Trusts – The Bundle of Rights – Is it good law? (Part 1)

The most intrusive “doctrine” that the Courts have recently devised concerning Trusts is the so-called “Bundle of Rights”.

It is an extraordinary thing that a doctrine of such importance should have first been articulated in the Court of Appeal – and then, without debate or detailed analysis.  It seems that the explanation for this is that it arose as a result of a concession by Counsel.

The doctrine was born in Walker v Walker [2007] NZFLR 772 where Chambers J said that a “party’s … interests in [a] Trust – whether … as settlor, trustee, appointor or beneficiary, … may be relationship property”.  He went on to say that:

“The wife seems to have conceded that certain other assets, which were relationship property … were to become the husband’s property.  Those other assets were:

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        • the directorship of the trustee company.
      • the shares of the trustee company.
        • the power to appoint and remove directors of the trustee company.
        • the power to appoint and remove trustees of the trust.
        • the parties discretionary interests under the trust.”

The Court of Appeal extended the “doctrine” slightly in Harrison [2009] NZFLR 687 where Robertson J said that:

“There was also a bundle of rights associated with Mr and Mrs Harrison’s positions as discretionary beneficiaries under the [Family Trust] and as the joint holders of the power of appointment of the … trustees.”

As Mr and Mrs Harrison could not reach agreement on the appointment of trustees, it is hard to understand how – assuming that the bundle of rights “doctrine” is correct – the joint power of appointment had any value.

For the benefit of those lawyers who have still not caught up with these decisions, the effect of them is that a Trust is held to be valid but the powers of appointment and other matters to which Chambers J referred are held to be items of relationship property which are to be valued by reference to the assets of the Trust.  In this way, the purpose of having a Trust in many situations will be completely defeated.

The question whether Trust powers are “property” has recently been the subject of a detailed analysis by Smellie CJ in TMSF v Merrill Lynch Bank & Trust (Company) Cayman Ltd, a decision of the Grand Court of the Cayman Islands, 26.6.09.  The decision was upheld on appeal a few weeks ago.

The question for consideration in that case was whether a power to revoke a Trust was available to a Judgment Creditor.  The definition of “property” in the relevant statute in the Cayman Islands says that “ ‘property’ includes … [any] other right or interest …”

Smellie CJ held that the power of revocation was not an item of “property”.

This case has close parallels to the PRA as the definition of “property” in the PRA also includes a reference to “any … right or interest”: see s 2 of the Act.

If the reasoning by which Smellie CJ concluded that the term “property” does not encompass Trust powers is good, it suggests that the reasoning of the CA in Walker may not be sound.

In reaching his conclusion that the term “property” did not include Trust powers, Smellie CJ referred to a long line of authority in the common law which showed the clear distinction between the two concepts.  Fry LJ had said as long ago as 1886 that “no two ideas can … be more distinct the one from the other than those of ‘property’ and ‘power’ …”. 

Parliament can, of course, extend the definition of “property” to include “powers”.  It did this, in substance, in the Estate and Gift Duty Act 1968 (NZ).  The fact that Parliament felt the need to expressly refer to powers in this way may suggest that the absence of any reference to “powers” in the definition of “property” in the PRA, means that Parliament did not intend to include them within the definition of “property” in that Act.

I should add a cautionary note.  In Melville v Inland Revenue [2001] EWCA Civ.1247 the English CA considered whether a general power of appointment was “property” for the purposes of s 272 of the Inheritance Tax Act 1984 (UK).  That Act defined “property” as including “rights and interests of any description”.  It was held that in the “legislative context” in which that definition appeared the words were intended to include a general power of appointment.

So it is not straightforward.  Whether a Trust power is included within the term “right or interest” will depend upon the interpretation of the Statute as a whole. 

The fact that the first suggestion that a Trust power fell within the definition of “property” was not made until 30 years after s 2 of the PRA was enacted suggests that none of the people who were involved with the framing of the Statute contemplated that it would include Trust powers.  So too, does the reluctance of Parliament in 2001 to modify Trusts more extensively than was done at that time.

The TMSE case is therefore a pointer that the doctrine that Trust powers are items of relationship property, may have vulnerabilities. 

This article is confined to the question of whether Trust powers are relationship property. The other aspects of relationship property to which Chambers & Robertson JJ referred in Walker and Harrison will require separate consideration on another occasion.  By this I refer to the directorship of a trustee company, the ownership of shares in a trustee company and the possession of a discretionary interest under a Trust.

An article as short as this cannot do justice to the reasoning that the term “property” does not include Trust powers.  Readers of this article who would like to read the judgments in the TMSF case can do so by accessing them below.

TMSF v Merrill Lynch, Grand Court decision.

TMSF v Merill Lynch, Court of Appeal decision.

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