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When a trust is not a trust: Relevant lessons from New Zealand
The recent New Zealand Supreme Court decision in Clayton v Clayton ((SC 23/2015);  NZSC 29) has implications for trust structures, especially those intended to protect assets from matrimonial claims / insolvency risks.
The case arose from a matrimonial dispute between a Mr and Mrs Clayton. The key issue was whether Mrs Clayton was entitled to share in the assets held in one Vaughan Road Property Trust. These assets were built up during the marriage and held in the Trust before their divorce in 2009. Mr Clayton was the settlor, sole trustee, and a discretionary beneficiary of the Trust.
Although the parties eventually settled the matter, the Supreme Court’s judgment has been published in view of its important decision in favour of Mrs Clayton. In particular, the Court found that:
- Mr Clayton, as sole trustee, had absolute power to remove any other discretionary beneficiary and was unfettered by any fiduciary obligation;
- He had the power to distribute all of the Trust income and capital to himself as a discretionary beneficiary and had broad resettlement powers – even to the detriment of all other beneficiaries, in his own favour, and regardless of any conflicts of interest;
- Therefore, these “unconstrained” powers were as good as ownership of the Trust assets; and
- The Trust was not a sham. However, the Court left unanswered (because the parties had settled) the possibility that the Trust might not have been validly set up and, hence, did not come into existence.
- The decision of the New Zealand Supreme Court might be persuasive in other common law jurisdictions, like Singapore.
- Judges might favour an approach of substance over form.
- Such an approach could also be adopted in insolvency actions brought by a creditor.
- Settlors should always seek legal advice when setting up asset protection trusts. This is vital to ensure that the facts do not point to a sham or an invalid trust.
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Managing Director, Savoir LLC
This information is provided for general information and does not constitute legal or other professional advice. Specific advice should always be sought in relation to any legal issue. Savoir LLC does not accept any responsibility for any loss which may arise from reliance on the above information.