A personal power, however, to appoint and remove beneficiaries could from hereon be treated as relationship property if it is one that is acquired during the course of the relationship
The recent decision by the Court of Appeal in Clayton v Clayton  NZCA 30 has some significant implications for trust and relationship property matters.
In summary, the Court of Appeal found that a power retained by a settlor of a trust to appoint and remove trust beneficiaries could be relationship property for the purposes of the Property (Relationships) Act 1976 (“the Act”).
The consequences of this decision were significant for both Mr and Mrs Clayton.
Facts of the Case:
This case involved a number of relatively complex relationship property and trust related issues arising out of the Claytons’ separation.
The facts of the case were as follows:
- Mr and Mrs Clayton separated in 2006 after 17 years of marriage.
- Mr Clayton had significant sawmilling interests in the central North Island. His business and other assets were owned by a series of companies and trusts. He controlled, in total, a property pool worth around $28 million.
- It was Mr Clayton’s case that none of the trust assets were relationship property, and that his former wife’s claim only extended to their $850,000 family home and $30,000.
- Mrs Clayton, however, contended that she was entitled to half of the value of the business and trust assets.
- One of the trusts was known as the Vaughan Road Property Trust (“the Trust”). It was settled by Mr Clayton in 1999 (during the course of the Claytons’ marriage). Mr Clayton was the settlor and trustee of this Trust; he, his wife and their two children were discretionary beneficiaries. The children were also the final beneficiaries of the Trust.
- Mr Clayton was also nominated in the Trust Deed as the “Principal Family Member” and, in that capacity, he held a power to remove any person as a discretionary beneficiary, as well as the power to appoint any person to become a discretionary beneficiary. He also held the power to remove and appoint trustees of the Trust. It was these powers of appointment that the Court of Appeal’s decision turned on.
Decision in the Lower Courts
The dispute as to whether or not the Trust assets could be treated as relationship property, and therefore subject to equal sharing, was first heard in the Family Court.
The focus was on whether or not the Trust could be held to be an “illusory” trust, or not. The concept of a “sham” trust is a well established doctrine in New Zealand; however, the concept of an “illusory” trust in this jurisdiction is relatively new. Prior to the Clayton case, it had never been accepted by the New Zealand Court.
The Family Court held that the Trust was “illusory” on the basis that the wide powers granted to the trustees negated the ability of its beneficiaries to ever call the trustees to account.
The manner in which the Trust was administered suggested that it was simply a convenient structure for commercial purposes and carried few of the hallmarks of a trust.
As such, the Trust property was regarded as relationship property and available for sharing in accordance with the provisions of the Act.
Decision by the High Court
The High Court agreed that the Trust was “illusory” but on a different basis from the Family Court.
The High Court was influenced by the fact that there was no clause in the Trust Deed preventing self dealing: The Trust Deed conferred on Mr Clayton an unfettered discretion, as the sole trustee, to distribute Trust property to himself (as a beneficiary). His exercise of that power was therefore not subject to fiduciary obligations and would not stop him removing all other beneficiaries; in other words, being able to transfer all of the Trust property to himself. It was on the basis of this degree of control over the Trust property that the High Court found the Trust was an illusory one.
Decision by the Court of Appeal
The Court of Appeal considered nine relationship property questions arising out of the lower courts’ decisions. Mrs Clayton was largely successful in some aspects of the appeal, but failed on others.
The appellate Court found that the Trust met the minimum requirements for a valid discretionary trust and found that Mr Clayton genuinely intended to create the Trust for legitimate business purposes.
The Court of Appeal then considered the concept of an “illusory” trust, which had been found by the High Court to be distinct from a “sham” trust. The Court of Appeal rejected the High Court’s decision that the Trust could be disregarded on the basis that it was illusory. The Court of Appeal considered that the distinction between “sham” and “illusory” was not supportable, the terms were synonymous and legal definitions of the two overlapped. Mrs Clayton could not therefore advance an illusory trust argument to access Trust property for the purpose of her relationship property claim.
The Court then went on to consider the power of appointment afforded to Mr Clayton. Although Mr Clayton was also a trustee, this general power of appointment was given to him in his separate capacity as the “Principal Family Member”. As such, his ability to exercise his power was an unfettered one; he was not constrained by any fiduciary duties such as those that would constrain the exercise of power by trustees. Mr Clayton would have been entitled, by virtue of this power conferred on him as the “Principal Family Member”, to remove all beneficiaries other than himself and then (in the exercising of his separate wide powers of distribution of Trust assets, held as the sole trustee) distribute all Trust assets to himself.
The Court then considered whether this general power of appointment was property and, if it was, was this right to exercise his general power of appointment “relationship property”. The Court concluded that a general power of appointment of this nature may give rise to property rights. As the definition of property in the Act includes “any other right or interest” the Court considered the power of appointment was within the definition of “property” as defined in the Act because it is a “right” and creates an “interest”.
The value of the power was, the Court found, equivalent to the full value of the Trust property. Therefore, Mrs Clayton was entitled to half of the value of the power (in other words, the value of half of the Trust property).
This decision is welcomed for the clarification that it brings to the scope of the “sham” trust doctrine and for the Court’s clear steer that there is no separate cause of action of an “illusory” trust.
The Court of Appeal’s focus on the manner in which the general power of appointment was conferred on Mr Clayton (not in his capacity as trustee, but as the nominated “Principal Family Member”) also provides helpful guidance. It could be said that it was the unchecked nature of that power conferred on Mr Clayton that was pivotal to the Court reaching the decision that it did; and it was the subject of that right which brought the value of the Trust’s assets within the ambit of the relationship property proceedings for the Claytons.
The finding of the Court of Appeal was that the power itself was relationship property, having a value equal to the value of the Trust’s assets. Whether this would also apply in a bankruptcy situation, i.e. giving a creditor in bankruptcy sufficient grounds to claim against a trust’s assets, is, as yet, untested.
Some commentators have noted the significant reduction in apparent comfort people can now take by settling their property into trust, assuming it was safe for evermore. To some extent, that is true. However, if a trust meets the requirements necessary (certainty of intention, subject and object) to create a valid trust it will not be considered a “sham” trust simply because one party holds a great deal of power over the trust property. A personal power, however, to appoint and remove beneficiaries could from hereon be treated as relationship property if it is one that is acquired during the course of the relationship.
Whether or not this will stay good law remains to be seen; in June this year leave to appeal these matters was granted.