Changing multi-generational Trusts against a Settlor’s wishes

Section 182 of the Family Proceedings Act gives the Court carte blanche to re-write Trusts that are “nuptial” settlements.

A Trust that is focussed on a specific marriage is a “nuptial” settlement.  Such a Trust can be made either in anticipation of a particular marriage or during the course of a marriage.

In Ward v Ward [2010] 2 NZLR 31 the Supreme Court said that Trusts of this type can be changed by the Courts if the expectations of the parties to the Trust have changed significantly since the time of their creation.  The task of the Court is to “identify all relevant expectations which … the Applicant party had of the settlement at the time it was made.  Those expectations should then be compared with the expectations which the parties, and in particular the Applicant party, have of the settlement in the changed circumstances brought about by the dissolution.  The Court’s task is to assess how best in the changed circumstances the reasonable expectations the Applicant had of the settlement should now be fulfilled.”

The case of Kidd v SA Van Den Brink & Ors [2010] NZCA 169, 6 May 2010 involves a Trust that a father settled for the benefit of his five children.  The discretionary beneficiaries included any “spouse” and “child” that any of the five children might have during the term of the Trust.

Several years after the Trust was formed, one of the sons met a woman whom he married and with whom he had a child.

After their marriage was dissolved the former wife asked the Court to change the father’s Trust under s 182.  The High Court refused to do this.  It held that when the father drew up the Trust, he had no knowledge of the woman who was to become his son’s wife and that the Trust was accordingly not a “nuptial” agreement.

The Court of Appeal has now given leave to the wife to appeal this decision.

It has done so - in William Young P’s words - on the basis that “dispositions to the Trust made during the currency of the marriage engage s 182 as post-nuptial settlements.”

In other words, although the Trust was not a “nuptial” settlement when it was created, it may have become a “nuptial” settlement as a result of settlements that were made on it during the course of the son’s marriage.

The Court of Appeal is not saying that settlements that were made on the Trust during the marriage will necessarily allow s 182 to be invoked but it is possible that they may have done so.

The case will turn on whether property that the Trust “acquired” during the course of a marriage “could fairly be viewed as settlements”. 

At this stage, the evidence about the identity of the property that was “acquired” by the Trust during the marriage is unclear as there has been no discovery.

The prospect that Trusts established by a grandparent or parent for future generations can be “intercepted” by a non-blood relative will alarm many Settlors.

In granting leave to appeal, William Young P said “we apprehend the possibility that the case may eventually be the subject of an application for leave to appeal to the Supreme Court.”

Whether the case stops at the Court of Appeal or makes it to the Supreme Court, there will soon be a ruling on this important aspect of s 182.

In the meantime, parents are on notice that if they want Trusts that they establish for their children and grandchildren to stay intact they should not make additional settlements on them after a child or grandchild has married or is about to marry or co-habit with someone.

There is another aspect of this case that deserves to be mentioned.  The Court of Appeal in both Ward and Kidd has said that the test of whether a Trust has a “nuptial” element will depend on whether property that is “acquired” during the course of a marriage “could fairly be viewed as settlements.”

A Trust can “acquire” property in two ways: first, with new monies or assets that are settled on it; second, with monies that are generated from existing assets.

I assume that the Courts’ reference to “property acquired by a Trust” is intended to refer only to new money or assets that are settled on a Trust and not to new assets that are acquired with monies that are generated from pre-existing assets.

If I am wrong in this, the scope of s 182 will be exponentially greater than any Court has yet ruled.  It will mean, for instance, that multi-generational Trusts with share portfolios and other financial assets, will invariably fall within the ambit of s 182 since such Trusts will generally “acquire” new assets on a regular basis.