please contact Renika Siciliano on 07 958 7429.