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Cases, Illusory trust, Relationship Property, s. 182, Settlor; settlors, Settlors, sham, Sham trust, Trustee liability, Trustees, Trusts


The long awaited Court of Appeal decision on the subject of illusory trusts should make unsettling reading for many a settlor, and perhaps their advisers too.

The decision, which runs to 96 pages is substantial.  The message is mixed.  While the trust in question was found to be valid (illusion it turns out, is just another word for sham) the sting in the tail is that the validity of the trust did not mean that the powers reserved to the settlor were not relationship property.

Step by step through the logic:

  • settlor is sole trustee
  • settlor is also a beneficiary
  • the settlor has the power to add and remove beneficiaries (due to the manner in which the class of discretionary beneficiaries was drafted, this included the ability to remove final beneficiaries)
  • there is no provision in the trust deed to prohibit self-benefit
  • the power was personal to the settlor and thus there were no fiduciary obligations, as is the case if the power was reserved to the trustees
  • the definition of property in the Property (Relationships) Act 1976 (PRA) is very wide

In a new 2015 “bundle of rights” argument:

  • settlor has power to appoint and remove beneficiaries and can be the sole beneficiary as a result
  • trust settled during relationship
  • power is property
  • value of the property interest = the value of the trust at (in this case) an agreed date that approximates the first time the matter was heard
  • trust property is not relationship property
  • but the holder of the power has a property interest with value – whether or not the power is exercised

The following excerpt from the judgment usefully summarises matters:

“[114] In reaching this conclusion, we recognise that, while we have accepted that the VRPT was a valid trust, Mr Clayton, in settling the trust, has failed to remove the value of its assets from the reach of the PRA. This is because he retained the right to exercise his general power of appointment under cl 7.1. This power does not invalidate the trust or mean that Mr Clayton, as trustee, does not hold the property of the trust for the beneficiaries. The trust remains in existence and is enforceable by the other beneficiaries. Their rights and Mr Clayton’s obligations as trustee continue unless and until he exercises his power under cl 7.1 to remove them as beneficiaries. But in the meantime, in terms of the extended definition of “property” in the PRA, the existence of the power under cl 7.1 also has the effect of bringing the net value of the assets of the trust as at 31 March 2011 into the pool of “relationship property”. This outcome, based on our analysis of recent developments in the recognition of a power of this nature as a property right, is consistent with both the law relating to trusts and powers and the underlying purpose and principles of the PRA.  The fact that Parliament enacted ss 44 and 44C of the PRA does not preclude the Court from reaching this conclusion based on the extended definition of “property” in the PRA.”

So what does it all mean?  Simply, the power to add and remove beneficiaries, at least if reserved to one party, can be  relationship property.  It does not invalidate the trust.  But it is nevertheless a property interest for the purposes of the PRA.

What to do?  If you have a personal (rather than a trustee) power to appoint and remove beneficiaries of a trust that you are wishing to keep out of a pool of relationship property, you might want to be reviewing that power.  At the very least, legal advice is recommended.

The question to consider is would the outcome have been different if the settlor in this case was not the sole trustee; and if the deed was sufficiently robust to prevent self-benefit in such a circumstance.  Whether this logic provides much salve is difficult though, in light of para [114] above where the determinative powers were the personal nature of the power and the fact that it is not what was done, but what could be done.

The case also highlights the need to consider whether, moving forward how best, and whether, to include the class of final beneficiaries amongst the class of discretionary beneficiaries, as is commonly the case.

Much will be written about this case.  This is first thoughts and observations.  More will follow.

Editor’s note

Leave to appeal to the Supreme Court has been sought.  See Sawmill magnate seeking Supreme Court hearing for divorce wrangle.  The Supreme Court allowed the appeal in a judgment handed down on 19 June 2015.

The matter was heard in the Supreme Court, which reserved its judgment.  However, the parties settled before the Supreme Court decision was released (Costly Split – $28 million divorce case settles).

The decision was later released (in two judgments) due to public interest in the outcome.  See The Supreme Court writes back.

Also for the musings of Ross Knight, who sat in on the Supreme Court hearing. See Clayton v Clayton – the last chapter?


Clayton v Clayton [2015] NZCA 30


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