The bundle of rights turns Trust to dust 

To use an image from aviation, the “Bundle of Rights” doctrine is beginning to resemble a Stealth bomber: it comes out of nowhere and creates havoc. 

Who would have predicted that the Courts could use the doctrine to convert Trust property into relationship property?  The case in which this occurred was Robertson v Robertson, a decision of Judge Burns of the Auckland Family Court (FAM-2009-004-001627/1628, 19.11.09).

A husband and wife established mirror Trusts to own the home in which they and their children lived.  They were both Trustees of each of the mirror Trusts.

The two Trusts co-owned various properties including the family home and a beach house.  The assets were managed together, pursuant to a formal Partnership Agreement. 

At the time the Trusts were established the Trustees passed a resolution by which the husband, wife and children were “entitled to reside in the residence at [address] …”

The Trusts subsequently sold that property and bought a replacement home but no such resolution was located in relation to the replacement property. 

The parties separated and following the separation, the husband took sole occupancy of the home.  The wife and two children went to live with the wife’s mother – an unsatisfactory arrangement that was likely to motivate a Judge to find a more “equitable” solution. 

The wife applied for an Occupation Order pursuant to s.27(1) of the PRA. This section authorises the Court to:

 “Make an order granting to either spouse … for such period … and on such terms … as the Court thinks fit, the right personally to occupy the family home …”

The Judge said that s.27 “only applies to relationship property, and only [to] a right to immediate physical and personal possession.”  He then proceeded to identify seven “property interests” for the purposes of the Bundle of Rights doctrine and made an occupation order in favour of the wife and children.  In his words:

 “There can be cases where a relationship property interest can be found in property owned by Trustees … i.e. the Trustees hold the property not only pursuant to the obligations, but in addition hold a beneficial property interest for one or both parties or children or one or both parties acquire a beneficial interest.”

It was implicit in his ruling that the Trust property had been converted into relationship property since he had said that s.27 “only applies to relationship property” and the occupation order was made under that section.

These were the various “property interests” that he relied on.

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    • The resolution that authorised the parties to occupy the original family home “which in my view, has been assigned to the new property”.

Comment:   Neither party could show the existence of a replacement resolution or of any document recording an assignment of it to the replacement property.  Even if the resolution had been assigned to the new property, it authorised all of the parties to occupy the original house and contrary to this resolution, the Court ordered that the husband should be excluded from it. 

• “A distribution by the Trustees to the parties thus converting the discretionary interest at the time of distribution to a property interest”

Comment:  I cannot discern from the Judgment what the reference to a “distribution” was intended to refer to.

• “The existence of the partnership between the two Trusts”

           Comment:  The co-operation of Trustees of two Trusts in the management of a jointly-owned asset can apparently convert the Trust property into relationship property.

• “The effective control held by each party in their respective Trusts by virtue of the power of appointment each holds”

           Comment:  “Effective control” can also convert Trust property into relationship property.

• “The fact that each are beneficiaries of each other’s Trusts along with the children in each case”

           Comment:  Merely to be a beneficiary of a Trust can apparently convert Trust property into relationship property.  (In contrast to this, the Judge says elsewhere that “a discretionary beneficial interest in a Trust is not property to provide jurisdiction for the Court to make an occupation order.”)

• “The decision made by the Trustees following the first separation to allow the wife to continue in exclusive occupation with the children …”

           Comment:  An historic resolution of Trustees allowing a beneficiary to occupy a former Trust property for a limited time can apparently convert the Trust asset into relationship property.

• The partnership  arrangement between the two Trusts “where the husband and wife have exercised decision-making not only in their capacity as Trustees, but in their capacity as husband and wife …”

           Comment:  An agreement between husband and wife as Trustees to co-operate in the management of Trust assets can apparently convert Trust property into relationship property.

The occupation order that was made in favour of the wife and children is to continue until the further order of the Court.

An Alarming Development

This is, of course, an alarming development. 

The PRA empowers the Court to make orders in relation to “relationship property” and, in limited circumstances, to “separate property”.

It gives no powers to make orders in relation to what I will call “other property”. 

This Judgment provides a platform for converting “other property” into “relationship property” and by the simplest of mechanisms.

If this decision represents the true state of the law today the fallout from it will be tremendous.  It will also extend far beyond relationship property disputes.  I refer to only one scenario:  Trusts that were created to shelter assets from the unanticipated claims of creditors.  Many of these Trusts may now be useless.  If the property in them is to be categorised as relationship property, the same assets are likely also to be “property” that can be intercepted by creditors.

The Robertson dispute can be viewed as a classic case for the removal of the husband and wife as trustees of both Trusts.  The unanimity rule requires them to agree on decisions concerning the Trusts and it is clear that neither will be able to do so.  In a situation where both Trusts are paralysed, the Court ought to be willing to make an order to replace the trustees on a summary judgment application.

If this course had been adopted the law of Trusts would have remained on a much more certain basis than it does following the Robertson decision.