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How safe is my Trust?

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Many Trusts are set up to protect family assets including homes farms and investments, but are drafted so that a degree of control is retained for the person who set up the Trust. 

That person may also be a beneficiary named in the Trust Deed.

The control is usually to be found in the power to appoint and sometimes remove trustees, and to add and remove beneficiaries. 

This can be dangerous, as Mr Clayton found in a case[1] which reached the Court of Appeal recently, and is now awaiting the Supreme Court’s decision on a further appeal. 

In Mr Clayton’s Trust he had, as the “Principal Family Member”, the power to appoint and remove beneficiaries, so that he could in effect become owner of all the Trust assets, even though he was initially named only as a discretionary beneficiary.  Mrs Clayton made a claim against the Trust assets under the Property (Relationships) Act 1976.  At the Court of Appeal’s suggestion she argued that the property in the Trust should be treated as Mr Clayton’s property because he had the power to take that for himself.  This required the Court to decide, as it did, that that power was property under Section 2 “property” (e) of the Act.

Mr Clayton’s Trust proved not to be safe!

Similar safety issues may arise where an equivalent to Mr Clayton is bankrupted and the Official Assignee claims the Trust property for the benefit of creditors. 

As many Trust Deeds contain variation powers anyone with a Mr Clayton’s Trust Deed should be able to avoid these problems. 

If you are setting up a Trust, or to discuss any matters raised in this article, contact one of our Trusts experts  Magnus Macfarlane, Gerry Sullivan or Stephen Greer.
Related article: An unexpected role for the independent trustee

[1] Clayton v Clayton [2015] NZCA 30.