Is your trust at risk? 04 Jul 2016
Is your Trust at risk?
Do you have a trust that was set up years ago and think it is still protecting your assets? In the recent case of Clayton v Clayton the traditional view of trusts and their ability to be challenged was turned on its head. It may pay to check the wording used that grants powers in your own trust because if it is too wide then that could result in the ownership of the trust property itself being called into question. Recent estimates have suggested up to 100,000 trusts could be at risk of challenge in New Zealand.
The key issue which was the subject of the case was the power that Mr Clayton had over the future of the trust. Effectively he could control who received the trust’s assets because he was the only trustee and held all the significant powers. After 17 years of marriage Mr Clayton and Mrs Clayton separated and she effectively argued that the powers Mr Clayton had in the Trust meant that the Trust assets were “property” for the purpose of the Property Relationships Act. This meant that those assets would be split 50/50. This was very important because the business Mr Clayton ran had grown significantly during their 17 years of marriage and the Trust property was significant.
That situation may seem extreme – most trusts will have more than one trustee or at least a sharing or separation of powers – but it does highlight the ability of the court to call into question how trust property will be treated. Would the situation be so different if the original Settlor of the Trust retains the power to appoint and remove trustees whenever they want and thereby exercises control over who the trustees decide should benefit from the Trust assets? We don’t yet know but it seems likely that this point will be tested soon enough in the courts.
The implication for those who have a trust is clear. Pull out that old trust document and have a look at the powers. If one person has a great deal of control then it might be worth discussing with your lawyer to see if the wording should be tightened up to make it less likely for the courts to call it into question. At the same time it is also worth considering if the Trust needs other changes or confirm that it is still as you originally intended. Also, have you prepared a Memorandum of Wishes for your Trust which will provide guidance about how its assets are to be distributed? Finally, this may also be a timely reminder to check other documents that are kept somewhere in a cupboard or drawer, like your will.
The old saying goes, “you cannot have your cake and eat it too” and this, surprisingly, might now be a point that is relevant to Trust law. Perhaps the case of Clayton will result in a much needed dusting off of Trust and other documents and a refreshing of them to reflect current situations. We are already seeing many of our clients express a desire to know more about what the implications of Clayton will be and we are happy to discuss your specific situation in detail.