Third party ante-nuptial trust amounts to nuptial settlement

The most recent High Court decision on s 182 of the Family Proceedings Act 1980 provides an interesting example of trust-busting in the post-Clayton era.

Section 182 allows a court to make an order to vary an ante-nuptial or postnuptial settlement at the same time as or subsequent to divorce proceedings.

This provision has its origins in 19th century English law and has been part of New Zealand law since the Divorce and Matrimonial Causes Act 1867. At that time there was no equal sharing regime. This provision enabled courts to vary settlements made on a couple at the start of their marriage when there was the expectation that the marriage would continue, to adjust for changed circumstances.

The purpose of s 182 was set out by the Supreme Court in Clayton v Clayton (Claymark Trust) [2016] NZSC 30, [2016] NZFLR 189 at [60] as follows:

“Nuptial settlements are premised on the continuation of the marriage or civil union. The purpose of s 182 is to empower the courts to review a settlement and make orders to remedy the consequences of the failure of the premise on which the settlement was made. Each case will require individual consideration” [footnotes omitted].

Section 182 is a discretionary remedy and does not apply to de facto relationships. It is independent of any remedies available under the Property (Relationships) Act 1976 (PRA), although the division of property under the PRA is relevant to the exercise of discretion under s 182.

The scope of s 182

To establish jurisdiction under s 182 it is necessary to show that there was an ante-nuptial or postnuptial settlement made on the parties. In the case of written trusts, this is to be determined by the terms of the trust deed.

The Supreme Court has twice affirmed the reasoning of the Court of Appeal in Ward v Ward [2009] NZCA 139, [2009] 3 NZLR 336. In essence, the trust must make some form of continued provision for one or both spouses. A family trust set up during the marriage with one or both spouses as beneficiaries will almost inevitably amount to a nuptial settlement. Property acquired by a trust during the marriage will also amount to a nuptial settlement.

In Clayton v Clayton, the Supreme Court accepted that the Claymark Trust was a nuptial settlement notwithstanding the factual finding that it had been set up for business purposes and the fact that Mrs Clayton had signed a contracting out agreement specifically disclaiming any share in Mr Clayton’s business interests.

The Supreme Court clearly signified the potential breadth of s 182 as a tool for ‘trust-busting’ in relationship property proceedings. The decision in Bethell v Bethell is an example of the expansive application of s 182 post-Clayton.

The facts in Bethell v Bethell

Mr and Mrs Bethell lived together on a farm for a period of 15 years. They were married and raised two children together. The land had been farmed by three generations of the Bethell family. The Stumpy Trust was established prior to the marriage at a time shortly after a hiatus in the parties’ relationship (the timing of the hiatus was in dispute).

The settlor was Mr Bethell’s mother and the trust was named after his grandfather, who was nicknamed ‘Stumpy’. The beneficiaries included Mr Bethell, his children and grandchildren and their spouses. A parallel trust in identical forms had been settled on Mr Bethell’s brother. The family solicitor gave evidence that the trust was part of an intergenerational succession planning exercise, through which the Bethell land was passed down a line of male heirs. Six years after the trust was established, in a complex series of transactions, the trust purchased the farm from another Bethell family entity in return for a debt-back for its full value. The debt was then assigned to Mr Bethell.

A third-party settlement

The facts in Bethell differed from those in Clayton in that the trust was settled by a third party. Although the characterisation of trusts set up by third parties was left unresolved by the Supreme Court in Clayton, it noted two possibilities (at [35]):

1. that there is an exception to the general rule that a family trust set up during a marriage amounts to a nuptial settlement in the case of a trust set up by a third party with substantial other beneficiaries apart from the parties to the marriage and their children; or
2. that as long as the trust has the relevant connection to the marriage and one or other spouse is a beneficiary, then it is a nuptial settlement.

In support of the first possibility, the Supreme Court cited the Family Court of Australia case In the Marriage of Knight [1987] 90 FLR 313. In that case, the inclusion of the husband’s parents as beneficiaries of equal ranking to the wife and children caused Nygh J to rule that the trust was not a nuptial settlement. The rationale was that the wider beneficiaries of the trust would be disadvantaged by its characterisation as a nuptial settlement.

The range of beneficiaries in both Bethell and Clayton were typical of the standard New Zealand family trust. Further, the New Zealand courts have found nuptial settlements to exist in circumstances where there were a wide range of beneficiaries. For example, in Fielding v Burrell [2005] NZFLR 558 (HC) a trust which included the sons of a previous marriage as beneficiaries was held to be a nuptial settlement and in X v X (Family Trust) [2009] NZFLR 956 (CA), the Court of Appeal accepted a trust that included the couple, their parents, their children and various charities as beneficiaries to be a nuptial settlement.

In my view, the second possibility raised by the Supreme Court in Clayton is the better interpretation because it is consistent with the purpose of s 182 to enable the court to intervene and prevent unfairness between the parties arising from changed circumstances. The rights and interests of other beneficiaries may be a factor relevant to the exercise of the court’s discretion but should not be a factor preventing jurisdiction.

An ante-nuptial settlement with no spouse in contemplation

Another issue left unresolved by the Supreme Court in Clayton (as it didn’t arise on the facts) was raised in argument on behalf of Mr Bethell. This was that the trust was formed prior to the marriage with no particular spouse in contemplation. In this situation, the Supreme Court in Clayton posited (at [36]) that:

“One view may be that once a marriage has taken place and the spouse identified, then there will be the necessary connection with the marriage. Even if that is not the case, however, it may be that each disposition of property to such a trust after marriage could constitute a post nuptial settlement” [footnotes omitted].

This point was critical in Bethell because of the factual dispute between the parties as to whether marriage was in contemplation at the time the trust was established.

Resolution of the issues in Bethell v Bethell

In the Family Court, on behalf of Mrs Bethell, Stephanie Marsden successfully argued that both the settlement of the Stumpy Trust and the later acquisition of the farm by the Stumpy Trust constituted nuptial settlements in terms of s 182. This followed from Judge Murfitt’s finding that the trust was established at a time when the relationship was afoot and marriage was seriously in contemplation. Even if Mr Bethell was actively trying to protect family assets against a future claim by Mrs Bethell, the Stumpy Trust had sufficient connection to the marriage to amount to a nuptial settlement.

In the High Court, Nation J recognised that it is insufficient for a trust deed to anticipate that a marriage may take place at some stage. Rather, the connection must be between the settlement and the marriage. He held that there was an adequate connection between the settlement of the Stumpy Trust and the marriage for it to be a nuptial settlement. As well as considering the intentions at the time the trust was established, Nation J also looked to the practical reality. He stated that (at [128]):

“[The Bethell family’s solicitor] said it was not intended [Mr Bethell’s] wife would benefit from succession planning or [the] farm. I cannot accept that as the reality given the way, as a spouse and a discretionary beneficiary, [Mrs Bethell] could benefit from the subsequent trust. Consistent with that, [Mrs Bethell] subsequently benefited from the trust through the ways she, along with [Mr Bethell] and their children, was able to use and enjoy the farm and the family home owned by the Stumpy Trust and have the Stumpy Trust pay for expensive alterations to the home and the installation of a tennis court and swimming pool.”

In terms of the purchase of the farm by the Stumpy Trust, Nation J accepted Ms Marsden’s argument that there can be a ‘settlement’ in terms of s 182 if the trust acquires property by way of sale and debt-back. This is an interesting point to note because it might have been assumed that a ‘settlement’ required some form of gratuitous transfer.

In finding that the acquisition of the farm by the trust amounted to a postnuptial settlement, Nation J relied on the same practical realities of the trust and also noted that but for the settlement of the farm on the trust, Mr Bethell would have owned it personally, in which case it would have been subject to a claim by Mrs Bethell under the PRA.

Nation J exercised his discretion under s 182 to vest a sum of $300,000 from the assets of the Stumpy Trust in Mrs Bethell and the children. In doing so, he took account of a long list of factors including:

• The outcome of the relationship property division without a s 182 order being made;
• The parties’ respective financial positions;
• Mrs Bethell’s loss of enjoyment of the farm and the lifestyle she had enjoyed during the relationship;
• Mrs Bethell’s loss of opportunity to use the farm as security to fund her lifestyle;
• The likelihood of Mr Bethell administering the trust fund for his own benefit rather than for the benefit of the children;
• The parties’ respective contributions to the farm;
• The fact that the new trust would partially reflect the original purpose, being protection Mr Bethell’s immediate family; and
• Mrs Bethell’s inability to make a claim against the homestead or against the increase in value of the farm under the PRA due to its ownership by the trust.

This case exemplifies the flexibility and breadth with which s 182 is to be applied. Proximity of a trust to a marriage cannot be reduced to a question of timing but needs to be considered more broadly. A trust may be a nuptial settlement even if it was set up by a third party, provided that it has a connection to the marriage. A trust may be a nuptial settlement even if it is established prior to the marriage and the spouse is not named, provided that the particular marriage was in contemplation. If the trust owns the family home, it will be extremely difficult to argue that it is not a nuptial settlement.

The role that the trust plays in the family’s affairs may be an important factor in establishing a connection to the marriage. Practitioners engaged in succession planning and asset protection should therefore advise clients that the way trust assets are used may impact upon the risk of a successful s 182 challenge.

Rhonda Powell rhonda@athene.co.nz has established a barrister’s practice, Athene Trust Law. She has worked for law firms in London, Melbourne and New Zealand providing advice on trusts, succession planning and asset protection. She offers trust law consultancy to law firms and barristers. Before beginning practice as a barrister, Rhonda was a senior lecturer in law at the University of Canterbury.