WARD v WARD – WHICH TRUSTS ARE LIKELY TO GET THE JUDICIAL CHOP?

I wrote recently about the Supreme Court’s decision in Ward v Ward.  In today’s article I refer to some of the lessons that Trust lawyers can learn from it.

Trusts that are “premised on the continuance of [a specific] marriage” that has failed (para 15) are now prime candidates for modification under s.182 of the Family Proceedings Act.  On the other hand, “if a dissolution [of a marriage] has not affected the implementation of the applicant’s previous expectations, there will be no call for an order”: para 25.

Spouses who jointly settle a Trust with relationship property for their intended benefit can therefore expect to see the Trust modified if their relationship ends.

What Trusts are less vulnerable to modification?

1. Trusts that are established by parents for their children at a time when no specific marriage for any of the children is in contemplation.
2. Trusts whose beneficiaries extend well beyond the immediate members of a family.
3. Trusts that are not “premised on the continuance of [a specific] marriage.”
4. Trusts that are not “nuptial” settlements, ie they were not entered into in contemplation of a particular marriage or during the course of a particular marriage.

Some of these principles can be seen from Kidd v S Van den-Brent & Ors, Auckland CIV-2009-404-4694, 21 December 2009, a decision of Harrison and Winkelmann JJ.  The decision was released shortly after the Supreme Court delivered its judgment in Ward v Ward.

In 1990 a father established a Trust for the benefit of his five children, their future spouses, their children, and so on.

The Trust was settled when none of the children were married (they were aged between 16 and 22 years at the time).

One of the children subsequently married Ms Kidd and much of the material benefits that were brought to the marriage came from the Trust. When the marriage ended, there was little relationship property to be divided.

The wife sought an order that the father’s Trust should be modified to her benefit.

The Court’s first task was to determine if the Trust was a nuptial settlement.  If it wasn’t, s.182 had no role to play.  The Court said that a nuptial settlement

“will be primarily directed towards and provide for the benefit of the particular family unit; that is, the husband and wife and their children.  The assumption of the existence of the marriage and its continuation is the qualifying nuptial characteristic.”: (para 28).

It held that, in accordance with this definition, the father’s Trust was not a nuptial settlement.  Instead:

“It is an orthodox discretionary Trust created for the benefit of two distinct classes of objects.  One, the final beneficiaries, [who are] confined to the settlor’s children, who now number five.  The other, the discretionary beneficiaries, encompasses a much wider group including the final beneficiaries, but extending to their children or spouses, family trusts, family companies and charitable trusts.”: (para 31).

“The trust was not premised upon the existence or continuation of this marriage ….  The Trust’s purpose was to provide for a range of individuals who might include [the applicant] wife while [she] remained in the state of marriage …”: (para 33).

The Court gave a second reason for not invoking s.182:

“Furthermore, an order under s.182 would affect the rights or interests of third parties. ….

“Section 182 does not contemplate interference with the rights enjoying by nominated beneficiaries other than the members of the immediate family unit created by this marriage.”: (para 34).

Settlors who wish to establish Trusts that will not later be modified by a Court should therefore:

(If possible) establish the Trust before a particular marriage is contemplated.

Record in a contemporaneous document the function of the Trust and how – if it be true - it is not premised on the existence of a specific marriage.

What about creditor protection Trusts?

The extent to which these Trusts are liable to modification following the end of a relationship will depend upon whether they were “premised on the continuation of [a specific] marriage”.  This test is not easy to apply to such Trusts.  Are the assets being sheltered for the benefit of the spouses, in anticipation that they will be able to gain the benefit of them?  Or are the assets being sheltered for the benefit of one of them, or for their children?  If there is contemporary documentation to record that the assets are being sheltered for the benefit of children and other wider members of a family, it may be more difficult for s.182 to be invoked.

Does it make a difference if the Trust assets contain property that was originally separate property?

It depends.  If the trustees have a practice of distributing such property to spouses it may indicate that the Trust was premised on the existence of a specific marriage.  If, on the other hand, they have only been willing to lend it, this may show that it was intended to be used multi-generationally.

These observations illustrate how settlors need to add a new level of sophistication when they settle Trusts that might be categorised as nuptial settlements, since actions can be taken that will reduce the prospect of the Courts later re-writing the Trusts under s.182.

It is inevitable with a law that is structured like this that many lawyers and accountants will face claims in negligence for setting up Trusts that were made more vulnerable to attack than they might otherwise have been.