Trust busting (Part 2): Constructive trusts
There have been a number of Court decisions in recent years in which it has been found in one way or another that assets of a trust can be accessed for the purposes of a relationship property division.
One of the notable recent cases is Clayton v Clayton, which was the subject of my November 2016 article. In that case the assets of the trust became part of the relationship property pool because the provisions in the trust deed essentially gave Mr Clayton full power over the trust’s assets. This meant that he was able to make decisions that were not necessarily in the best interests of the beneficiaries and that could have been solely to serve his own interests, including transferring all of the trust property to himself.
Trust assets have also been classed as relationship property in situations where the trusts have existed for some years, prior to the commencement of the relevant relationships, and in many cases have been family trusts. In these cases “constructive trusts” have been found by the Courts to exist – trusts created by law over certain assets, including existing trust property, essentially because that is the “right thing to do”. One of the most recent leading cases of that nature is the Court of Appeal case, Vervoort v Forrest & Ors  NZCA 375.
Vervoort v Forrest & Ors - background
In the Vervoort case the William Duffy Family Trust (the “trust”) was formed well before the parties began their 12 year relationship. At the time of the hearing the trust owned significant assets in both New Zealand and Fiji. Mr Duffy, or the trust, also had a number of other assets, including shares in various companies. Given his/the trust’s significant financial resources and the fact that Ms Vervoort was not in paid employment, from an early stage in their relationship Mr Duffy provided the funding for their lifestyle.
After having relationship issues for some years, the parties eventually separated and negotiated a settlement of their relationship property issues. One of their agreements included a payment by Mr Duffy to Ms Vervoort of $327,000. However, despite that purported settlement, proceedings were ultimately brought by Ms Vervoort against Mr Duffy.
Ms Vervoort’s relationship property claim included arguments that she was entitled to a share of certain trust property. One of those arguments included that a constructive trust had been created in her favour over a lifestyle block in Auckland, which the parties lived in for a period with two of Ms Vervoort’s sons and one of Mr Duffy’s.
Constructive trusts and contributions
In considering whether a constructive trust did exist, the Court set out the requirements for a constructive trust from the case Lankow v Rose. The four key features are:
- Direct or indirect contributions to the property;
- The expectation of an interest in the property;
- That such expectation is a reasonable one; and
- That the defendant should reasonably expect to surrender an interest to the claimant.
The Court added that the contributions need not be monetary and that they have to have caused the acquisition, preservation, or enhancement of the owner partner’s assets, whether directly or indirectly.
Ms Vervoort argued that she helped Mr Duffy find the Auckland property, she helped to redecorate and refurbish a cottage that was on the property and that she maintained the property by cleaning it regularly, maintaining the house and gardens, the swimming and spa pools and caring for the animals. Mr Duffy did some work around the property but was inhibited by a severe knee problem.
The Court’s decision
In deciding whether or not a constructive trust existed the Court considered a number of other similar cases. In doing so it was acknowledged that it would not be common for rights and obligations under an express trust to be subject to a constructive trust – that it would take something exceptional before the Court would find it “unconscionable” for a trustee to be allowed to follow the trust. It is clear from the Court’s analysis of those cases that in successful constructive trust claims the claimant will have contributed to assets of the express trust and their value will reflect those contributions.
Although in the Vervoort case the Court considered that it was possible that a constructive trust claim could exist, Ms Vervoort’s claim failed. This appears to be because of a lack of evidence in terms of her contributions to the Auckland property. No attempt was made in her evidence to show any increase in the value of trust assets, she was not in a position to put money into the trust properties, and the Court did not consider her work and help to be a great contribution to the value of the assets. Mr Duffy was at least partially retired and there was no indication that her support of him assisted him in building or maintaining his assets.
Also relevant was that Ms Vervoort had the benefit of living in houses or apartments owned by the trust throughout much of the parties’ relationship and had enjoyed extensive travel. Against that background the Court considered that any entitlement under a constructive trust in Ms Vervoort’s favour would likely be significantly less than the settlement of $327,000 she had already received.
Common cases in which constructive trusts have been argued and upheld include cases in which the family trust owns a farm property and the son/daughter and their spouse operates the farm and carries out improvements to it over a number of years. In some cases promises have been made, and in others the settlors’ intentions have not been clear but the key features of a constructive trust have nonetheless been made out.
The lesson in this is to make sure that, if the intention is not for an interest in the relevant property to be passed on, any significant or ongoing contributions made to the property are clearly recorded and explained (for example, a non-monetary contribution could be made in lieu of paying rent). The reason for this is to remove any argument that there was any expectation of an interest in the property in return for those contributions.
If you would like further information please contact Renika Siciliano on 07 958 7429.
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