The Supreme Court decision in Clayton v Clayton changed the trust landscape. But how afraid should we be? Are all trusts vulnerable to Clayton-style challenge? Or just the ones that push the envelope? And, if the latter, how far can one push before there is a problem?
A recent decision of Moore J has provided some guidance as to the appropriate parameters. The decision related to an appeal from a Family Court decision where it was claimed that the trust in question was under such settlor control that the trust property was relationship property for the purposes of the Property (Relationships) Act 1976 (PRA). Judge Southwick QC found that the trust in question was readily distinguishable from Clayton for reasons including the fact that the powers and entitlements vested in the settlor were different from the powers and entitlements vested in Mr Clayton because the settlor in the case in hand was fettered both as trustee and appointor. Four specific factors were relied upon:
- the history of the trust and the consistently stated intention to benefit the settlor’s daughters
- the existence of a no benefit clause
- the inability of the trustees to act alone (except in the case of a corporate trustee), and
- the settlor’s inability to remove the original discretionary beneficiaries.
Of note regarding the inability to remove the original discretionary beneficiaries was that the clause in question was not well drafted and ultimately both the Family Court and High Court judge determined that the addition of the word “such” in clause 7.1 (b) meant that only beneficiaries appointed pursuant to clause 7.1(a) could be removed; that is, beneficiaries already named in the deed could not be removed. Clause 7.1 read as follows:
7.1 Power to appoint and remove Beneficiaries: The Appointor may, by deed, before the expiry of the Trust Period:
(a) appoint any person to become a member of the class of Discretionary Beneficiaries and any person so appointed shall from the date specified in such deed (or if no date is specified, from the date of the deed) become a Discretionary Beneficiary as if such person had been specified or named in this deed as a Discretionary Beneficiary;
(b) remove such person from the class of Discretionary Beneficiaries and any person so removed shall from the date specified in such deed (or if no date is specified, from the date of the deed) cease to be a Discretionary Beneficiary as if that person had not been specified or named in this deed as a Discretionary Beneficiary …”
Editor’s note: the clause in the deed appears to be a commonly used clause to appoint and remove beneficiaries and it is suggested that the word “such” is not normally included in clauses of this type, thus supporting the view reached in the Family Court and the High Court.
Reference was made to Trustee Resolutions andto different Memoranda of Wishes to support what Moore J referred to as “a consistently stated intention to benefit [the settlor] as well has his daughters.”
Arguments that because the deed allowed a corporate trustee, the settlor could, through a corporate trustee, control the trust were unsuccessful. However, it is suggested that where this is not intended the simple use of a prohibition against settlor control would put the matter beyond doubt. The thrust of these arguments was that the settlor could exercise powers to add and remove trustees without constraint. Moore J held, by reference to decided cases such as the Court of Appeal decision in New Zealand Maori Council v Foulkes, that this was not the case and the power was fiduciary.
Regarding the self-benefit provision, this, it is suggested, was the most significant finding regarding the parameters of control. While Moore J noted that “It is true that the trustee’s discretion is unfettered in terms of clause 11 and that, on the face of clause 2.1 [bringing forward the vesting day] and clause 6 [the trustee may pay all or any part of the capital to one or more discretionary beneficiaries] the trustees could apply the assets of the trust to [the Settlor’s] sole benefit prior to the vesting day. But the powers that [the Settlor] holds in his capacities as trustee and appointor do not permit him to do this. He cannot remove the original discretionary beneficiaries and he cannot appoint a sole corporate trustee under his direction. And as a trustee he is fettered by the no self-benefit clause.”
It was the no self-benefit clause that was absent in Clayton; that was the deciding factor. As noted in conclusion “… the fetters constraining [the Settlor] are derived largely from the no-self benefit clause. Without this clause, it would be arguable the powers he enjoys under the deed are sufficiently similar to that in Clayton v Clayton that they could constitute property under the PRA.”
A demonstrably robust self-benefit provision may be the best defence against Clayton-style PRA claims. However, it is not enough to include the clause in the deed; trustee practice must also, it is suggested, be consistent with this. If the co-trustees are mere ciphers the inclusion of such a clause may not be sufficient to ward off arguments that the trust powers are property rights.
- Clayton v Clayton  NZSC 29
- New Zealand Maori Council v Foulkes  NZCA 552