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The Professional Trustee Team

Ground-breaking trust case - are your trust assets safe?


A labyrinth case, involving legal proceedings spanning a decade, has finally made its way through four courts. The ultimate judgement delivered by the Supreme Court is probably one of the most ground breaking decisions in respect of trusts and relationship property that this country has seen for many a year.  

The decision will affect countless trusts in different ways. Accordingly, I'm urging all our trust clients to take note especially if they want their trust to confer continual asset protection.

The facts
I have always said trust law is a moving beast. This case optimises that sentiment. The legal landscape frequently changes resulting in clients having to review their trust affairs to ensure their trusts are compliant. 

The facts of this case are not of themselves extraordinary and probably are representative of plenty of marriages. 

Mr and Mrs Clayton began their de facto relationship in 1986 and married in 1989. Prior to marriage, they entered into an agreement, commonly referred to as a 'pre-nup'. Pursuant to the terms of the agreement, Mrs Clayton agreed not to make any claim against Mr Clayton's assets and in the event that the relationship demised within three years of marriage, was entitled to maximum sum of $30,000. 

During the course of their marriage the Claytons had two daughters. As is sometimes unfortunately the case, love is blind but then you marry it. In this instance, the Clayton's relationship terminated in 2006 and the couple divorced in 2009. 

Mr Clayton Senior had built up a sizeable company in his lifetime, which he handed over to his son. Mr Mark Clayton (son) continued the business of sawmilling and timber processing which prospered. On advice, he transferred assets, including the business, into two trusts. 

Initially, a financial settlement between the parties could not be reached and thus, the matter proceeded to court. 

The claims
Mrs Clayton brought several claims in relation to the division of assets and the two trusts. However, this blog focuses on only one trust and on only one of the arguments advanced. 

The Family Court set aside the pre-nup agreement on the basis that giving effect to it would cause a serious injustice. 

In relation to one of the trusts, Mrs Clayton alleged it was a sham and as such, the assets of the trust actually belonged to Mr Clayton and could therefore be taken into account in the division of relationship property.

At this point you are likely to be asking similar questions as the rest of the legal fraternity did: (1) Didn't some of the assets of that trust belong to Mr Clayton's father originally? (2) If so, is it fair that inherited assets are distributed to a spouse? (3) Does a spouse who had no input into the original assets or building the business that has created additional wealth, have an entitlement to those assets? (4) Doesn't a trust protect against a relationship claim?

Before the Court had an opportunity to decide on the many arguments put forth, Mr and Mrs Clayton settled on the steps of the courtroom. However, because the points raised were significant to public interest, the Supreme Court continued and delivered its judgment.

As I said at the beginning of this article, this case for all legal counsel and the hierarchy of courts was akin to manoeuvring through Spaghetti Junction (Birmingham, England). At the heart of the trust argument was the fact that Mr Clayton was the sole settlor and principal family member beneficiary of the trust. Consequently, he could appoint and remove beneficiaries. Mr Clayton also held the position of sole trustee. This meant he could (amongst other matters) bring the vesting date of the trust forward and ultimately, pay the entire trust fund to himself as a discretionary beneficiary.

Without digressing into all the twists and turns of the case, the Supreme Court found that the powers Mr Clayton held through the positions he occupied were tantamount to ownership. As such, these powers were considered to be personal property. Furthermore, as the trust was created and as these powers were acquired during the course of his marriage, they had a value and were able to be divided on separation. In other words, the assets of the trust were now divisible.

Lessons to take 
There are lots of lessons to learn from this case. Some merely reinforce established legal points and views. Others bring to light new matters we must attend to in order to ensure assets remain protected in a trust against successful relationship claims.

• Have an independent professional trustee - someone who is not a beneficiary of the trust
• Ensure your independent professional trustee carries out their responsibilities:
o Annually reviews the trust and its affairs
o Reviews financial statements if they are to hand
o Is involved in all transactions the trust intends to undertake at the beginning of the process
o Completes appropriate documentation for the transactions the trust has undertaken

Review your trust deed to ensure:
• Autonomy within the deed itself places limitations on the personal powers held by the parties
• Only settlors hold the power of appointment - that is the ability to appoint and retire trustees
• Trustees, which would include the independent Professional Trustee, hold the power to appoint and remove beneficiaries
• There is a restriction on trustees' powers to vote on decisions that personally benefit themselves

Implement the following:
• A contracting out agreement with your spouse/de facto so your separate property does not become relationship property. This will sit alongside the trust. This needs to be done because this case has clearly shown a trust alone may no longer be effective in protecting assets from relationship claims without such an agreement being in existence.
• If you are putting assets into trust for your child and that child subsequently enters into a relationship, ensure your child and their partner enter into a contracting out agreement. Failure to do this could result in assets you have just bequeathed becoming divisible between your child and their spouse/de facto.
• Ensure all contracting out agreements are reviewed every couple of years, and document the reviews. This is important as it gives the parties an opportunity to amend the agreement should it be necessary - a step judges are keen to see occur should your affairs ever end up in court.

Assistance is available
Frequently the assets held in a trust are the big ticket items of an individual's and family's wealth. As such, continual asset protection is required. To ensure this objective is achieved, trusts must stay up to date with the law. Given the implications of the judgment, GRA currently recommend client's trusts be reviewed. Should you wish to discuss your trust, please contact GRA Trustee Services by emailing [email protected],  telephoning 09 522 7955 or via our website.

The Professional Trustee Team
The Professional Trustee Team
© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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I found Matthew Gilligan’s Property 101 and Tax Structures 101 to be superb books for the following reasons: 1. They contain a wealth of information about property investing and related tax matters; 2. The commentary is very rounded and balanced; 3. They are filled with financially savvy practical tips and red flag warnings; and 4. The relatively informal style, use of short case studies and anecdotes to illustrate points, and the clarity of presentation make the books very reader friendly. The above combine to make two books that are educational, thought provoking and inspiring. I only wish I had access to this information much earlier. - Geoff W - April 2016

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