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[87] Clause 12 of the trust deed confers on the trustees the powers of an owner, providing as follows:

12 POWERS AND DISCRETIONS OF TRUSTEES

12.1 Powers: To achieve the objects of the Trust, the Trustees shall have in the administration, management and investment of the Trust Fund all the rights, powers and privileges of a natural person and, subject always to the trusts imposed by this deed, may deal with the Trust Fund as if the Trustees were the absolute owners of and beneficially entitled to the Trust Fund and, accordingly, in addition to any specific powers vested in the Trustees by law, in dealing with the Trust Fund or acting as Trustees of the Trust, the Trustees may do any act or thing or procure the doing of any act or thing or enter into any obligation whatever, including, without limitation, exercising unrestricted powers to borrow and raise money, and to give mortgages, other securities, guarantees and indemnities.

12.2 Discretions: Except at otherwise expressly provided by this deed, the Trustees may exercise all the powers and discretions vested in the Trustees by this deed in the absolute and uncontrolled discretion of the Trustees at such time or times, upon such terms and conditions and in such manner as the Trustees may decide….

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[88] Finally, and in my view, critically, cl 14 provides as follows:

 

 

 

 

 

 

14 TRUSTEE/BENEFICIARY

14.1 Self benefit: A Trustee who is also a Beneficiary may exercise any power or discretion vested in the Trustees in his, her or its favour.

 

 

 

 

 

 

Justice Rodney Hansen then concluded that the Vaughan Road Property Trust was illusory for the following reasons:5


[89] Many of the provisions of the trust are identical to or not materially different from those in Hotchin where Mr Hotchin, though neither a trustee or beneficiary, had the power to appoint himself sole trustee and a beneficiary. As in the case of the Vaughan Road Property Trust, the deeds conferred unfettered discretion upon the trustees to distribute the property without considering the interests of any beneficiary, including future beneficiaries…. However, the trust deeds in Hotchin contained a prohibition on self-dealing. Whereas cl 14.1 of the deed in this case expressly permits a trustee who is also a beneficiary to exercise any power or discretion in his or her own favour, Mr Hotchin could not use control as a trustee to distribute trust property to himself. The provision on self-dealing was critical to Winkelmann J’s conclusion that a claim that the trusts were illusory had no prospect of success.

 

 
 
 

[90] In contrast, the provisions of the Vaughan Road Property Trust give Mr Clayton unfettered power to distribute the income and the capital of the trust to himself if he wishes and to bring the trust to an end at any time he pleases. Mr Clayton effectively retained all the powers of ownership. What he has in fact done is neither here nor there, although it appears that, through his delegates, Mr Clayton exercises, in a practical sense, the powers of ownership. It is what he has the legal power to do that is important and that is basically to do whatever he wants with trust property. Within a largely conventional framework the trust deed provides an appearance of separation. The reality is, however, that if he chooses to, Mr Clayton is able to deal with trust property just as he would if the trust had never been created.

 

 

 
 
 
 
 
 
 

[91] I am led inexorably to the conclusion that, as Judge Munro found, the Vaughan Road Property Trust is illusory.

 

 

The only cases relied upon by the Family Court Judge and Justice Rodney Hansen were the Privy Council’s decision in Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd & Ors (Cayman Islands),6 and Financial Markets Authority v Hotchin & Ors.7 In neither case was the term “illusory” trust used, In Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd & Ors (Cayman Islands),6 the Privy Council decided that where a debtor has a power to revoke a trust, the Court can give the power to a creditor. The Privy Council did not hold that the existence of such a power made the trust invalid or “illusory.” In Financial Markets Authority v Hotchin & Ors7 the FMA argued that Mr. Hotchin “did not intend to give or part with control over the property sufficient to constitute a trust.” . Justice Winkelmann held8 that the FMA’s argument had “no prospect of success”

 

In the writer’s opinion Justice Rodney Hansen’s decision is incorrect and does not correctly apply basic trust law principles, nor correctly apply the “illusory” trust doctrine as expounded in Jacobs’ Law of Trusts in Australia, 1 and Waters’ Law of Trusts in Canada2. As Anthony Grant has commented:9

 

The relevant question for trust lawyers is therefore whether a trust that is not a sham, and which was always intended to be a genuine trust, can be stripped of its status because a person (usually the settlor) has powers of control that enable the Court to treat him/her as the owner of the ‘trust’ assets.

 

On appeal the Court of Appeal held, correctly in my opinion, that the suggestion of a distinction between a sham and an “illusory” trust was not supportable:14

 

 

[74] Neither judge referred to any authority for the proposition that an otherwise genuine trust, which has not been found to be a sham, might be declared not to exist because its terms somehow made it “illusory”. ….

 

[75] In our view, however, there are several significant difficulties with this approach to the adoption of a concept of an “illusory” trust in New Zealand in this case.

 

                [76] First, it is inconsistent with the findings that:

 

(a) the VRPT was not a sham because Mr Clayton genuinely intended to create a valid trust and therefore did intend to part with control over the trust property;

 

(b) the VRPT did not erode Mr Clayton’s core obligations as trustee to act honestly and in good faith; and

 

(c) the other beneficiaries would be able to enforce those core obligations should Mr Clayton act in his capacity as trustee in breach of them.

 

[77] Second, the suggestion of a distinction between a sham and an “illusory” trust is not supportable. Not only are the terms effectively synonymous but their legal definitions overlap, with definitions of “illusory trust” referring to an arrangement which looks like or appears to be a trust but has no real substance or effect so that no trust was intended.

 

[78] Both terms focus on the real or true intentions of the settlor. The question in both cases is, notwithstanding the existence of a trust deed, did the settlor genuinely intend to create a valid, enforceable trust. In the absence of the requisite genuine intention, there will be no trust at all. As we have already noted, this question involves an examination of all the relevant evidence relating to the determination of the settlor’s real or true intentions. The inquiry focuses not on the legal form of the otherwise valid trust deed but on those intentions.

 

[79] The absence of any real distinction between the terms is reinforced by their use in other jurisdictions:

 

(a) In the United States the term “illusory trust” is used instead of “sham”.

 

(b) In Canada Waters’ Law of Trusts in Canada explains “illusory trusts” under the heading of “sham trust”.Lady Chambers placed some reliance on the Waters’ text, but it is apparent from it that, like a sham, the concern is with the intention of the settlor to employ the trust concept to perpetuate an illegality.

 

(c) In Australia Jacobs’ Law of Trusts in Australia describes an illusory trust as one where there is no trust at all because there was no intention to create one.

 

[80] Third, once a court accepts, after an examination of all the relevant evidence relating to the settlor’s intentions, that a valid trust has been established and is not a sham, the trust should not be able to be treated as non-existent because the trustee has wide powers of control over the trust property. Such an approach undermines the court’s acceptance of the existence of a valid trust and overlooks the trustee’s irreducible core obligations and the rights of beneficiaries to have them enforced by the court. We agree with criticism of High Court decisions suggesting otherwise.

 

[81] Our recognition in this context of the rights of beneficiaries is consistent with the approach of O’Regan and Robertson JJ in this Court in Official Assignee v Wilson to the analogous situation in the context of an alter ego trust where they said:

 

    [70] Actual control alone does not provide justification for looking through/invalidating a trust. The uptake of control by       someone other than an authorised person cannot be sufficient to extinguish the rights of the beneficiaries under a      trust. It is difficult to see the alter ego trust operating in New Zealand as an independent cause of action.

 

[82] The other member of the Court, Glazebrook J, agreed that the trust itself could not be looked through and that the trust assets would not be available for division under the PRA. But she expressly left open the question whether the trust property might nevertheless be treated as the property of the individual involved for the purposes of a relationship property division. This question arises now in the context of our consideration of Mr Clayton’s power of appointment under cl 7.1 of the VRPT deed.

 

[83] This Court’s reluctance to invalidate trusts on grounds other than proof of a sham reflects a concern that a decision doing so might have unintended consequences for other valid trusts in New Zealand, including other discretionary trusts. The Court does not have access to information relating to the generally accepted terms of such trusts. Consideration of reform of the law in this area, if it is required, should be left to the Law Commission and Parliament.

 

[84] Finally, once it is accepted that there is no real difference between the terms “sham” and “illusory” and there is a finding that the trust was not a sham, then, as Mr Carruthers submitted, there is no “halfway house” between the valid trust and a sham. Or, as pointed out in Lewin on Trusts, there is no “third state of affairs” between a valid trust and a sham.

 

[85] For these reasons, we therefore do not agree with the Judges in the Courts below that a trust which is not a sham and is therefore valid may somehow be “illusory”. There is either a valid trust or there is not. There is no separate principle justifying the setting aside of a valid trust on the ground that it is “illusory”. In the absence of a finding of a sham or the existence of a statutory power to set aside a trust (as in the case of a tax avoidance arrangement), the court has no power to do so….

 

On appeal in the Supreme Court made it clear that the term “illusory trust” was not helpful:15

 

[129] As we have already said, we do not find the term “illusory trust” helpful. What the Family Court and High Court meant by that term was that no trust was created. In such a case, the document as executed does represent the terms to which the party or parties intended to agree but, despite their subjective intention to create a trust, they failed in their attempt to do so.

[130]In the present case, Mr Clayton intended to create a trust on the terms recorded in the VRPT deed. The issue would be whether the powers held by Mr Clayton are so broad that what he intended to be a trust was not, in fact, a trust. As already noted, we are not determining that issue.

 

The Supreme Court's decision is a welcome clarification of the scope of the "illusory trust" concept. There is clearly no such concept. The issue that will arise for determination in future is whether the powers held by the settlor “are so broad that what he intended to be a trust was not, in fact, a trust.” 

 

The Court of Appeal however, went on to hold that the power to appoint and remove beneficiaries which Mr Clayton held as in his capacity as nominated "Principal Family Member", and not as trustee, under the VRPT Trust Deed was "relationship property" for the purposes of the Property (Relationships) Act 1976. In the Court of Appeal's opinion the value of the power was equal to the value of the trust assets themselves, and as it was relationship property it was to be shared equally under the Act. On appeal the Supreme Court disagreed but held, in a decision that will have major implications for many New Zealand trusts, that:16 

[38]We accept the submission for Mrs Clayton that the property definition in s 2 of the PRA must be interpreted in a manner that reflects the statutory context. We see the reference to “any other right or interest” when interpreted in the context of social legislation, as the PRA is, as broadening traditional concepts of property and as potentially inclusive of rights and interests that may not, in other contexts, be regarded as property rights or property interests. Against that background, we now turn to the power of appointment in cl 7.1 and other relevant provisions of the VRPT deed….

 

[40] TMSF was a case resulting from the bankruptcy (under the law of Turkey) of a Mr Demirel. He had earlier established two discretionary trusts in the Cayman Islands, which, between them, had assets worth more than US$24 million. The discretionary beneficiaries included Mr Demirel and his wife and children. Mr Demirel, as settlor, had a general power to revoke the trusts. The issue before the Privy Council was whether this power of revocation was a property right that Mr Demirel could be required to delegate to the receivers in his bankruptcy, allowing them to exercise the power and obtain access to the assets of the trusts for the benefit of Mr Demirel’s creditors.

 

[41] Lord Collins of Mapsbury delivered the advice of the Privy Council. Having reviewed the authorities, he concluded:

[59] … The powers of revocation are such that in equity, in the circumstances of a case such as this, Mr Demirel can be regarded as having rights tantamount to ownership. The interests of justice require that an order be made in order to make effective the judgment of the Cayman court recognizing and enforcing the Turkish judgment.

[60] There is no invariable rule that a power is distinct from ownership. Nor, (as the cases on the rule against perpetuities show) is there an invariable rule that any departure from the distinction between power and property is effected solely by legislation. As Lord St Leonards said (and Hoffman LJ approved), “To take a distinction between a general power and a limitation in fee is to grasp at a shadow while the substance escapes”, and in Re Triffitt’s Settlement[1958] Ch 852at 861 Upjohn J said that “where there is a completely general power in its widest sense, that is tantamount to ownership”.

[62] In the present case the power of revocation cannot be regarded in any sense a fiduciary power, and the defendants do not suggest otherwise. The only discretion which Mr Demirel has is whether to exercise the power in his own favour. He owes no fiduciary duties. As has been explained, the powers of revocation are tantamount to ownership.

 

[42] Having found that the power of revocation was “tantamount to ownership”, the Privy Council ordered Mr Demirel to delegate the power of revocation to receivers representing TMSF’s interests as a judgment creditor…..

 

[44] We agree with the Court of Appeal that, if Mr Clayton had a non-fiduciary power as Principal Family Member to make himself the sole beneficiary under the VRPT deed, the effect of the exercise of that power would be analogous to the revocation of the VRPT, justifying the application of the same analysis as inTMSF….

[80] We consider that, taking an approach that recognises the statutory context of the PRA, the VRPT powers are properly classified as “rights” that give Mr Clayton an “interest” in the VRPT and its assets….

 

[86] As the VRPT powers, which we have found to be property, were “acquired” by Mr Clayton after his relationship with Mrs Clayton began (when the VRPT was settled in 1999), they are relationship property under s 8(1)(e) of the PRA. Counsel for the VRPT Trustee suggested applying this analysis would lead to an unfair outcome, because the property transferred to the VRPT included the two Vaughan Road blocks, which Mr Clayton owned before the relationship began, and which were therefore separate property. He argued that the strict application of s 8(1)(e) of the PRA to the powers under the VRPT deed would, in substance, convert separate property into relationship property.

 

[87] We do not see any basis for such a concern in this case. We accept that the Court of Appeal found that the property held in the VRPT was not relationship property.86But it is clear that its only reason for doing so was because the property in the trust was held on trust by Mr Clayton, not that it was Mr Clayton’s separate property. The alleged unfairness would arise only if the underlying assets of the VRPT would, if they had not been settled on the VRPT, have been Mr Clayton’s separate property.

[88] The Family Court Judge accepted a concession from Mrs Clayton that the value of Mr Clayton’s separate property when the relationship began was $500,000.She found that, as both s 9A(1) and s 9A(2) applied, the increase in value of that separate property over and above that $500,000 was relationship property, to be shared equally…. The Family Court’s finding was upheld in the High Court.It was not challenged in the Court of Appeal.

[89] In those circumstances, we see no basis for the allegation of unfairness. If the underlying assets of the VRPT were all such that they would have been separate property but for having been settled on trust, it may have been necessary to consider whether s 13 of the PRA should be invoked…..

[131] For the reasons given, we conclude that the Court of Appeal erred in determining that cl 7.1 of the VRPT deed was a general power of appointment and that power was relationship property. But we find that the VRPT powers are relationship property, the value of which is equal to the value of the net assets of the VRPT. The practical outcome is the same. We formally allow the appeal and quash the Court of Appeal’s finding that the power of appointment under cl 7.1 of the VRPT deed is relationship property having a value equal to that of the net assets of the VRPT. We substitute a finding that the VRPT powers are relationship property having a value equal to that of the net assets of the VRPT. For the avoidance of doubt, we record the VRPT powers are Mr Clayton’s power as Principal Family Member under cl 7.1 and his powers as Trustee under cls 6.1, 8.1 and 10.1, in light of cls 11.1, 14.1 and 19.1(c).

These major implications arise because the clauses mentioned are standard form clauses found in many New Zealand trusts. Clause 6.1 of the trust deed was the normal discretionary power of the Trustee to distribute capital to any of the Discretionary Beneficiaries before the vesting day; clause 7.1 was the power of the settlor to appoint and remove beneficiaries (but not the Final Beneficiaries); clause 8.1 was the normal discretionary power of the Trustees to resettle all or any part of the Trust Fund upon the Trustees of any trust which included any one or more of the Discretionary Beneficiaries; clause 10.1 was the normal discretionary power of the Trustees to distribute capital to any of the Discretionary Beneficiaries on the vesting day; clause 11.1 was the normal clause conferring an unfettered discretion on the Trustees; clause 14.1 was the normal clause that a Trustee who is also a Beneficiary may exercise any power or discretion vested in the Trustees in his, her or its favour; and clause 19.1 (c) was the normal clause permitting a trustee to act notwithstanding a conflict of interest.

The decision is unlikely to affect settlors who have transferred separate property to a trust formed before a relationship. However a settlor who transfers separate property to a trust formed after a relationship is likely to be worse off than a party who retains separate property in his or her own name, or in a company the shares in which are owned by him or her. In view of the above passages in the Supreme Court judgment it is therefore essential that everyone with a trust, or who may form a trust, enters into a s 21 agreement before commencing living together with a new partner as a couple, providing, inter alia, that the settlors and trustees powers under the trust deed are not relationship property. That is now the only safe way in which to avoid such a result. I It is also clear that  settlors should not be  be granted personal powers to appoint and remove beneficiaries. Those powers should be granted to the trustees (who normally include the settlors), as trustees ability to exercise those powers is fettered by their fiduciary duties.

In reaching the conclusion that the combination of powers and entitlements of Mr Clayton as Principal Family Member, trustee and discretionary beneficiary of the Trust amounted in effect to a general power of appointment in relation to the assets of the Trust, the Supreme Court stated:17

 

[64] The powers Mr Clayton exercises as Trustee are fiduciary powers and it has been argued that even the cl 7.1 power is constrained by fiduciary obligations. But the freedom given by cl 14.1, cl 11.1 and cl 19.1(c) mean the normal constraints of fiduciary obligations are not of any practical significance in relation to his powers as Trustee. And Mr Clayton can appoint the property of the VRPT to himself without recourse to the cl 7.1 power.

 

[65] The fact that the VRPT powers are, for the most part, Trustee powers is, on the face of it, a distinction between this case and TMSF, where the relevant power was held by the settlor of the trust, not the Trustee. We acknowledge that but consider that the lack of the normal constraints on Mr Clayton as Trustee means that this distinction is not significant in this case….

 

[68]We conclude that the combination of powers and entitlements of Mr Clayton as Principal Family Member, Trustee and Discretionary Beneficiary of the VRPT amount in effect to a general power of appointment in relation to the assets of the VRP.

In relation to directorships and shares (which of course give the power to remove Directors) in trustee companies the Supreme Court in Clayton v Clayton did not form a view on whether directorships and shares in trustee companies were “property”, and that is an issue that will need to be resolved by the Supreme Court in future. They stated by way of obiter:18

 

[31] In a later decision of the Court of Appeal, Walker v Walker, the Court made an obiter comment that suggested that rights associated with a trust arrangement could be property and relationship property. In that case relationship property had been transferred into a trust, the trustee of which was a trustee company. The husband was the only director of that company. The spouses were both discretionary beneficiaries and had the power to appoint and remove trustees of the trust. The case was about the valuation of the debt owed by the trust to Mr and Mrs Walker. But the Court referred to “other assets” being:

(a) The directorship of the trustee company

(b)  The shares of the trustee company;

(c) The power to appoint and remove directors of the trustee company;

(d) The power to appoint and remove trustees of the trust;

(e) The parties’ discretionary interests under the trust.

 

[32] The Court then added:

Indeed, those items of property appear never to have been valued. Those five items of property, plus the debt, formed a very valuable package, as together they confer control of the company [which operated the husband’s business].

 

[33] It is not necessary for us to form a view on the correctness of the classification of those items as “property”. Professor Nicola Peart cautioned against attempts by the Court to widen the concept of property, emphasising the use of the conventional definition of that term in the PRA, in her chapter on equity and the PRA in Equity and Trusts in New Zealand. She said:

… the [PRA] has always defined beneficial ownership of property by reference to the general law. It is not a special definition designed to capture assets that would not normally qualify as property … [A]s Parliament opted for conventional definitions of “property” and “ownership”, it would be difficult to confine a judicial departure from the general law to claims under the [PRA] …

However what is now unclear is whether in the Clayton case if the power to appoint and remove beneficiaries had been vested in the Trustees, or if there had been an independent trustee, or if the only trustee was a company, the Supreme Court’s decision would have been any different. Those questions need to be determined in future by the Supreme Court in the cases of parties who fail to enter into properly prepared s 21 agreements.

 

1 JD Heydon, MJ Leeming Jacobs' Law of Trusts in Australia (7th ed, LexisNexis, 2006).

 

2 D Waters, M Gillen, L Smith Waters' Law of Trusts in Canada (4th ed, Carswell, 2012).

 

3 Clayton v Clayton [2013] NZHC 301, [2013] 3 NZLR 236 BC201362245.

 

4 Clayton v Clayton [2013] NZHC 301, [2013] 3 NZLR 236  BC201362245 at  [80] to [84].

 

5 Clayton v Clayton [2013] NZHC 301, [2013] 3 NZLR 236  BC201362245 at [89] and [90].

 

6 Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17, [2011] 4 All ER 704.

 

7 Financial Markets Authority v Hotchin [2012] NZHC 323  BC201260276.

 

8 Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17, [2011] 4 All ER 704.

 

9 Financial Markets Authority v Hotchin [2012]NZHC 323 BC201260276 at [30].

 

10 Financial Markets Authority v Hotchin [2012] NZHC 323 BC201260276 at [42].

 

11 JD Heydon, MJ Leeming Jacobs' Law of Trusts in Australia (7th ed, LexisNexis, 2006).

 

12 D Waters, M Gillen, L Smith Waters' Law of Trusts in Canada (4th ed, Carswell, 2012).

 

13 A Grant "Illusory trusts -- a new doctrine to invalidate trusts: Part One" NZLawyer (Issue 205, 5 April 2013).

 

14 Clayton v Clayton [2015] NZCA 30, [2015] 3 NZLR 293, [2015] NZFLR 233 with footnotes omitted.

 

15 Clayton v Clayton [2016] NZSC 29 at [129] to [130]

16 Clayton v Clayton [2016] NZSC 29 at [38], [40] to [42], [44], [80], [86] to [89] and [131] with footnotes omitted

 

17 Clayton v Clayton [2016] NZSC 29 at [64] to [65], and [68] with footnotes omitted

 

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