We are often asked by parents how they can protect the inheritance they will provide for their children – keeping it safe from relationship property and creditor claims. Our answer is to establish a trust. With recent media attention on a few high profile court decisions, the question arises as to whether trusts actually work. The short answer is "yes" if well managed. The recent High Court decision of Da Silva v Da Silva  NZHC 2064 is an example of a trust set up by a mother sustaining an attack by her daughter's ex-husband.
In De Silva, the mother set up a trust following the death of her husband and transferred to the trust shares in a company that held a significant commercial property. The mother was a beneficiary of the trust, together with her daughter and the daughter's children.
The mother died and the trust continued to be managed for the benefit of the daughter and her children.
The son-in-law did have some involvement with the commercial property. He was the director of the company that owned the commercial property and he arranged the leasing of the property and managed other maintenance issues.
The son-in-law's lawyers argued that he should have an interest in the trust and presented a number of legal arguments to the High Court to support this.
Firstly, the son-in-law's lawyers argued that powers that his wife held in the trust were her property based on the recent Supreme Court decision in Clayton v Clayton  NZSC 29 and therefore he could either bring a claim on the basis that the property was relationship property or that there should be a claim against the separate property for the contributions that had come from him and his wife. The Court disagreed that the powers that the daughter held in the trust amounted to property that could be subject to a claim. The daughter had always been a beneficiary of the trust, but she was not a trustee until after her mother's death. The daughter did not hold the power to appoint and remove trustees. Instead this power was held by the daughter together with a lawyer and accountant as executors of the mother's estate. In the Clayton case the Supreme Court decided that Mr Clayton could exercise unfettered control of the Trust fund. In contrast, in this case, there were a number of controls on the trustees set out in the trust deed which together with the trustees' standard fiduciary obligations which were not circumvented by the trust deed, meant that the daughter did not have unfettered control of the trust fund. She must exercise her discretions as trustees with the diligence and skill of a trustee considering all of the beneficiaries.
As an alternative, the son-in-law argued that he should be able to bring a claim under section 182 of the Family Proceedings Act 1980.
Section 182 originated in Victoria England as a mechanism of parents controlling settlements that they made for their children, in particular their daughters. It provides that where a married couple have their marriage dissolved and one of the couple will not benefit from the Trust as they did during the marriage, then the Court can order that trust to make provision for the disentitled spouse. In order for this section to apply the trust must be set up in anticipation of the marriage or during the marriage, and must be connected to the marriage relationship, making it an "anti-nuptial" or "post-nuptial" settlement.
The trust in the Da Silva case was set up by the mother during her daughter's marriage. However, the High Court decided that it was not actually a "post-nuptial settlement" as the husband was never included as a beneficiary of the trust and never had any role as trustee in the trust.
The Judge further held that if she was wrong and it was a post-nuptial settlement then she would not exercise her discretion to benefit the husband.
The husband also mounted a constructive trust claim on the basis that he provided his services to the trust and it was reasonable for the trustees therefore to yield to him an interest in the Trust property.
The Court accepted that the husband had done a lot of work in managing the commercial property. However it accepted that the husband had received other monetary remuneration or discount in rent for his business that meant that he had been fully recompensed for his contribution. A constructive trust claim could therefore not be brought.
So the trust established by the mother was able to sustain the son-in-law's claim. It is important to remember that what we see here is a well constructed trust that was also well managed. The terms of the trust deed did not vest significant powers in the daughter. The trust had always had an independent professional trustee. While the son-in-law had provided services to the trust, he had always been fully recompensed for that work. We note that if the property had not been held in trust but rather in the daughter's personal name following her mother's death, the husband is likely to have been successful in his claim, in particular any claim for an interest in the increase in value of the commercial property due to the his and his wife's monetary and time contributions to the property.
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