A couple separated after ten years in a de facto relationship, leading to disputes over the division of relationship property.

Early in the relationship Mr. P was involved in establishing a family trust. His former partner, Ms. C, was neither a trustee nor a beneficiary under the Trust Deed.

The key dispute was whether Mr. P’s rights and powers under the family trust constituted “property” and therefore fell within the scope of relationship property for the purposes of division.

A recent Supreme Court decision analysed the above issue, specifically whether an individual’s rights and powers under a family trust deed grant them control over the trust assets and should therefore be treated as “property”.

The Court considered the meaning of “property”, examined the extent of Mr. P’s control over the trust, and concluded that Mr. P’s powers were not his property for relationship property purposes.

The law defines that “property” includes:

1. real property (houses and land);
2. personal property;
3. any estate or interest in any real property or personal property;
4. any debt;
5. any other right or interest.

The law also defines an “owner” as “the beneficial owner of the property under any enactment or rule of common law or equity”.

A trust deed may set out a “bundle of rights and powers” of individuals. These general powers may include appointing trustees, removing beneficiaries, and managing trust property. Such powers could empower an individual to act as if the absolute “owner” of the property, to invest trust assets, and to apportion receipts and outgoings between income and capital.

However, fiduciary obligations and trustee requirements can limit these powers, ensuring that an individual’s control over the trust is not absolute. In other words, if a trustee’s powers are limited, they may not be considered the “owner” of the trust property under the law.

As to fiduciary obligations, a trustee:

• must know and act in accordance with the terms of the trust;
• must act honestly and in good faith;
• must act for benefit of beneficiaries;
• must exercise powers for a proper purpose;
• has general duty of care;
• has a duty to invest prudently;
• has a duty not to exercise power for their own benefit; and
• has a duty to act unanimously.

A previous court decision, Clayton v Clayton, held that if a trust deed grants an individual unrestricted powers to control the trust and access all its capital and income, where the fiduciary powers on the trustee were substantially reduced, these powers can be defined as "property" under the law.

This is particularly relevant where the individual holds a general power of appointment amounting to effective ownership of the property, which means they could appoint themselves as the sole beneficiary and take full control of the trust assets.

In the present case, Ms. C argued that Mr. P’s extensive control over the family trust gave him effective ownership of the trust assets. However, the Court ruled against this argument.

The Court found that the trust powers under the Trust Deed were not as broad as to constitute Mr. P’s property. Specifically, Mr. P’s powers were not broad enough to allow him to remove other discretionary beneficiaries and to appoint all trust assets to himself as the sole beneficiary.

Furthermore, even if it were possible for Mr. P to have total control over the trust assets, his power to dispose of the assets would still be restricted by fiduciary obligations under the Trust Deed. As a trustee, Mr. P must exercise his powers in good faith and in the interests of the beneficiaries, and not for any improper purpose.

Additionally, unlike in Clayton, where the Trust Deed allowed an individual to hold the position as sole trustee, the Trust Deed in the present case requires at least two trustees acting jointly. Mr P. also could not remove or add beneficiaries at his sole discretion, further restricting his ability to treat the trust assets as his own property.

This Court decision reaffirms that simply having control over a trust as a trustee does not automatically make trust assets relationship property.

Key Takeaways

If you have concerns about how a family trust may be impacted by relationship property claims, you may consider the following:

• Examine the Trust Deed carefully: ensure it clearly defines fiduciary obligations and trustee requirements.
• Establish a strong trustee structure: prevent a single person from unilaterally controlling trust assets.
• Limit the power of a trustee to appoint assets to themselves as sole beneficiary: reduce the risk of trust assets being classified as relationship property.
• Seek legal advice: Trust structures can be complex, and professional guidance can ensure they remain effective and valid.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

 

Please note that Rainey Collins is not contracted to provide Legal Aid, other than in the Treaty of Waitangi area.  We therefore are unable to take on any Civil or Family Legal Aid work. If you require Legal Aid in those areas, you can search the list of Legal Aid lawyers on the Ministry of Justice website.