Tax Watch: Edition 4, June 2016

Vulnerable Trusts

Supreme Court’s new take on trusts and relationship property

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Two recent Supreme Court decisions in Clayton v Clayton (Vaughan Road Property Trust)1 and Clayton v Clayton (Claymark Trust)2 have demonstrated the risks faced by settlors and trustees of trusts. They have changed the law. 

Trusts are used to protect assets against claims by creditors of all kinds as well as in matrimonial property matters.

It is common for settlors who established a trust to also be the trustees and/or beneficiaries of that trust, and retain various powers to control the trust property. However there is a fine balance between the settlor:

  • Retaining too much power and control over the trust property (as settlor, trustee, appointor, protector, principal family member or any combination of those)
  • Retaining too little power and control, which limits the settlor’s ability to supervise the administration of that trust property 

Too much power retained

Clayton v Clayton (Vaughan Road Property Trust) outlines that where the settlor has retained too much power, the trust property may be exposed to claims from ex-partners of the settlors that the trust property constitutes ‘relationship property’ in terms of the Property (Relationships) Act 1976 and, as such, ought to be shared equally. There is an expectation that the same argument will be explored in relation to claims made by the settlors’ creditors. 

Nuptial settlements cast a wide net

Clayton v Clayton (Claymark Trust) relates to the application of section 182 of the Family Proceedings Act 1980, which gives the court discretion to inquire into any ‘nuptial’ settlement and make any order it thinks fit. 

The Supreme Court held that a generous approach must be taken when considering whether there is a nuptial settlement, overturning previous judgments which focused on the intentions of the parties at the time the settlement was made.

The Supreme Court noted that the following trusts may be regarded as nuptial settlements, setting a very wide net indeed: 

  • Trusts set up before marriage when no particular spouse is in contemplation (could become nuptial if marriage is entered into later)
  • Trusts from which others will benefit (the fact that others may benefit is irrelevant)
  • Trusts for business purposes (nature of assets/purpose of trust is irrelevant)
  • Trusts set up by third parties, in particular by parents for the benefit of their adult children who are or might become married

The Supreme Court’s decision firmly offers section 182 of the Family Proceedings Act 1980 as a powerful tool for attacking trusts, in addition to the tools available under the Property (Relationships) Act 1976.  

Our team at EY Law has experience in advising on trust matters and can offer comfort that your trust is not vulnerable, suggest appropriate amendments to your trust or assist you with drafting a trust tailored for your purposes, ensuring the aforementioned risks are minimised to the extent possible. We can also work with your existing legal advisors, for instance by offering a peer review of your trust documentation, should this be appropriate.

EY - Kirsty Keating
Kirsty Keating
Leader – EY Law
Tel: +64 274 899 090
EY - Silvia McPherson
Silvia McPherson
Senior Associate, EY Law
Tel: +64 21 927 383

1 [2016] NZSC 29

2 [2016] NZSC 30