Talking trusts: An example of the impact of Clayton v Clayton.
Laura and Craig had owned their family business for a number of years.
They had started it from scratch and now it was a successful business, importing and distributing merchandise to the restaurant industry. They had transferred the shares in the business to a family trust a number of years ago. Laura and Craig’s daughter, Juliet, had joined the business after leaving school. She had started at the bottom and worked her way up into a management position.
Juliet had recently married and Laura and Craig were looking to wind down their involvement in the business. They went to their lawyer with a proposal to transfer the majority of shares in the business to Juliet. However, they wanted to make sure that the transfer of shares to Juliet was protected, so that if something happened to Juliet’s relationship with her new husband, Mark, he wouldn’t have a claim against the shares.
Business shares in a trust
Laura and Craig’s lawyer advised that the best form of protection would be for Juliet and Mark to sign a section 21 agreement contracting out of the provisions of the Property (Relationships) Act (otherwise known as a pre-nuptial type agreement). Laura and Craig floated this idea with Juliet who said no way. She was newly married and there was no way she was going to ask her new husband to enter into that kind of agreement.
The next suggestion from the lawyer was that a trust be set up for the benefit of Juliet and that the shares be transferred to that trust. Juliet would be able to say who the beneficiaries and the trustees of the trust were. In essence it would be her inheritance trust. Laura and Craig agreed to do that.
The impact of Clayton v Clayton case
Three years later, Juliet and Mark’s relationship did fall apart. Juliet was devastated and to add insult to injury, Juliet received a letter from Mark’s lawyer demanding information regarding the trust her parents had set up for her. The letter said that in light of the recent Supreme Court decision in Clayton v Clayton, the fact that Juliet had the power to appoint and remove trustees and beneficiaries of the trust amounted to rights which were relationship property. That property had a value and Mark wanted half of the value of the trust assets.
This very recent case has changed the law as we know it relating to the establishment of trusts. Very careful considerations need to be made and all trusts should be reviewed in light of this new case.
For further Trust Law advice, get in touch with Tammy and the Trust Law Team.
tammy@davenportslaw.co.nz | 09 883 4420
