Busting a trust
All legal eyes are glued to a landmark case that’s set down to be heard in the Supreme Court early next month – and its significance is such that anyone with a trust would do well to take a keen interest in, too.
A litigious decade in the making, Clayton v Clayton has traversed the Family Court, High Court and the Court of Appeal – and, as things stand, it’s turned trust and relationship property law somewhat on its head.
Mark and Melanie Clayton’s 17-year marriage ended in 2006. Mr Clayton had a sizeable sawmilling empire and had inherited business interests from his father. Mr Clayton controlled a property pool worth approximately $30m, held in various interrelated trusts and companies, which weren’t accessible to Mrs Clayton as “relationship property” on separation. Mr Clayton sought to ring-fence the trust’s assets, leaving just $850,000 in non-trust relationship property.
One of the trusts, the Vaughan Road Property Trust (VRPT), settled by Mr Clayton in 1999, however, came under the scrutiny of the Courts. Mrs Clayton’s legal team has, over the years, fought to “bust” the trust – in other words, to have the usual protections set aside by the Courts, to allow their client to legitimately lay claim to a share of the trust’s assets.
Mr Clayton was the trust’s sole settlor (the person who established it), sole trustee and a discretionary beneficiary. Furthermore, and rather more unorthodoxly, the trust was set up in such a way that Mr Clayton could use the trust assets as he saw fit (and entirely in his own interests), to the exclusion of other beneficiaries, and, importantly, in his own personal capacity rather than as a trustee. He also held sole right to appoint and remove beneficiaries. And, right about here, each of the Courts has had an issue.
Power is property
While Mrs Clayton has not succeeded to date in her argument the trust was a sham, all Courts to this point have agreed the trust did not meet the thresholds required to protect it from claims against it, although their rationale as to why has differed somewhat.
The Court of Appeal found that Mr Clayton held a power over the trust – not as a trustee, which carries onerous duties to the beneficiaries – but in his personal capacity as a “principal family member”. While the Court highlighted there was no evidence to suggest Mr Clayton intended to exercise his ability to transfer the trust property to himself, it was still a power – and a very weighty one at that. Significantly, too, it was a power acquired during the relationship.
Under the Property (Relationships) Act 1976, “property” includes “any other rights or interest”. The Court of Appeal relied on a non-relationship property case that said in some situations there should be no distinction between a “power” and “property”. The holder of the power should be treated as if they were the owner of the property. The Court of Appeal found Mr Clayton’s power in regards to the VRP Trust was not only bona fide relationship property, but was valued at the entire worth of that trust (that being the amount Mr Clayton would have realised had he exercised his power), to which Mrs Clayton was entitled half. Ergo, trust busted
Supreme judgment
The ins and outs of this case will have their final thrashing next month in the country’s highest jurisdiction, the Supreme Court. Two of the key issues to be tested: whether Mr Clayton’s power over the trust is, indeed, relationship property, and, if so, whether the Court of Appeal valued it appropriately. For now, though, anyone with a trust needs to be clear that the Court of Appeal’s decision is law, and will change only if the Supreme Court overturns it.
This case also serves as a bit of a swift kick in the pants around trusts – it is imperative, if you have a trust, that you, firstly, establish it soundly and, secondly, administer it robustly. Remember, a trust is there to protect your assets, but, to be effective, you must follow the rules. If you don’t, and it’s challenged after a separation or a death, there’s even more scope now for it to be busted and provide no safeguards at all. Although it’s yet to be tested, this case also has implications around protecting assets from creditors – yes, they, too, could potentially draw on this case law to bust your trust if it’s found to have similar cracks.
For most trusts, your lawyer can help you put simple, but effective, systems in place to clearly document all transactions and resolutions. An annual health check with your lawyer – we’re talking around 30 minutes – to ensure everything is as it should be can well mean the difference between a trust that’s safe as houses, as opposed to one that risks falling down around your ears.
Testing times
Don’t forget, either, as this case demonstrates, law rests on ever-shifting sands; by investing in annual trust checks you’ll stay up with the play, and empower yourself to make any necessary changes in a timely, informed and proactive way. The golden rule to remember about trusts is that they are separate from you, and need to be demonstrably established and operated as such, lest they be deemed a sham.
Alarmingly, many trusts still don’t even have separate bank accounts for starters. A stark test is coming up – as of October all trust properties that are bought and sold will need to provide Land Online with the trust’s IRD number. Yes, if you didn’t already know, your trust needs not only its own bank accounts, but its own, specific IRD number. Does yours?
For all of this, you needn’t be put off by the law changes and the rules governing trusts – these structures remain a crucial and powerful tool with which to protect your assets from a range of threats. If the Clayton case is ringing any alarm bells, or it’s a while since you’ve given your trust’s administration some TLC, a quick check-in with your trust lawyer will either give you peace of mind all’s well, or an all-important path to shoring up your asset protection strategies.