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Acknowledgement of Debt, insolvency, Taxation, trust, Trustees

Trusts and puppies

When settling a trust it can be useful to consider what happens next.  In this regard the settlement of a trust can be likened to that moment in the pet shop where this adorable puppy all paws and nose and licky tongue and waggy tail and soulful eyes uses its artillery of cuteness to attack all logic and before you know it you are at the counter with your wallet out and your defences down.

But what next?  The puppy will need to be walked and taken care of, no more spontaneous let’s go to a movie, let’s … the puppy will need to be cleaned up after, and the only thing that might save the puppy’s life as you try to find a single matched pair of unchewed shoes is that it is so cute you just melt and all is forgiven.  Until the next time …

Trusts are like that.  They are a great idea.  Trusts have proven themselves over time as the best form of long-term intergenerational asset protection.  But trusts like puppies, do not enter your life fully formed.  They take time and effort – and the wallet gets pulled out of your pocket or purse or hand bag a lot.

Trusts (again like puppies) cannot be forgotten for too long.  Or overlooked.  Of course you can never overlook a puppy because they bark and chew and cry and soil.  With trusts it is a bit more insidious.  Consider the case of Slade v Slade  where spouses each settled a trust to own the family home in equal shares.  The marriage ran its course and the parties separated.  Following the sale of the family home the proceeds of sale were transferred in equal shares to the two trusts, which is what would be expected.  However, Mr Slade had a tax debt, which was met from “his” trust’s share of the sale proceeds.  He was concerned that his wife’s trust might dissipate the proceeds of sale before he was reimbursed one half of the tax debt, which he argued was relationship property.  Freezing orders were obtained.   The next step was whether these could be up-held.  To maintain a freezing order it is necessary to:

  • establish a good arguable case
  • satisfy the court that there is a risk that the assets will be disposed of or dissipated
  • provide a meaningful undertaking as to damages, and
  • make full disclosure.  See Medtronic New Zealand Ltd v Finch.

The difficulty that Mr Slade faced was that whether the tax debt was relationship property needed to be dealt with under the Property (Relationships) Act 1976.  As noted at [13] “… the statement of claim does not formally seek orders for division of property under the Act. That is not surprising, because the Family Court has exclusive jurisdiction to deal with originating applications under the Act. Although the Family Court may in certain circumstances transfer a relationship property proceeding to this Court, the High Court does not have any originating jurisdiction under the Act.”

What all this means in a practical sense is that once you settle a trust, nothing is ever the same.  While freezing orders can extend to trusts (see Medtronic) that is only possible  where the trusts in question hold assets on behalf of the party whose assets are sought to be frozen. In Slade there was no evidence  to suggest that Mrs Slade’s trust holds the proceeds of sale on her behalf. The terms of the trust deed made it clear that the trustees must consider the interests of a wide range of beneficiaries, of whom Mrs Slade was only one.

While parties may treat trusts as their “own” they are not devices to be looked through or disregarded when inconvenient.  It is fundamental to a validly settled trust that the transferor or trust assets loses personal control of those assets.

So not looking so good for Mr Slade.  However, at this point the court threw him  bone.

The High Court has the power under s 46(2) of the District Courts Act 1947 (since repealed and replaced by the District Courts Act 2016. s 94(2)) to transfer a proceeding of its own motion to the District Court if the subject matter of the proceeding is within the jurisdiction of that court. It may do so unless the Court is of the opinion that the proceeding is likely to give rise to an important question of law or fact.

The court ordered that the case be transferred to the District Court so that that court could decide whether the matter should be heard under its civil jurisdiction or within the jurisdiction of the Family Court.

A useful reminder that trusts change everything.

 References:

 

 

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Discussion

2 thoughts on “Trusts and puppies

  1. Hi Vicki I have a lot of questions abut the state of my fathers estate and the mismanagement from the executor and my fathers ex wife. Can I email you about the current issues?
    Ngaa mihi Matene.

    Posted by Matene Karena | January 13, 2017, 1:05 pm

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