Trusts & Relationship Property – What Does Clayton v Clayton Mean For Me?

Clayton v Clayton [2015] NZCA 30 (‘Clayton’) considers whether property owned by a particular trust is relationship property for the purposes of the Property (Relationship) Act 1976 (‘Act’).

Relevant Facts

Mr & Mrs Clayton separated in 2006 after 17 years of marriage.   During the marriage, Mr Clayton established a number of trusts, including the Vaughan Road Property Trust (‘Trust’).   The discretionary beneficiaries of the Trust were Mr Clayton and Mrs Clayton, together with their two children, who were also the Trust’s final beneficiaries.   The deed establishing the Trust nominated Mr Clayton as the ‘Principal Family Member’, which conferred on him certain powers, including:

• exclusive powers of appointment & removal of trustees and beneficiaries;
• wide powers that permitted the trustees to act contrary to the benefit of the Trust’s beneficiaries; and
• the power to distribute Trust assets to himself.

Family Court Decision

The Family Court held that the Trust’s assets were relationship property for the purposes of the Act, as the Trust was “illusory”.    It was held to be an illusory trust because the powers conferred upon the trustees hamstrung the ability of the Trust’s beneficiaries to hold the trustees to account.   This type of administration over the Trust was described as a “convenient structure for commercial purposes, carrying few hallmarks of a trust”.

High Court Decision

On appeal, the High Court also held that the Trust was “illusory”, but for different reasons.   The High Court held that the powers conferred on Mr Clayton were analogous to ownership over the Trust’s assets, allowing Mr Clayton to manage the Trust’s assets, as though the Trust itself did not exist.   As a result, the High Court held that the Trust’s assets were relationship property for the purposes of the Act.

Court Of Appeal Decision

On appeal, the Court of Appeal disagreed that the Trust was “illusory” and concluded that the Trust was valid.   However, the Court considered the wide definition of property in the Act, which defines property to include “any other right or interest”.   The Court held that Mr Clayton’s power to appoint and remove beneficiaries met that definition.   As a result the Trust’s assets were relationship property for the purposes of the Act.   The Court went on to hold that the value of Mr Clayton’s powers would be equal to the value of the Trust’s assets.

Practical Implications

The Supreme Court is yet to deliver its judgement.   However, the Family Court, High Court and the Court of Appeal all reached the same conclusion – that the Trust’s assets were relationship property for the purposes of the Act – but for different reasons.

The Court of Appeal’s decision means that Trust powers may now be possibly defined as relationship property for the purposes of the Act, despite being sheltered behind a validly constructed trust.

While the implications of Clayton are fact specific, it is a current reminder of the critical importance of both effective asset planning, trust drafting and proper trust administration practices.   Clayton compels those drafting trust deeds to carefully contemplate the nature and extent of trust powers.   If you think your situation may be effected by the decision of Clayton, call us to get us to review and advise you on your trust deed and your past trust administration practices.