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Recent court decision has major implications for family trusts

By Andrew Steele - 13 Apr 2016

The Supreme Court, our highest court, just released an important judgment regarding family trusts.

The case is Clayton v Clayton and involved typical discretionary family trusts where the beneficiaries included the settlor (Mr Clayton who put the assets in), his spouse, former spouse (Mrs Clayton), children and grandchildren.

Mr Clayton was a successful businessman who wished to protect his business assets by using the trusts, but he did not want to give up control of those assets. So Mr Clayton retained the power to add and remove trustees or beneficiaries and distribute the capital and income as he wished, including to himself. This gave him effective control over the trust assets.

The Supreme Court held that Mr Clayton's level of control constituted relationship property for the purposes of the Property (Relationships) Act, and the value of this 'property' equated to the net value of the assets of the trust. Bear in mind, as a discretionary beneficiary Mrs Clayton had no legal right to or interest in the trust property and, going forward, was unlikely to receive a distribution given the marital split. By reason of the Judgment however, Mr Clayton becomes liable to 'pay' half the net value of the trust assets by taking a lesser share of the relationship property available for division between them.

Just as importantly, the Court held that Mrs Clayton was entitled to half the trust property pursuant to the Family Proceedings Act because the trust was a nuptial settlement. The trust was 'nuptial' because its creation was connected and proximate to the marriage. The trust was settled during the marriage and provided for the family. So and notwithstanding that Mrs Clayton apparently agreed to make no claim against the trust, the Court held that objectively she did have a reasonable expectation of provision from it in the sense that, had the marriage continued, she and the family generally would have receive continued provision from it. By ordering that she receive half the trust assets, the Court satisfied that expectation.

Ironically, the case settled before the Judgment was released, so the Court did not make the orders it would otherwise have made. Nevertheless, the Judgment has major implications for the drafting and administration of family trusts.

If you wish to know more and or check the legal soundness of your trust planning, talk with one of our trust team experts.

Contacts

Andrew Steele

Catherine Atchison

Lewis Grant

Angus Rogers

 

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