[2015] NZCA 30

The recent Court of Appeal decision in Clayton v Clayton involved a number of relationship property issues upon the Claytons' separation. Mr. Clayton controlled a property pool worth around $28m, the substance of which was held in various interrelated trusts and companies and thus not accessible to Mrs. Clayton as relationship property.

The Vaughan Road Property Trust, settled by Mr. Clayton in 1999, came under scrutiny in the Family and High Courts. The High Court determined that Mr. Clayton retained powers tantamount to ownership of the trust property, and the property should be treated as though it were owned by Mr. Clayton when determining the total pool of relationship property to be divided. In a novel judgment, Rodney Hansen J held that while the trust could not be set aside as a sham, it could nonetheless be disregarded on the basis that it was illusory. His reasoning was that although a valid trust was intended, Mr. Clayton could deal with trust property "just as he would if the trust had never been created". The trust was therefore an illusion.

Mr. Clayton was settlor, sole trustee, and a discretionary beneficiary of the Vaughan Road Property Trust. His wife and daughters were also discretionary beneficiaries, and his daughters were the final beneficiaries of the trust. It is not uncommon for one person to be settlor, trustee, and a discretionary beneficiary of a trust, but there were two less common features contained within the Trust Deed:

  • As a trustee, Mr. Clayton was able to deal with trust property entirely in his own interests (and to the exclusion of other beneficiaries); and
  • In his personal capacity, Mr. Clayton had the power to add and remove beneficiaries (including final beneficiaries).

It was crucial that Mr. Clayton's power to add or remove beneficiaries was to be exercised in his personal capacity as "Principal Family Member" rather than in his capacity as a trustee. His exercise of that power was therefore not subject to fiduciary obligations and nothing would stop him removing all other beneficiaries, effectively transferring all the trust property to himself. It was this degree of control over the trust property that the High Court found rendered the trust illusory.

The Court of Appeal disagreed in part. It found that the trust met the minimum requirements for a valid discretionary trust and had been created for legitimate business purposes. It agreed with the High Court that the trust could not be set aside as a sham. The Court of Appeal then considered the concept of an illusory trust, which the High Court had found was distinct from a sham. The Court of Appeal decided that the terms "sham" and "illusion" were effectively synonymous and were not separate legal concepts. A sham would be found where the settlor never intended to create a valid trust, but there was no "illusory" halfway house where an otherwise valid trust would be set aside because a settlor/trustee had wide powers of control over the trust property. The Court of Appeal found that the concept of an illusory trust "undermines the court's acceptance of the existence of a valid trust and overlooks the trustee's irreducible core obligations and the rights of beneficiaries to have them enforced". As the trust was not a sham, it was to be upheld. Mrs. Clayton could not use an illusory trust argument to access trust property for the purposes of her relationship property claim.

However this was not the end of the matter. The definition of "property" in the Property (Relationships) Act 1976 is very wide and has been held to include some rights and powers. In this case, Mr. Clayton held a power that would allow him to appoint himself as sole beneficiary and take the benefit of all the trust property. Because he held this in his personal capacity rather than his capacity as a trustee, he was unconstrained in his exercise of it. Although there was no suggestion that Mr. Clayton had any intention of transferring the full beneficial ownership of the trust property to himself, the power to do so was very valuable. As the power was acquired during the course of the relationship (when the trust was settled), it was relationship property. The Court of Appeal held that the value of the power was equivalent to the full value of the trust property. Mrs. Clayton was therefore entitled to half of the value of that power, i.e. to the value of half of the trust property.

What does this mean?

The good news: If a trust meets the requirements for a valid trust (intention to create a trust, property held by the trust, and "objects" or beneficiaries of the trust), it will not be set aside as an illusion merely because one party holds a great deal of power over the trust property.

The other news: A personal power (rather than a trustee power) to appoint and remove beneficiaries is likely to be relationship property if it is acquired during the course of a relationship. Concerned parties holding such powers should seek legal advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.