New Zealand Update – The Clayton Case

step confrence nz 2016

New Zealand Update – The Clayton Case

Ora was fully represented at a STEP conference held in Auckland, New Zealand earlier this year. Of most interest were discussions around the Clayton case, a matrimonial relationship property, which from observations has turned the spotlight on where New Zealand Trust law stands on some fundamental issues, more particularly whether creditors now have wider access to reach into trust assets as result of this case.

The Vaughan Road Property Trust (“the Trust”) was settled by Mr. Clayton in 1999 when he was still married to Mrs. Clayton. Mr Clayton was the Settlor, sole trustee and a discretionary beneficiary. Mrs Clayton and their two daughters were discretionary beneficiaries. The terms of the Trust Deed allowed Mr. Clayton as trustee to deal with the trust property entirely in his own interest, and to the exclusion of other beneficiaries. In his personal capacity as the Settlor he also had the power to add and remove beneficiaries, including final beneficiaries.

The primary issues before the courts were; Whether the Trust was a sham or an illusory trust and whether the power of appointment held by Mr Clayton amounted to “relationship property” under Section 2 of the Property (Relationships) Act 1976 (New Zealand)?

The Court of Appeal reinforced the common law position that a Settlor could be the sole trustee as well as being a discretionary beneficiary. It found that the trust met the minimum requirements for a valid discretionary trust which had been created for legitimate business purposes and therefore could not be set aside as a sham.

It determined that the terms “sham trusts” and “illusory trusts” were effectively synonymous and were not separate legal concepts. There was no “illusory” halfway house where an otherwise valid trust can be set aside because a settlor/trustee had wide powers of control over the trust.

As to the more contentious issue of whether the power of appointment under the terms of the trust deed came within the statutory definition of “relationship property” the court held that as Mr Clayton retained a power equivalent to the full ownership of the trust property, such property should therefore be treated as though it were owned by Mr. Clayton. Since the power was acquired during the course of the relationship (when the trust was settled), it was therefore “Relationship Property”.

The case upon which the Court of Appeal relied in interpreting the power to appoint and remove beneficiaries as “property” involved a revocable trust (TMSF v Merrill Lynch [2011] UKPC 17) where the Privy Council held that where a donee of a power is entitled to appoint the subject matter of the power to himself without regard to the interests of the others, the donee is the effective owner of that property. The court took the view that under the terms of the trust deed, Mr. Clayton intended to confer the power of appointment on himself in his capacity as the Principal Family Member, and not in his capacity as trustee.

While this case has thrown up more questions than it answers, what remains clear is that the courts simply endorsed the common law position as handed down in the TMSF case. Certainly there are those who fear that the recent decision may have implicitly given creditors wide rights to take assets from many New Zealand trusts.

We have yet to read the decision of the Supreme Court which upheld the views of the Court of Appeal. While the debate will continue in New Zealand, the above highlights how the Cook Islands since the enactment of the International Trust Act 1984, has set upon a path which avoids many of the very issues being discussed in the Claytons case. Had this trust been established under the laws of the Cook Islands, which has modified and codified certain positions under common law, then the following provisions of the Act would have been relevant:

Section 13C “Retention of Control and Benefits by Settlor” 

An international trust shall not be declared invalid or a disposition declared void or affected in any way if the Settlor retains or acquires:

1. a power of revocation of the Trust;
2. a power of disposition over Trust property;
3. a power to amend the Trust Deed;
4. any interest in the Trust property.

Section 13E “Heirship Rights” 

A disinherited heir cannot challenge an international trust on the basis that it
interferes with his or her right to succeed to assets or property.

Section 13F “Spendthrift Beneficiary” 

An international trust can provide that an interest in property given to a beneficiary for life or a lesser period shall not be alienated or pass from the trust by bankruptcy or be taken in execution by process of law.

As an estate planner or legal advisor to families and trusts with substantial assets, it is important to consider the current legal environment under which your clients are subject to. If there is doubt as to the preservation of family wealth, then consideration ought to be given to the benefits provided under Cook Islands law, a jurisdiction which since the 1980s introduced the world to the concepts of asset protection and is seen as the gold standard for the preservation of wealth.