Trust Law Revolution?

The Supreme Court has recently addressed controversial topics of great interest to lawyers, accountants and their clients.

In Clayton v Clayton the Court decided that in one Trust set up for business reasons and with business assets Mrs Clayton was entitled to a substantial distribution. It was not an unusual Trust, and there are many sufficiently like it to cause concern.

The Supreme Court decided in that case to revisit the law as it had been declared in Ward v Ward in respect of the use of Section 182 Family Proceedings Act 1980 to award one spouse property from the Trust which could be seen as settled in some way for a spouse’s benefit even though he or she was not named in the Trust as a beneficiary. The Court decided that the reasonable expectation of such a spouse, measured objectively, would be an important determinant of what if any property might be awarded to that spouse. It is not necessary to show need. The purpose of s182 was to empower the Courts to review a settlement to remedy the consequences of the failure of the premise on which the settlement was made. That premise was the continuation of the marriage.

Awards of up to half of the Trust property can be expected dependent on the facts, even if there are other beneficiaries, such as children, to consider, and even if the Trust was set up for business reasons and contains business assets.

For trustees and settlors seeking certainty of protection from unexpected claims arising upon separation and dissolution of marriage Claytons’ case changes the landscape. Upon review two courses are open to those wishing to avoid the effects:

  1. When there is a variation power remove spouses as possible beneficiaries before they become spouses.
  2. Where necessary distribute the Trust to a new one which does not make provision for a spouse at all.

Even if the spouse is a beneficiary a trust is not always caught by s182 as the Chief Justice explained at [114] of the Judgment. The first question is therefore whether or not s182 captures the particular Trust as a nuptial settlement.

The Supreme Court’s decision now makes clearer when Trusts can be expected to be subject to s182 orders. The range has been broadened somewhat.

For more information please contact one of our Trust Lawyers, Hawkes Bay.