A trust should be a simple concept.  A person, the Settlor, provides property to another person, the Trustee, to manage on behalf of the beneficiaries.  However, over the last twenty to thirty years, and in particular post the repeal of estate duty, there has been a definite trend for the Settlor to retain a certain amount of control over the trust property.  The recent New Zealand Supreme Court decisions in Clayton v Clayton look at these types of arrangements and it is clear a number of New Zealand trusts will now need to review powers that vest with parties that are not the trustee.

The Clayton litigation involved a husband and wife with substantial assets held in two trusts.  Although the parties ultimately settled out of court in late 2015 the Supreme Court still issued two separate judgements due to the precedents raised in the cases.


Mr and Mrs Clayton entered into a relationship in 1986 and were married in 1989.  They separated in 2006 and the marriage was formally dissolved in 2009.  Before they were married they entered into a section 21 contracting out agreement.  Under the terms of the agreement Mrs Clayton was to receive a maximum of $10,000 for each year of marriage up to a maximum of $30,000.

Vaughan Road Property Trust (VRPT)

The VRPT was settled in 1989.  A summary of the trust was:

  • Mr Clayton was the settlor and sole trustee.
  • The discretionary beneficiaries include Mr Clayton, Mrs Clayton and their two daughters.
  • The daughters were the final beneficiaries.
  • Mr Clayton held other powers under the deed of trust, including the power to add and remove beneficiaries, bring forward the vesting day and resettlement the trust.

Mrs Clayton argued that the VRPT was a sham or an illusory trust.  The claim of sham failed and the Supreme Court said that the term illusory trust was unhelpful.  There is either a trust or not and this will be driven by the actions of the parties involved.

Mrs Clayton also argued that the powers held by Mr Clayton should be considered as relationship property under the Property Relationships Act 1976 as they were rights or interests in property.  The Property Relationships Act 1976 applies for a de-facto relationship and as the VRPT was settled before Mr and Mars Clayton were married it applied here.  The Court of Appeal had previously found the power to add and remove beneficiaries held by Mr Clayton was relationship property and attributed fifty percent of the assets of the VRPT to Mrs Clayton.  This decision was challenged by Mr Clayton in the Supreme Court.

The Supreme Court ruled in favour of Mrs Clayton but did decide that Court of Appeal was incorrect in their approach.  Instead, the Supreme Court took a holistic view of the trust and the powers held by Mr Clayton.  The court ruled that Mr Clayton’s powers collectively under the VRPT were classified as rights and, therefore, gave Mt Clayton an interest in the VRPT for the purposes of relationship property.  As these powers were provided to Mr Clayton after the relationship with Mrs Clayton began the Court valued the powers as equal to the net assets of the VRPT.

It was important to note as the Court took an overall view it considered both fiduciary and personal powers held by Mr Clayton and bundled them up together.  This is an important point – it was clear the court was looking at the substance on how the trust operated as opposed to the strict legal form which is equity in a nutshell.

Claymark Trust

The legal principles that affected the Claymark Trust were different.  The Court had to decide whether the Claymark Trust was a nuptial settlement under section 182 of the Family Proceedings Act 1980.  This section allows the Court to order varying a trust to be made for the benefit of the children or a spouse or civil union partner.  However, for such an order to be given the trust must be considered a nuptial settlement and unlike for the VRPT Mr and Mrs Clayton were married when the Claymark Trust was settled.

The Supreme Court said that a two-stage approach to section 182 claims should be taken:

  • Step 1 – determine whether the settlement is a nuptial settlement. The Supreme Court said that to be considered a nuptial settlement the trust must have a connection with the marriage.  It is important to note that the make-up of the assets is not important and a nuptial settlement can be made for business reasons.  In this case, the Claymark Trust was settled during the marriage with assets acquired during the marriage for the benefit of the Clayton family.
  • Step 2 – decide whether the court’s discretion under section 182 should be exercised, and if so, how the discretion would be exercised. This simply means each case will be considered individually and practically this requires a comparison of how the parties will benefit from the trust post-separation compared to what would have hypothetically occurred had they not separated.

For the Claymark Trust, the Supreme Court found there was a nuptial settlement and the discretion under section 182 should be exercised.  This was because there were clear benefits to Mrs Clayton from the trust if the marriage had of survived.  As the parties have settled no formal order was given by the Supreme Court but if no settlement has existed an order would have been given to split the Claymark Trust equally into two separate trusts.

The result here is that section 182 is potentially a very powerful tool that can be used by the courts to benefit a spouse in the event a relationship breaks down and there are substantial assets tied up in trusts.  As long as a spouse can prove the trust was a nuptial settlement he or she should be able to obtain a court order that provides them with benefit from the trust.

Practical Implications

What does this mean for current New Zealand trusts?  There are now a number of specific issues that should be considered by Settlors and Trustees:

  1. Trusts which have a number of powers that vest in a singular Settlor or Principal Family Member should be reviewed and if necessary amended to ensure those powers are not held by the Settlor. This is especially so if that person is also a trustee and beneficiary.
  2. Consideration needs to be given that when a relationship starts a section 21 contracting out agreement is entered into, that covers all interests in trusts as well, i.e. they remain a person’s separate property.
  3. If parties are in a relationship and want to keep property separate, including the formation of a new trust during the relationship; then a section 21 contracting out agreement should be put in place.
  4. As always in the event of a relationship breakdown, it is far easier to negotiate a settlement between the parties as opposed to entering into prolonged and expensive litigation.

It is clear the courts are looking at trusts from a perspective of how they have been run and how the parties have acted.  The Supreme Court simply confirms that approach and this case simply reinstates general trust principles.

If you would like to discuss how these changes will impact your Trusts or have any questions relating to Trusts please contact Marcus Diprose.