"Trusts – The Supreme Court – “Effective control” and Sham Trusts" NZ Lawyer article

Nicky Richardson, a lecturer in law at Canterbury University disagrees with an article that Anthony Grant wrote a few weeks ago. She says:

“In the NZ Lawyer (26 June 2009) the decision …"
[and here set out the rest of her article].

Response from Anthony Grant

The New Zealand Court of Appeal and Courts in other countries have said that the existence of “effective control” over a Trust is a signpost to a sham Trust.

“Effective control” indicates a sham because a person who can deal with a Trust’s assets as he or she likes is not subject to any fiduciary or other restraints and can treat “Trust property” as his or her personal property.

In Kain v Hutton Blanchard J said that Mrs Couper – who was one of three trustees of a Trust – “could ensure, if she wished it, that the [Trust assets] would revert to her”; that she had “effective control” of [the Trust assets] with the ability to take the benefit herself”; and that the Trust was “controlled by Mrs Couper”.

How could this be?

The self-dealing rule prevents a trustee from taking Trust assets personally. In accordance with the rule, Mrs Couper could only take the assets if the terms of the Trust negated the self-dealing rule. The Supreme Court judgment does not say if such a term existed in the Deed under consideration.

Alternatively, she could engage in self-dealing if she had placed herself in a position of necessary conflict, by being given a power that she could exercise in her favour. It appears that Mrs Couper was placed in such a position. But even so, she was only one of three trustees and, in accordance with the unanimity rule, no decision of the trustees would be binding unless it was made unanimously.

How then, as one of three Trustees, could Mrs Couper “ensure … that the [assets of the Trust] would revert to her” unless the Trust was a sham?

With that introduction I turn to Ms Richardson’s riposte. She uses emotive language, saying that I predicted “dire consequences”. I did not. I said that if this understanding of the Supreme Court’s decision was correct, there would be a marked divergence from the rest of the common law world on this aspect of the law of Trusts.

She refers to the decision of Asher J in the Sanctuary Propvest case. But I did not criticise Justice Asher for what he decided. I made it clear that I considered his decision to be correct.

She says that if “effective control… means that [there is] … a sham transaction then half the Trusts in the realm could probably be attacked. This cannot be so, pandemonium would result.” This is an extraordinary argument. If half the Trusts in New Zealand are a pretence how can the weight of numbers make them genuine?

She asks “What is wrong with Mrs Couper having effective control? She still has fiduciary duties …” The Supreme Court said that Mrs Couper had “complete ongoing control of the Trust” and could “if she wishes it … take the benefit [of the assets] herself.” This was said of a Trust that had three trustees, one of whom was an accountant and an independent trustee. Even he, apparently, could not prevent Mrs Couper from taking the assets herself. So where were the fiduciary constraints?

She says that “From an ivory tower perspective nothing seems amiss.” To that I say politely that the view from within an ivory tower is notoriously different from the view outside it.

I now turn from her comments to two decisions of the Court of Appeal that mitigate the problems that are caused by powers that give elements of control over Trusts.

The supposed “evil” of Trust control is that it allows a person to shelter assets from creditors, spouses and others by the pretence that the assets are no longer owned or controlled by the “controller”.

In the context of relationship property, the Court of Appeal has attacked this problem from another angle. In Walker [2007] NZFLR 772 Chambers J said that the powers of appointment and other elements of control of a Trust are pieces of relationship property, that must be valued and accounted for. Some people thought these words were confined to the facts of the Walker case but this was not correct. In the Court of Appeal’s most recent decision - Harrison [2009] NZFLR 687 - Robertson J has held that a couple’s “positions as discretionary beneficiaries … and as the joint holders of the power of appointment of the … trustees” were items of relationship property.

This is a controversial statement which deserves to be the subject of a future article. For the moment it is sufficient to say that in the context of relationship property the Court of Appeal has said quite plainly that powers that give aspects of control over a Trust, and the prospect of receiving a distribution from it, are to be treated as items of relationship property. Their value will presumably reflect the value of the assets of the Trust.

This may be a pragmatic solution to problems caused by powers to control a Trust but it is an unfortunate development as it appears to assume that there are no fiduciary or other restraints that will prevent a person with Trust powers from appropriating a Trust’s assets.

Copyright Anthony Grant 2006