21.10.2019

A trust on a trust – how strange is that?

In New Zealand we are trust crazy and owning a home in trust is common place. For many, just as for Mr Hodgkinson in Judd v Hawkes Bay Trustee Company Limited [2016] NZCA 397, the trust has been set up to protect a home from a claim by a future partner. Well, Mr Hodgkinson’s story shows that trusts really do work; but also that trusts are not impenetrable. Trusts are not a ‘magical shield’ against all claims.

In the Hawkes Bay case the Court found a trust on a trust – or what lawyers would properly call a constructive trust on an express trust. The Court found that the family trust that held the home was open to a claim of an over-arching constructive trust because of the conduct of the parties.

A constructive trust is a trust created by law and implied by the court where one person holds property as its nominal owner for the benefit of others.  It is an equitable remedy that prevents the person holding property from unjustly benefitting from that property.

The following factors must be determined to establish a constructive trust:

  • direct or indirect contributions to the asset;
  • the expectation of an interest in an asset;
  • the expectation must be reasonable in the circumstances;
  • the owner of the asset should reasonably expect to yield an interest in the asset to the person claiming a constructive trust.

The Havelock North Home

Mr Hodgkinson and Ms Judd were married for six and a half years.  Both had children from previous relationships.  During their relationship they lived in a property in Havelock North (we will call this the “Home”) that was owned by Mr Hodgkinson’s trust (which we will call the “Trust”).  The Trust had owned the Home before the relationship began.  The Trust had been settled by Mr Hodgkinson to “protect” his assets following an earlier marriage breakup.

The trustees of the Trust were Mr Hodgkinson and a corporate trustee operated by an accounting firm.  Ms Judd was aware that the Home was owned by the Trust and that she was not a beneficiary of the Trust.

Following their separation, Ms Judd claimed that the Trust held an interest in the Home on trust for her due to her contributions to the Home. Ms Judd said her contributions included:

  • Gardening, landscaping; and general maintenance of the Home. The Court agreed this was a contribution;
  • $50,000 she paid towards renovation to the Home. However, Mr Hodgkinson said that he had paid the $50,000 back to Ms Judd, and the Court agreed.
  • Contributions to the relationship that indirectly merged with the Home – such as cooking, cleaning and caring for Mr Hodgkinson and his sons. While these contributions were indirect, it was accepted that they had prevented the property from “going to rack and ruin”.

Court decision

In the Hawkes Bay decision, the Court had to determine whether, due to her expectation and contribution, Ms Judd was entitled to an interest in the Home that was not owned directly by Mr Hodgkinson, but rather by the Trust settled by him.

In making its decision the Court considered the following:

  • Whether Ms Judd’s contributions to the Home qualified as “contributions” as that term is interpreted under existing case law.
  • Whether Ms Judd had a reasonable expectation of a share in the Home.
  • Whether the independent trustee had delegated responsibility to the other trustee, Mr Hodgkinson, and therefore Mr Hodgkinson’s actions and representations would bind both of the Trustees.

Why did she have a claim?

The Court found that Mr Hodgkinson, on behalf of the trustees of the Trust, had led Ms Judd to believe that she may have a claim against the Trust. The Judge held that Ms Judd’s knowledge of the Trust’s background and existence was not enough to displace her expectation that she would share in the Home. While Ms Judd knew about the Trust and the reason it was established by Mr Hodgkinson, the couple both contributed to improve the Home together and this work together was an important aspect of their relationship. Ms Judd could therefore reasonably expect to share in the value of her work.

Interestingly, the Home had fallen in value by approximately $30,000 over the duration of the relationship. However, the fact that Ms Judd’s contribution did not increase the value of the property did not affect the Court’s decision.  In the High Court decision, the Judge held that:

“contributions that directly or indirectly maintain property value will also generate entitlements, all other things being equal … This means that even in a falling market and even in respect of an overcapitalised property, contributions can have proprietary effects.”

Accordingly, Ms Judd was successful in bringing a claim for roughly 10% of the value of the Home. She was awarded the sum of $65,000, being $10,000 per year for each year of the relationship. The Court considered that this sum was equivalent to $200 per week for the course of the relationship and that, if Ms Judd had also paid rent of $200 per week, her overall payment would equate to $400 per week. The Court considered the sum of $400 per week to be reasonable.

It is important to note that if the Home had been owned by Mr Hodgkinson personally it would be the family home and any equity would be shared equally as relationship property.

Role of the independent trustee

The Court found that the independent trustee left many trust matters for Mr Hodgkinson to decide on his own. A director of the corporate trustee of the Trust was the primary communicator with Mr Hodgkinson, and was an experienced accountant. He was relatively hands-on and met with Mr Hodgkinson fortnightly to deal with his trust and personal affairs.  He also countersigned all cheques for the Trust. However, despite being a proactive trustee in many areas, he left all maintenance and upkeep in relation to the Home for Mr Hodgkinson to oversee. It was noted that the independent trustee knew that the property would be Mr Hodgkinson’s home and that Ms Judd would live in the property. It was therefore found that the independent trustee had delegated the Trust’s decision making responsibilities in relation to the Home to Mr Hodgkinson.

Lessons for others

The decision in Hawkes Bay serves as a reminder of the importance of complying with trustee duties and for trustees to take proactive steps to prevent a constructive trust claim by acting cohesively as a group and giving consistent information to beneficiaries and the partners of any beneficiaries.

While a trust may provide some property protection, and in this case it certainly did, it should not be seen as a “cure-all”. It is important to have excellent trust management and, preferably, also a relationship property agreement recording the status of the trust, and any claim or compensation that might be given due to the partner’s contributions to the trust.

 

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