From a Trust Perspective How are the courts responding when a relationship breaks down?

A few years ago the case of Clayton v Clayton opened the door for trusts to be attacked by an aggrieved spouse through section 182 of the Family Proceedings Act. Under this section, if a trust was formed by a spouse after the relationship was started it was considered a nuptial settlement for the purposes of section 182, regardless of whether separate property was put into the new trust. Note, separate property in a relationship property context is property already owned by one spouse prior to the relationship starting. This case clearly opened the door for lawyers to attack trusts in a relationship separation.

Recently, the Supreme Court considered these principles again in Preston v Preston. The assets Mrs Preston was attempting to access were owned by the GPF Trust (‘the Trust”) that was settled prior to the marriage which was a difference to the Clayton case. Also, the Preston’s marriage had a shorter duration – less than five years compared to over 10 years for the Clayton’s – and also Mrs Preston was subsequently added as a beneficiary to the Trust. So, clear differences to the facts in Clayton. Mrs Preston was arguing that the deed adding her as a beneficiary of the Trust was a nuptial settlement and therefore would come under section 182 of the Family Proceedings Act meaning the assets of the Trust would be available for settling relationship property claims.

Both the High Court and the Court of Appeal held the deed adding Mrs Preston as a beneficiary was a nuptial settlement, but did not make an order under section 182 to provide for Mrs Preston out of the assets of the Trust. In the Supreme Court the issue whether adding Mrs Preston as a beneficiary was a nuptial settlement was not argued – both sides accepted that. Instead, whether the order under section 182 should be made in favour of Mrs Preston.

In determining this the Supreme Court adopted a three step process to section 182:

Determine whether there has been a nuptial settlement.
Assess whether there is a difference between the position of the spouse under the settlement with the marriage dissolved and what the position would have been had the marriage continued. If there is a disparity then the discretion under section 182 is live.
Decide how the discretion should be exercised in the particular case.
With regards to Mrs Preston, the Supreme Court found the lower courts had not considered step 2 at all. There was a disparity in this case that needed to be addressed. The judges considered both the direct and indirect benefits Mrs Preston would have continued to receive under the Trust if the marriage was ongoing and on order was made in her favour. However, there were also various facts that reduced this sum from the starting point of a 50/50 asset split between spouses, which included Mr Preston’s children were the final beneficiaries of the Trust, the main assets had been settled on the Trust prior to the beginning of the relationship and the marriage was of relatively short duration. The ultimate order was for Mrs Preston to receive value of approximately 15% of the assets of the trust.

What are the learnings from this?

If you have an existing trust prior to the relationship starting do not add the new spouse as a beneficiary as it will be considered a nuptial settlement. This will take any potential section 182 order out of play. A lot of people would have done this so the spouse (and often the second spouse) can also benefit from the trust, but instead of being just a discretionary beneficiary the separate spouse clearly has a claim against the trust assets.
A relationship property agreement should be put in place which clearly states that assets of a particular trust are separate property.
New Zealand Courts have been contorting themselves to break open trusts where relationships have broken down in the interests of creating equity for an aggrieved spouse. This case is just another demonstration of this.

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