A victory for the family trust – no “grand march” into trust assets

Wednesday, March 24, 2021

A recent decision from the Court of Appeal in Preston v Preston should have calmed some of the alarmist views generated by professional advisors over the robustness of family trusts. We did not see the Supreme Court in Clayton as opening up a new wave of “trust busting”. Headlines such as “a new doctrine to invalidate trusts” or “could your trust be busted too?” or most alarmingly “up to 100,000 trusts at risk thanks to Clayton decision” generated much anxiety.

We took the view that Clayton did not affect the fundamental principles of trust law and the basic benefits of settling a trust remained unchanged following the decision. This more measured approach has now been endorsed by the Court of Appeal.

The Preston decision is worth reading if only because the Court of Appeal describes it as “everything relationship property litigation should not be”. After four years and three sets of High Court proceedings over modest relationship property, Mrs Preston had to pay $15,903 to her former husband as an equalising payment. She also had to pay (on top of her own costs) $137,233 to him in costs and disbursements. The Court of Appeal summed up the outcome succinctly in the first paragraph of the judgment – “Result: misery”.

The failure of the litigation to deliver any meaningful result for the parties aside, it has at least had the benefit of illustrating how the Courts will approach a challenge to a fairly standard family trust in the context of a relationship breakdown.

The Preston litigation arose in the form of a s 182 Family Proceedings Act challenge to a family trust. Section 182 allows a settlement of property to be re-opened if it is made in contemplation of or during a marriage. This applies even if property is within a trust. Once s182 is engaged, the Court has discretion as to whether to reopen the settlement. It is generally used (as it was in Preston) as a way of seeking trust assets in relationship property disputes.

The Court in Preston ultimately decided not to use the s 182 “nuptial settlement” mechanism to provide equality to the parties from the trust assets. This was largely due to the facts that the trust pre-dated the relationship and the spouse had not contributed to the assets within it.

Key facts

  • A trust was settled prior to the relationship to protect assets for Mr Preston’s children.
  • Various assets were transferred to the trust, including a business and the land on which the family home was built.
  • The new partner was later added as a beneficiary.
  • She worked in the business and lived in the home that was built on the Trust’s land.
  • She received payments for her services to the business.

Outcome

Adding the new partner as a beneficiary was a nuptial settlement under s182 of the Family Proceedings Act.

BUT no award should be made from trust assets to her.

Detailed discussion

Preston concerned claims for various assets following the dissolution of Mr and Mrs Preston’s marriage in 2018. The parties had commenced a de facto relationship in March 2009 before marrying in December 2010. They separated in September 2015.

The Court of Appeal in Preston was faced with an appeal on three issues. The first issue is of most interest to those with family trusts. That issue was whether the High Court was right in saying that the addition of Mrs Preston as a beneficiary of the Grant Preston Family Trust was a “nuptial settlement” and, if so, whether the Court should award her some of the assets from the Trust.

When a marriage is dissolved, a Court can make orders if property has been settled in contemplation of a marriage or during the marriage. A common example will be transfers of assets into a family trust. In Preston, the trust was created well before Mr and Mrs Preston met. The principal asset of the Trust was a 99% shareholding in a company named Eastern Bay Thrusting Limited (EBTL) and the section of land in Whakatane on which the family home was ultimately built.

Mrs Preston was not one of the original beneficiaries of the Trust. She was added as a discretionary beneficiary shortly before marrying Mr Preston in early 2010.

Mrs Preston was employed by EBTL as an office administrator and had provided advances to EBTL at various stages when there were cashflow shortages. Despite those cashflow issues, the company was profitable and Mrs Preston was provided with a fair wage. The advances were repaid to her.

Mrs Preston asked the Court to award her a share of the assets owned by the Trust. She said that adding her as a beneficiary to the Trust was a nuptial settlement, and so the Court could (and should) exercise its discretion under s182 by awarding some of the Trust’s assets to her.

The Court of Appeal agreed that making Mrs Preston a beneficiary of the Trust was a nuptial settlement. But it disagreed that she should be given anything else from the Trust. No award was made.

The Preston decision provided useful clarification on the scope of nuptial settlements. Referring to two earlier cases - Clayton and Ward - the Court in Preston said the relevant section was intended to “remedy the consequences of a failure of the premise on which a settlement is made.” The Court said that this will most commonly apply to circumstances where a trust has been validly set up (without an intention to defeat relationship property interests) but where, following a marriage, one spouse is left in effective control of the trust.

Applying that lens to the situation in Preston, the Court distinguished Clayton and Ward on the basis that in those two cases, the spouses challenging the trusts had contributed to acquiring the trust property. For example, in Ward, it was held that both parties had contributed equally to trust property and expected to gain equal benefits from the trust during marriage. Naturally, they had envisaged that the marriage would be ongoing when they made those contributions. As such, it was appropriate for the Court to utilise section 182 so that they both continued to benefit after the marriage ended.

In Preston, the assets of the Trust had been contributed solely by Mr Preston. Mr Preston’s children were and remained the primary objects of the trust, and the assets were deposited into the trust before the de facto relationship between Mr and Mrs Preston began. In those circumstances, the Court held that there was no unfair benefit conferred on Mr Preston when the marriage ended, even though this meant that Mrs Preston would receive nothing from the trust.

Ward was different to Preston. It would have been unfair for one spouse to take all the beneficial interest in trust property that both spouses had contributed to. In Preston, there was no such unfairness. Mrs Preston had been provided with benefits by the trust during the marriage, but she had not made contributions to the assets within it (besides those which she was already compensated for).

In Preston, the Court held that the nuptial settlement provisions have a “relatively modest remit” that does not “authorise a grand march into… third party trust property to achieve economic equalisation in the name of contemporary family values.” This finding clearly illustrates the fact that even after Clayton, the correct approach is not to simply “bust” trusts for the sake of achieving equal division of property – section 182 is reserved for the narrow purpose of preventing unfair inequality when a marriage ends. Something more than inequality alone is required.

Preston offers some comfort to those doubting the security of trusts following the Clayton decision. It demonstrates that Clayton is not a silver bullet for every spouse who wishes to bust a trust. That does not mean that Clayton is of no consequence – it is a clear warning, particularly for those trusts over which the settlor maintains a high level of control. However, what Preston illustrates is that a family trust can still provide real security for assets even in the post-Clayton age. There is little doubt that if the assets in Preston were held unprotected in Mr Preston’s own name, they would have been relationship property. Much like the beverage of the same name, the Claytons’ trust was not what it seemed. A fact worth remembering for those considering the impact of that case on their own family trusts.

To discuss further, please contact Ayleath Foote or Amanda Bradley

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

 

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