While recent headlines might lead one to belive that trusts are falling down in the face of relationship failures, closer inspection would suggest that in fact this is not commonly the case. There appears to be a significant distinction between trusts where both spouses or partners are settlor/trustees and cases where only one spouse or partner is a settlor/trustee. The facts of Potter v Duffy highlight the difficulties that can be faced when property is transferred to a trust (gifting presumably completed) and then later the settlors’ relationship fails. As noted by the court:
 Mark Duffy and Teri Potter lived in a relationship in the nature of marriage from 1979 to 2007. They have two children, Michael aged 23 and Rhian aged 20. They lived on a horticultural property at Pyes Pa, Tauranga. Since separation Mr Duffy has continued to live on the property. Rhian lives there as well. Ms Potter, a sickness beneficiary, has been waiting since 2007 to obtain a property settlement with Mr Duffy. That has not been straightforward. That is because their family trust owns the Pyes Pa property. Trust law applies, not the Property (Relationships) Act 1976.
 Ms Potter and Mr Duffy have not been able to decide what should happen to the Pyes Pa property. If the couple owned the property in their own names, rather than through a trust, Ms Potter would have a strong case under the Property (Relationships) Act 1976 to have her share of relationship property realised. The “clean break” principle would count strongly in her favour. The remedies under trust law are not so straightforward.
This can be the case even when the trust deed contemplates a relationship break down, as was the case in Potter v Duffy where the deed of trust included a clause providing as follows:
In the event of an irreconcilable dispute or marriage breakdown or dissolution or cessation of the relationship between the settlers, the trust deed shall be compellable to transfer one half of the trust funds to the trustees of a trust nominated by Mark Francis Duffy, such trust being on the same terms as this trust but excluding Terri Anne Potter as a beneficiary and the provisos to clauses 4.1, 6.1 and 11.1 and the balance to the trustees of the trust nominated by Terri Anne Potter such trust being on the same terms as this trust but excluding Mark Francis Duffy as a beneficiary and the provisos to clauses 4.1, 6.1 and 11.1.”
The trust property was subject to a mortgage and the trustees had differing views on the management of the business the trust operated.
So what was Ms Potter to do?
What she could not do was:
- apply for an order for sale under the Property (Relationships) Act 1976 as the provisions of this Act do not apply to a spouse acting as a trustee (see s 4B)
- seek court authority under s 64 of the Trustee Act – this section can only be invoked where the trustees are unanimously agreed on a course of action but require the court’s assistance by the conferral of the power (see Neagle v Rimmington, Melville v NRMA Insurance NZ Ltd and KAMG v STG)
- obtain directions under s 66 of the Trustee Act – s 66 allows a trustee to obtain directions from the court where there is uncertainty as to the propriety of a proposed course, but it cannot be used to resolve differences between trustees (see Harrison v Mills)
As there is no trust legislation that provides for applications for the sale of land held in trust (as is the case in some other jurisdictions – see for example the Trusts of Land and Appointment of Trustees Act 1996 (UK), ss 14-15; the Conveyancing Act 1919 (NSW), s 66G; the Property Law Act 1974 (Qld) s 38; also see the United Kingdom decision:Mortgage Corporation Ltd v Shaire).
So Ms Potter applied for an order for sale under Part 6 subpart 5 of the Property Law Act 2007, under which the court may order the division of property among co-owners. This approach raised a number of difficulties, which are summarised as follows:
- the final beneficiaries and the mortgagee had not been served with the application, s 341(2) and (3) of the Property Law Act require service on affected parties including any person with an estate or interest in the property. In this regard it was noted that if the children were only discretionary beneficiaries, they could have no more than an expectation that they might receive an interest in the property in due course. That would not be enough to bring them within s 341(2). In B v M Allan J distinguished the position of discretionary beneficiaries from final beneficiaries, holding that the latter’s rights amounted to property under s 2 of the Property (Relationships) Act:
“The position of the parties as final beneficiaries is different. Those rights are vested and therefore fall within the definition of “property” in s 2…”
- The judge was not satisfied that the provisions of the Property Law Act could be used to divide property owned by a single trust (compared with say property owned by a partnership of trusts). The purpose of Part 6 subpart 5 of the Property Law Act is to provide for the division of property among co-owners. Division can be ordered in three forms:
- sale of the property and division of the proceeds among the co-owners;
- division of the property in kind; and
- requiring one or more of the co-owners to buy out others.
- Ownership by trustees of a single trust does not lend itself to those kinds of division. While trustees own as joint tenants (necessarily to prevent the dissipation of trust assets on the death of a trustee and to prevent a single trustee from dealing with a proportionate share of trust assets) trustees are required together to hold and manage trust assets under the terms of the trust for beneficiaries. As noted in para  of the decision in Potter v Duffy “… trusteeship is collective. The default position under trust law is that trustees must act unanimously. Even in those trusts where majority voting is allowed, trustees must confer before making a decision. Unless a trust instrument were to provide for it specifically, trustees cannot allocate trust assets to be managed separately by individual trustees. A court-ordered division of trust assets under s 339 of the Property Law Act would not bring the trusteeship to an end. The trustees would still hold the divided assets on trust and would still be required to confer and agree on all trustee decisions. They would remain collectively responsible to the beneficiaries for the management of the divided trust assets. “
Given that Ms Potter is really seeking to enforce the terms of the deed of trust that allows for division of trust assets following the settlors’ irreconcilable breakdown her application was found to be procedurally flawed and needed to be amended to ask for a re-settlement of the trust fund under cl 8.1 of the trust deed.
Ms Potter’s application for the removal of Mr Duffy as a trustee was similarly procedurally flawed.
The case highlights that while trusts might appear ripe for “busting” at any moment. Attention to appropriate procedure and what powers the court has in accordance with the relevant legislative framework is imperative.
- Potter v Duffy  NZHC 544
- Neagle v Rimmington  3 NZLR 826
- Melville v NRMA Insurance NZ Ltd HC Wellington CP70/01, 17 April 2002
- KAMG v STG  NZHC 1767
- Harrison v Mills  1 NSWLR 42 (NSWSC)
- Trusts of Land and Appointment of Trustees Act 1996 (UK), ss 14-15
- Conveyancing Act 1919 (NSW), s 66G
- the Property Law Act 1974 (Qld) s 38
- Mortgage Corporation Ltd v Shaire  Ch 743
- Hunt v Muollo  2 NZLR 322 at  – 
- B v M  NZFLR 730 at .