Reforming Family Law Without Compromising The Integrity of Trust Law : Recognising Wealth Held In Trust When Reallocating Family Property On Separation

• Date: 01 January 2023

Reforming Family Law Wi thout Compromisin g the Integrity of Trust Law:

Recognisin g Wealth Held in Trust When Realloc ating Family Property on S eparation

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REFORMING FAMILY LAW WITHOUT

COMPROMISING THE INTEGRITY OF TRUST

LAW: RECOGNISING WEALTH HELD IN

TRUST WHEN REALLOCATING

FAMILY PROPERTY ON SEPARATION





e relationsh ip between trus t law and social p olicy in New Zealand is n ot always

an easy one. Peo ple will use tru sts, where the la w permits, to str ucture their pr operty

aairs in a way that de livers advantageous outco mes. As discretionar y family trusts are

unassailably entrenched in the political economy of New Zealand wealth-holding, they

need to be approac hed in a principled way by leg islation.

e law takes a di erent approach to t rusts in a comme rcial context th an in social

policy contex ts such as relati onship proper ty. Unhelpfully, so me concepts that r ightly

belong in the rela tionship property c ontext have surfaced in gene ral trust law.

To clarify the situ ation, the val ues and approach es used in dieri ng contexts are

set out. ese co ntexts include i nsolvency la w, the Social Sec urity Act, Lega l Aid, the

Financial Ma rkets Conduct Act, and the C riminal Proceeds (Reco very) Act. ese values

and approache s are then used to cri tique the approa ch to trust prope rty used in family

property – bot h in the current Prop erty (Relations hips) Act, and in the Law Comm ission’s

proposed reform of th e regime. Improveme nts to the reform proposa ls are identified , along

with compleme ntary reforms to red uce the pressure o n the interface betw een the family

property an d trust law domains.

I. Introduction

Statut e law in New Zeala nd provides for dividi ng family proper ty on separatio n,

as well as rea llocat ing propert y in the cas e of death, ban kruptc y and other

situation s. Each of these st atutor y intervent ions in propert y right s must inter act

with an u nusual feat ure of wealt h-holding i n New Zeala nd: the prevale nce of

* Barri sters•Com m chamber s, Welling ton (Mast er of Manag ement, Masse y Universit y, LLB

(Hons), Victo ria Universit y of Wellingt on).

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discret ionary fa mily trusts. T rusts have the potent ial to thw art the pol icies of the

law, by ring-fencing a ssets as beyond a p erson’s ‘property ’. The magnit ude of the

issue is il lustrated by rea l estate, of which a g reater value is owned by f amily tru sts

than by hou seholds directly.1 Relat ionship property a nd testament ary property a re

two interl inked ar eas of New Zeal and law that a re current ly being refor med, and

this req uires polic ymakers t o grapple wit h how to deal w ith asset s held in trus t.

Possible approaches i nclude disregard ing property in t rust; reversin g transactions

that put proper ty in trust ; recognising t hat ‘rights and i nterests’ relati ng to a trust

may have value t hat should be broug ht into accou nt; and ma king orders d irectl y

alteri ng the trust s themselves.

This paper focu ses on propert y held in disc retionar y trus ts, which a re introduc ed

in section I I. Section II I identifies two d ierent approache s to ‘propert y’ in tr ust

assets: t he ‘strict concepts of prop erty law’ th at apply in the insolvenc y context, and

the relaxe d approach used under t he Property ( Relationships) Ac t 1976 (PRA). Sec tion

IV discu sses attempts th at have been made to ‘bust t rusts’ with in the general law.

Section V out lines the polit ical economy of the New Zea land discret ionary tr ust,

discussi ng who uses the t rusts a nd for what purpo ses. I then descr ibe statut ory

approaches to wea lth held in trus t in section VI .

Section V II applies these mat erials to t he Law Commission’s recent r eview of the

relationsh ip property regi me. I propose measures t hat would be less intru sive than

the reforms t hat the Law Comm ission has contempla ted. Section V III then consider s

whether cha nges to New Zealan d’s generic trust law sta tute are war ranted.

I conclude in sect ion IX with a c all for great er certainty a nd clarit y in the law,

by recogni sing that bl ack letter r ules work bett er than a di scretiona ry approach

for famil ies that need t o be able to move on wit h their lives a fter a cha nge of

circumstances.



A discret ionary tr ust is a type of express t rust.2 The core char acterist ics of an

express tr ust are that:3

1 Famil y trusts t otall ing $87 7 billion com pared wit h $612 bil lion of owner-o ccupied dwell ings and

other rea l estate in 2018: Sta tistics New Zeal and “Household net worth s tatistics: Year en ded

June 2018” (14 D ecember 2018) Sta ts NZ <www.s tats.govt .nz>.

2 While a rguably not a “term of a rt”, the “discretion ary trust” is w ell described in th e relevant

texts, s ee, for example, Ala stair Hudson Equity and Trusts (7th ed, R outledge, Oxon, UK , 2014)

at 186; and Law C ommissio n Review of Trust Law i n New Zealand: Intr oductory Iss ues Paper

(NZLC IP 19, 2010), at 33 n 174, discuss ing the distin ction between powers of ap pointment and

discretionary trusts.

3 Tr usts Act 2019 , s 13.

Reforming Family Law Wi thout Compromisin g the Integrity of Trust Law:

Recognisin g Wealth Held in Trust When Realloc ating Family Property on S eparation

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(a) it is a fiduciar y relationsh ip in which a t rustee hold s or deals

with tr ust property for the benefit of t he beneficiaries or for a

permitted purpose; a nd

(b) the trust ee is accounta ble for the way the tr ustee ca rries out

the duties i mposed on the trust ee by law.

Trust ees have a fiduciar y obligat ion to properly consider a ny request by a

discret ionary beneficiar y to receive a distr ibution, so it follows th at the beneficiary

has the reci procal right to h ave such a request duly cons idered.4 However, it may be

that no such di stributions a re ever made. For that eventua lity, a discretion ary trust

has “fin al beneficiaries” who h ave a residual propert y interest.5

In a discret ionary t rust each d iscretiona ry beneficia ry’s equi table propert y

interest i n the trust asset p ool remains una llocated,6 whi le the legal title is held b y

the trustees.7 Collec tively, the beneficiaries a re able to call for the t rust property t o

be appointed a s they see fit,8 as “t ogether [they have] posses sion of the total bund le

of proprieta ry rights”.9 However, consis tently with t he observation t hat the propert y

interest re mains u nallocat ed, indiv idual discretiona ry beneficia ries do not have a

property i nterest in the tr ust corpus, just a “ mere expectanc y” or “hope” (spes).10

As with t he “mere expect ancy” ass ociated wit h being a disc retionar y beneficiary,

holding a power rel ating to a trust i s also tradition ally not held to be an int erest in

the underly ing trus t property.11 Common p owers include the set tlor being a ble to

add or remove discret ionary beneficia ries.12

The most exten sive power is a genera l power of appointment , where a person

has a power to di rect trustees to p ay the estat e to anyone, includ ing themselves.13

4 Gartside v Inland Revenue Commissioners [1968] AC 553; an d, for the “right t o request payment ”,

see Chief Executive of Ministry of Social Development v Broadbent [2019] NZCA 201, [2019 ] 3 NZLR

376 at [84].

5 K A No 4 Trustee Ltd v Financia l Markets Authorit y [2012] NZCA 370 at [1 7].

6 The asset s are “ownerles s”, per Mark J Benne tt “The Il lusory Tr ust Doct rine: Form al or

Substa ntive?” (2020) 51 V UWLR 193 at 2 04.

7 D onovan Waters “Se ttlor contro l—what kind of a probl em is it?” (2009) 15 T & T 1 2 at 12.

8 The trus tees must t erminat e the tru st on receipt of a not ice signed by e ach beneficia ry

(discret ionary or fin al): Trust s Act 2019, s 121 .

9 Re Phili ps New Zealand Ltd [199 7] 1 NZLR 93 (HC ) at 101, provided t hey are al l competent ; Saunders

v Vauti er (1841) 4 Beav 1 15; Hudson, above n 2, at 182; C harlotte Bey non “The rule in Saunders v

Vauti er: to t he ‘residuary benefic iary’, the spoils?” (2 019) 25 T & T 963; and Law Commi ssion

Perpetuit ies and the Revoca tion and Variation o f Trusts (NZLC IP2 2, 2011) at [4.2 0].

10 Hunt v Muollo [2003] 2 NZLR 322 (C A); Gartside v Inland Revenue Commissioners, above n 4; and

Hudson, above n 2 , at 190.

11 Z v Z (No 2) [1997] 2 NZLR 258 , [1997] NZFLR 24 1 (CA) at 278, citin g Re Armstrong, Ex p Gilc hrist

(1886) 17 QBD 521 at 57 9.

12 J ohn Priestley “ Whence and Whit her: Reflections on t he Property (R elationships) Ac t 1976 by a

Retire d Judge” (2017) 15 Otag o LR 67 at 68.

13 Chri s Kelly Garr ow and Kelly Law of t rusts and tr ustees (7t h ed, LexisN exis NZ, Wel lington , 2013) at

923; and Clay ton v Clayton [Vaughan R oad Property Tru st] [2016] NZSC 29, [2016 ] 1 NZLR 551, [2016]

NZFLR 23 0 at [60].