Constructive trusts – claiming an interest in trust assets

It is estimated in New Zealand that there are over 400,000 family trusts, many of which have been set up to protect assets from a relationship breakdown.  However, there is an ever increasing number of ways for claims to be made to “trust-bust”.  One of those claims, usually run when Property (Relationships) Act claims are exhausted or not an option, is that of a constructive trust.

A successful constructive trust claim can provide a way for a claimant to gain an interest in property owned by an express trust (for example a home or company shares owned by a family trust).  If a constructive trust is imposed by the court, then the claimant will have an interest in the property.

The requirements of a constructive trust claim against an asset(s) of an express trust are four-fold:

1. The claimant must have made direct or indirect contributions to the property in question;
2. The claimant must have an expectation of an interest in the property;
3. That expectation must be reasonable in the circumstances of the particular case;
4. The trustees should reasonably be expected to yield an interest in the property to the claimant.

Contributions could include direct contributions to an asset such as a house, for example, applying relationship income to the home, maintaining gardens, renovating or even organising the tradesman and repairmen where required (held to be a contribution in a 2002 High Court case).

They could also be indirect contributions; for example, looking after children, allowing the other party the time to acquire assets, could be sufficient.  The contribution must be more than minor.

In a 2003 High Court case, the claimant successfully established a constructive trust in relation to a business that was owned by a trust.  The female claimant had contributed directly to the business, providing advice on debtor control, revising company documents, manuals and promotional material.

In addition she had managed the household and cared for the parties’ two children.  This was a franchise business, and although the company shares were owned by a family trust, the claimant was able to establish a constructive trust allowing her to gain an interest in the business.

More recently, in August 2014, our Court of Appeal has made it clear that a constructive trust can be imposed on assets owned by an express trust.  This case involved a home that was built and owned by a family trust.  There were two trustees, the male partner to the relationship (Mr Hamilton) and his solicitor.  The first three requirements of a constructive trust were established however, the High Court rejected the constructive trust argument on the basis that the solicitor co-trustee did not stimulate the claimant’s expectation that she should expect to receive an interest in the home.

The Court of Appeal disagreed, finding that the solicitor trustee had handed over his responsibilities in respect of the house, allowing Mr Hamilton to deal with it as he saw fit.  Mr Hamilton was free to enter into various building and supply contracts for the house.

The solicitor trustee had allowed him to bind the trust in many other ways, and as such it was considered unconscionable for the trustees to deny the claimant’s constructive trust claim based on the expectation stimulated by Mr Hamilton.  The Court of Appeal imposed a constructive trust and the claimant was awarded a 15% interest in the home.

The imposition of a constructive trust is another way claims can be made against trust assets.  To avoid such a claim it is crucial that a trust is operating properly and that robust records are kept.  It is also important that parties to a relationship are clear about their expectations in respect of asset sharing.

Those wanting to protect their assets from relationship breakdowns should consider up to date advice on the asset protection mechanisms they have in place and whether they are sufficient.