Why the fuss?

As we begin to look at 2016, the year that was, Clayton v Clayton will go down in the history books as one of the most significant legal happenings of the year - and one of the most defining cases in New Zealand relationship property and trust law history.

With all its twists and turns, Clayton v Clayton evolved into a lengthy legal spaghetti junction – just when we thought we were getting some direction along the way, the map was rejigged by a higher Court.

As labyrinthine as this benchmark case was, it wasn’t just those in the legal fraternity who have dissected its ramifications at every critical juncture. In fact, the reasonably technical post mortems and developments were closely followed by the mainstream media, as well. Our clients at Aspiring Law stayed glued, too – out of dozens of stories, the Clayton v Clayton update was the most-read story in our monthly newsletters for all of 2015.

Why the interest? Tens upon tens of thousands of trusts exist in New Zealand, and when the media made it clear this case stood to “redraw the landscape” around relationship property and asset protection, people sat up and took notice to see how it might change their own situation. So, if you have a trust, think one day you might have a trust, and you’re in a relationship or hope one day you will be, settle in; the following constitutes “required reading”.

Where are we at?

It’s doubtful that when sawmilling magnate Mark Clayton and his former wife, Melanie, separated in 2006 they would have banked on their relationship property taking four Courts and 10 years to sort out.

Late last year, Clayton v Clayton had its final hearing, this time an appeal to the Supreme Court. But before the judges had a chance to deliver their findings the Claytons reached an out-of-court settlement. Usually, the judges would have stopped thinking about it, and we’d be none the wiser on what could have been. Due to the public interest and the case’s significance, the Supreme Court continued to deliver its decision.

At stake was a total property pool nearing $30m, largely made up of business and trust assets that Mr Clayton – the sole settlor and trustee, as well as discretionary beneficiary – fought to keep as his own. His contention was the relationship assets totalled around $900,000, which essentially covered little more than the family home’s value. Mrs Clayton challenged him throughout on two key points. Firstly, she contended the powers her former husband held in the trust at issue were so broad that they constituted personal property and should, therefore, be deemed and valued as such. Her second argument centred on “busting” the trust – in other words, to have the usual trust protections set aside by the Courts, thus enabling her to lay claim to the significant assets Mr Clayton had sought to ring-fence for himself.

On point number one, the Supreme Court took a different approach from the Court of Appeal. The Court of Appeal had found Mr Clayton’s powers to appoint and remove beneficiaries in themselves amounted to personal property and, hence, had a value which could be divided on separation. The Supreme Court decided that those powers in isolation did not pass the trust-busting threshold. They said, however, those powers, in conjunction with the other personal powers Mr Clayton had granted himself under the trust deed, amounted to total control and could be considered personal property.

Did the earth move?

So, has the law been shaken up on this point, as some have suggested? Yes. And no. The Supreme Court ruling pulls back somewhat on the Court of Appeal’s decision, limiting when the argument of powers constituting property can be raised. Therefore, the judgment tells us, yes, powers can be potentially viewed as personal property, yet it hasn’t provided much by way of guidance on where that tipping point lies, unfortunately. While the whole “are powers property?” issue grabbed the lion’s share of the headlines throughout most of the proceedings, what has arguably, turned out to be more noteworthy and significant is Mrs Clayton’s second argument: that the trust in question was a “nuptial settlement”. (Under the Family Proceedings Act, the courts are allowed to vary a settlement for the benefit of children of the relationship.)

The Court of Appeal had previously found in Mr Clayton’s favour, saying it was not a nuptial settlement because the trust had been created for business purposes, and Mrs Clayton had no expectation of gaining an interest in its assets. Not so, said the Supreme Court. It stated there was a clear connection between the marriage and the settlement of the trust, as it had been established during the parties’ relationship for the benefit of the Clayton family. Therefore, the Court ruled, it was, indeed, a nuptial settlement and, had the matter not settled beforehand, the judges would have ordered the trust assets be split 50-50. The sum total of this judgment is that partners and spouses should find it easier to lay claims against a trust established during their relationship when they are not named as a beneficiary.

Shoring up your trust

While, naturally, we lawyers would have loved nothing more than definitive answers on every point, this decision has opened the door to new arguments. Importantly, it is now quite clear that the Courts have an appetite for scrutinising trusts. Trusts are now firmly on the Courts’ radar ... and your assets just might not be as safe as you thought. While the Claytons were clearly very well-heeled, this decision should bring pause for thought for anyone in a relationship who has a trust, no matter whether their asset pool is paddling or Olympic-sized.

In terms of keeping your trust safe and structured to actually serve its original purpose, step one is to consult your legal advisor and check what your trust deed says. The key lessons from Clayton v Clayton include: have more than one trustee; give careful consideration to who should have the power to remove beneficiaries, and take care to ensure that trustees are restricted from voting on any decision that personally benefits them. Most important of all, in this day and age, you really can’t ignore a “contracting out” agreement (probably still more commonly known as a pre-nuptial). Backing up your trust deed with this safety net provides another important layer of protection – and clarity – around who owns what by way of relationship property. If I’ve said it once, I’ve said it a thousand times: if in doubt, contract it out.

Last updated 25 October 2016

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