Family Trust Update - Clayton v Clayton

In the recent Court of Appeal decision of Clayton v Clayton a number of trust issues were canvassed. The Case was a relationship property claim. There were a number of trusts involved but there was a particular focus on the terms of one trust the Vaughan Road Property Trust (VRPT).

The background to the case was Mr Clayton built up a substantial timber mill business and he also took over a business' set up by his father. Mr and Mrs Clayton were married in 1989, they separated in 2006, and the marriage was dissolved in 2009. There were a number of trusts set up during the marriage and after the separation to own assets and property acquired by Mr Clayton. Mrs Clayton claimed half of the property and assets on the basis they were relationship property. Most of the property was held in trusts and at the time of the Family Court hearing were valued by Mrs Clayton's advisors at just over 28 million dollars. The case went through the Family Court and then on appeal to the High Court and then on appeal to the Court of Appeal.

The Court of Appeal accepted Mr Clayton to be the settlor, trustee and one of the discretionary beneficiaries of the VRPT. It is acceptable for a person to be both settlor and trustee of a trust and also trustee and beneficiary, but not sole beneficiary as there would be no trust. The Court of Appeal held that the three trust certainties existed. Mr Clayton as Settlor intended to create a trust for his business purposes which was to separate the land and buildings from the business operation. There was an initial amount of $10.00 settled on the trust and the discretionary beneficiaries where able to be ascertained. Even though the Trust Deed gave Mr Clayton wide powers as sole trustee this did not eliminate the fiduciary obligations imposed on him at law and enforceable by other discretionary beneficiaries.

Mrs Clayton's lawyers tried to argue the VRPT was a sham. For various reasons the Court of Appeal rejected this argument and found there was a valid trust. As there was a valid trust the trust property was not relationship property and therefore Mrs Clayton was not entitled to half. However, the case did not finish there and the Court of Appeal went on to consider the power of appointment and removal of beneficiaries.

This power is often included in family trusts. Most commonly this power is held by an appointor or in the case of a trust established by a Settlor and spouse by them during their lifetime. In the case of VRPT the power was held solely by Mr Clayton. The Court looked closely at the drafting of the clause granting the power. The power was granted to Mr Clayton personally and not in his capacity as trustee. Mr Clayton was the defined "Principal Family Member". The Court determined this was intentional as the exercise of the power in Mr Claytons personal capacity meant he owed no fiduciary obligation to any one when exercising the power in his own interest i.e. appoint himself as sole beneficiary. He would have owed a fiduciary obligation to the beneficiaries if the power had been held by him as trustee. The Court decided that Mr Clayton intended he should be entitled to remove other beneficiaries and appoint himself sole beneficiary acting exclusively in his own interest. As a result, Mr Clayton failed to remove the value of the trust assets the subject of the right to appoint and remove beneficiaries from the relationship property pool. The assets of the VRPT were regarded as relationship property to which Mrs Clayton was entitled to half.

There is no clear indication if the Clayton v Clayton decision may have wider application and be of assistance to creditors trying to get at trust assets. It is possible that a creditor could use the same reasoning and gain access to assets held in a trust.

The Court of Appeal decision is being appealed. However, the case does reinforce the need for those who have a family trust to review periodically the Trust Deed and the trust structure. There is a need to make sure the trust is still relevant and meeting the needs of the family.

If you would like to discuss or review your family trust, please contact John Stirling.