"Changing a trust by the use of s 182 of the Family Proceedings Act 1980 by Anthony Grant "

There is one mechanism to change Trusts which is relatively simple and straightforward: s 182 of the Family Proceedings Act 1980.

This section gives the Court what appears to be an unfettered discretion to re-write “post-nuptial” and “ante-nuptial” settlements of which one or both parties to a marriage or civil union are beneficiaries. The operative words are these:

“S 182 Court may make orders as to settled property, etc.
(1) On, or within a reasonable time after the making of a … final decree, a Family Court may enquire into … any ante-nuptial or post-nuptial settlement made on the parties, and may make such orders with reference to the application of the whole or any part of any property settled or the variation of the terms of any such … settlement, either for the benefit of the children of the marriage or civil union or of the parties to the marriage or civil union or either of them, as the Court thinks fit.

(3) In the exercise of its discretion under this section, the Court may take into account the circumstances of the parties and any change in those circumstances since the date of the agreement or settlement and any matters which the Court considers relevant.

(4) The Court may exercise the powers conferred by this section, notwithstanding that there are no children of the marriage or civil union.

(5) An order made under this section may from time to time be reviewed by the Court on the application of either party to the marriage or civil union or of either party’s personal representative.

(6) Notwithstanding subsections (1) – (5) of this section, the Court shall not exercise its powers under the section so as to defeat or vary any agreement, entered into under [Part 6 of the Property (Relationships) Act 1976], between the parties to the marriage or civil union unless it is of the opinion that the interests of any child of the marriage or civil union so require.”

In circumstances where s 182 applies, there is no need for the Courts to resort to the alter ego doctrine, the sham trust doctrine, the laws relating to constructive trusts, and the other doctrines and devices to which they have recently resorted in their attempts to extract assets from Trusts.

Historical Outline
Section 182 has its origin in s 45 of the Matrimonial Causes Act 1857 (UK). In circumstances where a wife had committed adultery the section empowered the Court to deprive her of benefits under settlements which contemplated that she would remain faithful to her husband and the marriage would endure. The provision passed down through subsequent statutes and is now contained in s 24 of the Matrimonial Causes Act 1973 (UK).

The original New Zealand enactment on this subject was in 1867. Four statutes later it has ended up as s 182 of the Family Proceedings Act 1980.

Although s 182 has been part of our law for more than 140 years, it has rarely been invoked and it has not even been considered by the Court of Appeal. That situation is about to change with the hearing of X v X later this year.

Application to Marriages and Civil Unions
Section 182 applies to parties to a marriage or civil union and can only be invoked after the marriage or civil union has been dissolved.

It does not apply to parties in a de facto relationship. At first sight this seems anomalous but, having regard to the casual way in which de facto relationships will usually develop, there will hardly ever be a settlement of an “ante-nuptial” nature on a couple in a de facto relationship. If the statute is to be extended to de facto relationships there will need to be a modification of the language of “ante-nuptial” and “post-nuptial” settlements.

The potential reach of the Section
The most adventurous use which has been made of the section in New Zealand was in Crystall v Crystall . There, the Court directed that a Trust which had been established by a father for the benefit of his married son should provide a house for the son’s estranged wife for the rest of her life. The factor of particular significance in that case was that the Trust had not been settled by either the husband or the wife but by a third party and with the third party’s assets. I will refer to the case in more detail shortly.

There has been a similar case in England. In E v E an extremely wealthy father settled a home on his son and his family. The beneficiaries of the Trust were the husband, the wife, their three children, any future children, and any future wife of the husband. The father was the Protector of the Trust.

When the daughter-in-law left the home to live in rental accommodation with another man, the father was furious.

The Judge described the origin of the Trust funds: “The first home was bought before the marriage. The money was supplied by the father when the house was put in the husband’s name. In August 1985 the land was transferred to a Company in Jersey. It is a holding Company, and it was held on Trust for the husband and is still so owned. The value of their house with its garage is now … £280,000.”

The Court directed that £250,000 should be “pulled out of the Trust and made into a separate fund for the wife” and that: “£50,000 should be given absolutely to the wife and the balance of £200,000 should be settled on her for life with the remainder for the children. That fund, of course, will be taken from the powers of the Protector. The remainder of the fund will remain on Trust for the husband and the children. It will be right in my judgment, to remove the father as Protector of that fund too and to arrange the fund in such a way that the balance will be available so far as it is needed to provide a home for the husband and the children …”

This extreme result derived from the unusual facts of the case. The wife produced an article about her former father-in-law entitled “The World’s Greatest Middleman”. His discipline was said to be “absolute, castigating and often vengeful”. It was said in the article that the children’s expenses “are unlimited but when they leave, they leave with nothing”. He used to give the husband and daughter-in-law about NZ$1m pa for living expenses. (As this was 20 years ago a current equivalent would be a great deal more.) The comfortable life which they enjoyed was evident from the fact that when they separated the wife “left behind 70 pairs of shoes, some of them in their unopened boxes, and clothes which filled 20 packing cases …”.

The Court obviously had no concerns that modifying the Trust would diminish the Settlor’s wealth to any significant extent.

The Courts in England have used the equivalent section in England to not only modify English Trusts but also Trusts in other jurisdictions . This will usually be a pyrrhic display of English supremacy since most countries will not enforce such orders. The Courts have, on occasions, overcome this difficulty by requiring a spouse to pay a sum of money to the other, which sum can only be paid with the co-operation of the offshore trustees. An example of this was Browne v Browne . In this case the wife was the beneficiary of (a) a trust which had been established by her mother and (b) a trust which had been established by her grandmother. One Trust was established in Jersey and the other in Switzerland. The assets of the two trusts were no more than £675,000. The Court did not make an order under s 24 – presumably because of the perceived difficulties in enforcing the orders in Jersey and Switzerland. Instead, it treated the assets of the Trusts as Mrs Brown’s own property and directed her to pay her former husband £175,000 – which she could only do if the Trustees made a distribution to her of that sum. The trustees refused to pay her the money and the Court made an order that she should be imprisoned for contempt of Court.

The order for imprisonment was suspended while she applied to the Court of Appeal. It showed her no sympathy, saying:
“This is not in my judgment a case of improper pressure upon the trustees by the Court or by the husband’s side. Looking at reality, she is the sole beneficiary of some £430,000 in Jersey and a lesser sum in Switzerland. The amount of money that was due to be paid by the wife over and above assets in this country at the time of the Judge’s judgment, was some £60,000 at most. That money was perfectly able to have been paid and the Judge was entitled, in my judgment, … to believe that it would be paid. I, for my part, believe that it would be paid today if the trustees were absolutely satisfied that the wife had to have the money.”

Following this unsympathetic stance the trustees made sufficient moneys available to the wife to keep her out of prison. It should be noted that the law in England differs materially from the law in New Zealand in that in England the Courts can treat as the property of a spouse a “financial resource” which is available to that person. In Browne the Trusts were established for the benefit of the wife and in that sense they were a resource which was available to her.

The willingness of the English Courts to order modifications to Trusts established in other countries has given rise to the enactment of “exclusivity laws” in a number of the more popular tax havens. These prohibit the off-shore Courts from giving effect to the orders of the English Courts. It was almost certainly for this reason that in the much publicised recent case of Charman the wife’s lawyers did not seek an order to amend a substantial Trust in Bermuda (since the Bermudan Court would not enforce the order) but required that the husband should make a personal payment which could only be satisfied if the trustees made a substantial portion of the Trust fund available to him. The enforcement of this Order against an off-shore spouse is not straightforward.

Not all jurisdictions will resist the modification of their Trusts by Courts in England. In the recent case of Re the B Trust a Court in England made an order purporting to vary a Trust in Jersey. It did this by directing the creation of a sub-Trust in favour of the wife. In a move which will disturb those who have established Trusts in Jersey for the purposes of asset protection, the Royal Court of Jersey decided to give substantial effect to the English order, notwithstanding the fact that Jersey had enacted an exclusivity law which removed the jurisdiction of the Jersey Court to enforce an English order on the basis of comity!

Orders which have been made in New Zealand
These are some of the Orders which the Courts have made under s 182.
• In Williamson the Court took away a husband’s power to appoint trustees. (It should be noted that in the English case of Compton v Compton the Court suggested that the equivalent provision in England did not empower it to remove a person as trustee. It said that if that relief was wanted, the applicant should apply to the Chancery division, presumably by invoking the relevant powers under the Trustee Act.) This case was not cited to the Court in Williamson.)
• Trustees were ordered to “make a payment to [the wife] forthwith” of $145,000; “to make provision for the future support of the dependant children … by way of an immediate payment to [the wife] in the sum of $28,000; to make specific provision to meet the arrears of child support” (which the husband had not paid); and “to pay interest on it …”
• Trustees were ordered to “acquire a home of reasonable quality for the use of the [wife]” … “In addition it is the Court’s intention to order that a capital sum be allocated from the settled property and paid to the [wife]. The Court’s intention is that the Trust should not be required to allocate more than $175,000 in capital for these purposes …. The Trust will of course retain ownership of the home purchase for the [wife’s] use.”
• Trustees were directed to make a payment of $17,500 to a wife who was in materially poorer circumstances following the separation from her husband.
• Trustees were ordered to pay $40,000 to a former wife. The only asset of the Trust was a house worth $170,000 in which the husband lived. “The trustees will only be able to comply with this order in one of two ways. Either the … house will need to be sold, in which case they will be able to replace it with one of lesser value, or the amount required will need to be raised on mortgage …”
• Trustees were ordered to pay a former wife $40,000. The Trust was understood to have land and buildings worth $80,014 and investments of $813,171.
• Trustees were ordered to vest some Company shares to two separate Trusts. The trustees of the new Trust were to be the wife and a suitable independent trustee acceptable to counsel for the children. The beneficiaries were to be the same as the beneficiaries of the original Trust but excluding the husband. The terms and conditions of the new Trust were to be the same in all other respects as those contained in the original Trust. It was a condition of the order that on the transfer of the shares to the new Trust the wife would forthwith resign as a trustee of the first Trust and relinquish all claims to any interest in that Trust. The trustees of the new Trust were directed to accept the shares subject to a liability to pay all monies owing to the former wife for the transfer of her shares to the Trust and to indemnify the original Trust from all liability in respect of such payments.
• A family home was directed to be removed from a Trust. The house had been acquired during the course of the marriage, presumably from relationship property.

Comment on the cases in which trusts have been modified
A person reading the summary of orders in the previous paragraph could easily draw the conclusion that orders modifying Trusts under s 182 can be obtained with some ease. Such a conclusion would be quite misplaced. The summary represents most of the successful orders which have been obtained under s 182.

There is insufficient space in this Paper to refer to the circumstances of each of the above cases and the reasons why the Courts decided to modify the trusts concerned. It can, however, be said that orders have generally been made where the disadvantaged party (invariably the wife) was left with almost nothing. In the most extreme case – Crystall – the wife was left after 22 years of marriage with relationship property amounting to a pitiful $21,323. The Court held that the settlor (the father-in-law) would not have contemplated that the wife of one of his sons “could simply be discarded and left to fend for herself on her share of whatever limited amount of matrimonial property might be available for division at the time …”.
In most of the cases the orders were made as a “last resort” in the sense that there was so little relationship property available to the wife that if the Trust could not be modified, she would be left in very straightened circumstances.

Time for making an application
S 182(1) provides that an application should be made “on, or within a reasonable time after the dissolution of a marriage or civil union”. It has been held that a period of two years and four months is a reasonable time and even that a period of six years is a “reasonable time”.

Varying an order under s 182
Section 182(5) gives the Court power to vary an order modifying a trust. This power was recently invoked in a case where a former husband employed a number of devices to defeat the wife from being able to implement an order which she had obtained under s 182(1).

The settlement must be “made on the parties”.
Although the wording of the section suggests that the ante-nuptial or post-nuptial settlement must be made on both of the parties to the marriage or civil union this is not how the section has been interpreted. It is sufficient if the settlement is made on one of them . Nor does it disqualify the spouse or party to the civil union from being able to invoke the section although he/she ceased to be a beneficiary of the Trust on the dissolution of the marriage or civil union. (This will occur automatically in Trusts where the wife is not named personally but where one of the beneficiaries is “the wife of the settlor”.)

The settlement must be “nuptial” in nature
The section is confined to “nuptial” settlements. If parents establish a Trust for the benefit of their children at a time when they are infants, that Trust cannot be described as a “nuptial” settlement and s 182 will not apply to it.

Rights of third parties are to be respected
A practical constraint upon the modification of such settlements is the need to respect the rights of other people who have interests under the Trust or in relation to Trust assets. Banks, for example, which have lent money to finance Trust assets and which have securities over Trust assets, are entitled to be heard and their interests taken into account.
Similarly, the rights of other beneficiaries under a Trust must be respected.
The Statute directs that the interests of the children of the marriage or civil union must be considered when determining whether or not to make an order to modify a settlement. Children who are discretionary beneficiaries and final beneficiaries under a Trust will ordinarily have their own representation.

The relevance of post-dissolution circumstances
It is relevant to consider the circumstances of a spouse or civil union partner following the dissolution of the marriage/civil union. If a former spouse has entered into a new and prosperous relationship, the financial benefits should be taken into account when deciding whether or not it is appropriate to make any modification to the Trust.

S 182 applies only to property settled on the creation of a Trust
It has been held that s 182 gives jurisdiction to the Court “only in respect of the property settled when the Trust was created” . Heath J has recently indicated his support for this proposition . If this interpretation is correct - and there is reason to believe that it is not - it will deprive the statute of any effect in relation to Trusts which are established with a settlement of $10 and on which a house or other asset is settled at a later date.

Nor, in all probability, will the section apply to assets which the Trust acquires itself and which are not settled on it.

S 182 is not a mechanism to give an equality of income or assets
Section 182 is usually invoked as a means to achieve a greater equality of income and/or assets than can be achieved by the PRA.

It has been held that this is not how the section should be interpreted although a study of the cases where the section has been successfully invoked suggests that it has been applied as a means to give some assets – although nothing like an equality of them, to a spouse.

The fact that a Trust contains property which would otherwise have been relationship property does not mean that the Trust should be modified.

S 182 does not empower a Court to direct trustees how to act
The section does not empower the Court to direct trustees how they must act. It merely gives the power to modify a Trust and leaves the trustees to implement the terms of the modified Trust as they think appropriate.

Orders should not vary relationship property agreements
Section 182(6) provides that orders should not be made under s 182 if they would have the effect of varying relationship property agreements unless the Court “is of the opinion that the interests of any child of the marriage or civil union so require.”

This provision was successfully invoked in the recent case of Ward v Ward (2007).

Principles to apply when modifying a Trust
It has been held that (a) the purpose of s 182 is to provide relief where the dissolution of the marriage has altered circumstances so that the expectations at the time of the settlement are no longer appropriate, (b) the discretion is limited by the need to intervene only to the extent shown to be necessary and (c) that the position of the children of the marriage should as far as possible not be detrimentally affected by the demise of the marriage.

In Crystall Judge Inglis QC applied the following principle: “A more reliable approach might be to contemplate how the Settlor might have proposed to formulate the settlement on the [husband] and his family if aware of the likelihood of the circumstances which arose …”.

In Bell-Booth the same Judge referred to s 182(3), which provides the Court with a discretion to “take into account the circumstances of the parties and any change in those circumstances since the date of the … ‘settlement’. He said: “… The clear intent is that there should be a comparison between their respective circumstances both pre and post dissolution…. The dissolution of marriage is itself a material change in the parties’ circumstances which activates the Court’s jurisdiction under s 182.”
….
“I have no difficulty in accepting that the extent of the Court’s intervention under s 182 should be regulated at least in part by the reasons justifying the intervention, but … I am unable to find anything in s 182 or its statutory context to justify a view that the powers under the section should be invoked or used sparingly or reluctantly or with any unusual or superior degree of caution. The section was enacted for a purpose. If a case falls within the section … there is no reason to hesitate in applying the section.”

And Judge Walsh has said