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The Supreme Court decision of Clayton v Clayton has given new insight into the operation of section 182, Family Proceedings Act 1980.
The section is the descendent of Victorian legislation that enabled wealthy families to ensure their daughters’ husbands did not get away with the family fortune leaving the daughter destitute.
Section 182 empowers the Court to make orders to vary nuptial settlements upon the breakdown of a marriage or civil union. Prior to the Clayton decision it was uncertain how this section fitted with the equal sharing regime of the Property (Relationships) Act 1976. The Supreme Court’s judgment suggests that section 182 has the potential to become a useful weapon in the “trust busting” arsenal.
In making an order to vary a nuptial settlement under section 182 the Court must establish first, that there was a nuptial settlement and second, if and how the Court should exercise its discretion to make such an order. In Clayton, the Supreme Court was critical of the lower Courts who had erroneously conflated the two enquiries.
The existence of a nuptial settlement will be determined primarily from the construction of the settlement documentation – this will typically be the trust deed. However, the Supreme Court noted the Court should be generous in its interpretation of the documentation.
The key requirement of a nuptial settlement is that is for the benefit of both or either of the parties in their capacity as spouses or civil union partners. This means there must be a connection or proximity between the settlement and the marriage. In the Court’s opinion a family trust set up during the currency of a marriage would almost inevitably have the requisite connection. If the children of the marriage are named as beneficiaries this is a strong indication of a nuptial settlement. The exception to this being when a family trust was settled by a third party with substantial other beneficiaries.
The extent to which a party actually benefits from the settlement during the relationship and the nature of the assets settled are not relevant to the Court’s consideration of whether the trust is a nuptial settlement.
The Supreme Court conceded that it is harder to draw the connection if the trust was made before the marriage and the future spouse, while intended to benefit, was unknown at the time. They added a settlement does not cease to be a nuptial settlement because parties other than the spouses benefit.
The decision whether to make an order to vary a settlement and to determine how to make the variation requires a comparison between the position of the parties under the settlement if the marriage continues and the position of the parties after the dissolution of the marriage. The exercise is forward looking. There is no formulaic or presumptive approach for this comparison, but relevant considerations are:
(a)The terms of the settlement.
(b)How the trustees are exercising (or likely to exercise) their powers in the changed circumstances.
(c)The suitability of the particular trust structure given the changed circumstances.
(d)The length of the marriage.
(e)The source of the funds settled on the trust.
Each case must be considered on its merits.
In Clayton v Clayton, Mrs Clayton successfully appealed the decision of the lower courts that a discretionary family trust containing business assets was not a nuptial settlement.
The trust, The Claymark Trust, was settled by Mr Clayton after the birth of the couple’s second child. The discretionary beneficiaries were Mr Clayton and Mrs Clayton, with provision made for any former wife or widow of Mr Clayton, their two daughters and any future grandchildren as well as the spouses of their daughters and grandchildren. The Claytons’ daughters were the final beneficiaries.
The trust contained business assets – properties purchased to buffer the family sawmill and a vehicle used by Mrs Clayton. The trustees had a broad discretion to apply any income or capital of the trust for the “maintenance, education, advancement, well being or benefit in any way” of the beneficiaries.
In the lower courts the trustees successfully argued that the trust was established for business purposes. The Claytons’ had signed a pre-nuptial agreement precluding Mrs Clayton from any claim against the business; however this agreement was thrown out as unjust. Nevertheless, the lower courts concentrated on the business assets as an indication this was not a nuptial settlement. The Supreme Court rejected this argument concluding that separating the property from the risks associated with business assets must have had the purpose of protecting assets for the family. Furthermore they held that the nature of the assets was not relevant, rather whether there was the connection between the settlement and the marriage.
Having established the first requirement the Court considered how to exercise their discretion. They found a clear difference in the benefit Mrs Clayton would have received had she remained married compared to the benefit she was receiving post-separation. They notes that the assets settled on the Claymark Trust were not separate property, such as an inheritance.
The Claytons actually settled this dispute out of court before the judgment was made. However, the Supreme Court indicated that they would have opted to divide the trust equally and resettle it between Mr and Mrs Clayton, making their daughters discretionary beneficiaries of both trusts.
The outcome of the Clayton decision is that the Courts have indicated a willingness to find normal discretionary family trusts set up during a relationship for the benefit of the family as nuptial settlements. This means they may be susceptible to claims under section 182 and means assets in trust are not as protected.
If you would like to protect your property from a section 182 claim, our Private Wealth Team would be happy to meet with you to discuss your various options to achieve protection. Please email lawyers@heskethhenry.co.nz
