More trust busting on the horizon? Implications of the Clayton Supreme Court judgments

Clayton v Clayton is a ground-breaking decision which has changed the legal landscape for trust and relationship property lawyers. Most of us have committed the facts surrounding Melanie and Mark Clayton to memory.

Tammy Mcleod

The facts themselves are not remarkable. Mr and Mrs Clayton began living together in a de facto relationship in 1986. They married in 1989. Shortly before they married, they entered into a section 21 agreement, contracting out of the provisions of the (then) Matrimonial Property Act 1976. Under the agreement, Mrs Clayton agreed that she would make no claim against Mr Clayton’s separate property and, in the event that they separated after a three year period, her entitlement would be $30,000. They went on to have two daughters and separated in 2006. By that time Mr Clayton had built up a substantial sawmilling business, and had set up trusts, the two in question being the Vaughan Road Property Trust (VRPT) and the Claymark Trust.

After nearly ten years of litigation, Mr and Mrs Clayton managed to settle matters just before Christmas last year; however, not before they left the legal profession the legacy of the Supreme Court decisions Clayton v Clayton (Vaughan Road Property Trust) [2016] NZSC 29 and Clayton v Clayton (Claymark Trust) [2016] NZSC 30.

The first of these decisions, regarding the VRPT, dealt with whether the VRPT was either a sham trust or an illusory trust. The second point on appeal was whether the rights of Mr Clayton under the trust deed for the VRPT were relationship property.

In relation to the sham trust issue, the Court was quite conclusive – a sham is very hard to prove. In fact, it is difficult to know in what circumstances a sham trust would exist. A sham trust requires a common intention by all parties that a trust was never intended. An illusory trust is a trust whereby the settlor retains so much control that he does not actually give up his property rights. The Court could not reach a unanimous decision on this point and so didn’t make a ruling in relation to the illusory trust argument.

In the Court of Appeal decision relating to the VRPT, that Court held that the power to appoint and remove beneficiaries which Mr Clayton had retained was “tantamount to ownership” and was property in terms of the Property (Relationships) Act 1976 (PRA). However, the Supreme Court disagreed with this view – it said that the “bundle of powers” held by Mr Clayton (the power to appoint and remove beneficiaries, the power to appoint and remove trustees and the power of the trustees to distribute capital), not just the power to appoint and remove beneficiaries, amounted to a property right which could be valued in terms of the PRA. The Court valued that property as the value of the net assets of the VRPT and determined that it was relationship property of the parties.

The Claymark Trust decision related to the application of section 182 Family Proceedings Act 1980. Section 182 gives the court a wide discretion to vary the terms of any settlement made during a marriage. The court may take into account any matters the court feels are relevant. Section 182 only applies to marriage and civil union. It is not a remedy available to those in de facto partnerships.

The Court of Appeal had found that the focus was on the expectations of the parties at the time of the settlement. It found that the expectations at that time were that the trust was settled for business purposes and that there was no intention for Mrs Clayton to acquire an interest in that trust.

The Supreme Court overturned this interpretation and said that there was a two-part test. First, was there a nuptial settlement (the Court said a generous approach must be taken to this) and secondly, in what manner should the Court’s discretion be exercised?

The Court held that the settlement of the Claymark Trust was a nuptial settlement and the fact that it had been established for business purposes was of no consequence. A majority of the Court held that if the parties had not settled, they would have held that the Trust be split equally into two shares.

So, what are the consequences for the way we advise clients now? First, in relation to the bundle of powers being property for the purposes of the PRA, it is crucial to take time to draft trust documents specifically for the circumstances of the relevant clients.

In essence, if you put what would otherwise be relationship property during a relationship into a trust, then it is highly likely this will be treated as relationship property. Section 21 agreements are even more crucial if parties do want to keep their separate property separate. Trusts by themselves will not achieve this.

In itself, this may not make any difference to the way we advise people in a relationship, but it will make a difference to how we advise parents who want to set up trusts for their children to protect assets passed down to their children against the failure of a relationship. Careful consideration needs to be given as to who holds what powers and in what circumstances.

In relation to section 182, section 21 agreements are obviously not going to help directly, but it is likely that they will be a consideration the courts will take into account when exercising their discretion. In her judgment, Justice Glazebrook said there is no presumption of 50/50 sharing under section 182 as it is not the PRA, but if the settlement occurs during marriage then it is likely that the court will find in favour of equal sharing.

Section 182 also has the ability to be applied to inheritance trusts where the parents set up a trust for their daughter or son during the daughter’s or son’s marriage, even if this was intended to hold inherited property. It will be crucial to have a very narrowly defined beneficiary class in that event, and even a class of excluded beneficiaries which would prevent spouses from ever being named as beneficiaries. It will be interesting to see how the courts use their discretion in those kinds of cases.

The Clayton cases have altered the law and how we advise clients. These are interesting times for trust and relationship property advisors and the decisions re-emphasise that there is no room in New Zealand for a “one size fits all” cookie cutter approach to trust deed drafting.

Tammy McLeod is a member of ADLS’s CPD Committee. At the upcoming Cradle to Grave Conference (9 and 12 May 2016) she will deliver a paper on insurance for trustees. Chris Kelly (Auckland session, 9 May 2016) and Greg Kelly (Christchurch session, 12 May 2016) will speak on the legal landscape following the Clayton litigation. For more details about the Conference, see pages 8 and 9. 

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