19 ways to bust a trust and more: Michael Coote looks at the legal showdown brewing in the Family Court. Your view?

By Michael Coote*

Many people who have set up family trusts in New Zealand would be surprised at the ways in which courts can bust trusts by often novel means.

In March the Auckland District Law Society held a symposium, Cradle to Grave: The Interface Between Property and Family Law, at which barrister Anthony Grant presented a paper entitled “How the courts can successfully attack trusts and some things you can do about it”.

People who have trusts or are thinking of setting them up should probably obtain a copy of Mr Grant’s paper. (See more here.)

The document lists no fewer than 19 ways New Zealand’s courts have been known to bust trusts, including the highly publicised variation currently wending its way through the courts against Hanover Finance figure Mark Hotchin under Section 60H of the Securities Act.

One of the most curious of the trust busting methods is called the “bundle of rights” doctrine that the Family Court has been developing concerning the various interests that parties to a trust may have.

In one case, Walker v. Walker (2007), Judge Chambers found that a “party’s … interest in [a] Trust – whether … as settlor, trustee, appointor or beneficiary … may be relationship property.”

In another case, Harrison v. Harrison(2009), Judge Robertson found there existed a “bundle of rights” that the Harrisons had in their family trust that included being discretionary beneficiaries and joint holders of the power to appoint trustees.

Yet another case cited is that of Robertson v. Robertson (2009) in which trust property was converted into relationship property under a decision made by Judge Burns.

"Bundle of rights"

In this case, using words of parallel effect to the bundle of rights, the judge found there were seven “property interests” in a family trust and made an Occupation Order in the wife’s favour.

Mr Grant observes that, “At this time, the [bundle of rights] doctrine has not been subjected to any rigorous analysis and the extent to which it will survive as good law remains to be seen.”

But clearly, as is evident in the three cases referred to, this tenuous position in law has not prevented the Family Court from viewing trusts as having detachable and reassignable relationship property rights.

In Grant v. Grant (2010) the Family Court applied the doctrine, but that has been appealed to the High Court and Judge Woolford has reserved his decision.

Will the gavel fall on trusts?

“When it is delivered,” Mr Grant observes dryly, “it may be one of the more interesting decisions in this area of the law in 2011.”

 Indeed, supposing the bundle of rights doctrine does survive in law, it seems tailor-made for using the Property (Relationships) Act to attack trusts in the Family Court.

(To read more on the Law Commission's review of family trust read this previous column by Michael Coote.)

Section 44 of the Act concerns situations where a person may have disposed of property (for example, to a trust) to defeat the claim or rights of another person, and if a court finds this to be so it can make an order under Subsection (2).

Subsection (2) is draconian, as it permits the court to make orders that a person who has received property “otherwise than in good faith and for valuable consideration” must transfer it at the direction of the court to some other person, and pay to the court or any person the court directs the monetary difference between the consideration and the value of the property.

Mr Grant argues that if the word “property” in Subsection (2) is interpreted in accordance with the Walker and Harrison cases, then the bundle of rights doctrine could be extended to attack a trust settled by an ex-spouse or ex-partner, although probably not to a trust settled by a third party.

Evidently not a fan of the doctrine, Mr Grant writes, “Conjecture of this nature shows the extremity of the Walker and Harrison decisions.”

Confetti separations

“The notion that Trust powers are like bits of confetti that can be scattered over spouses when they separate,” he continues, “belittles the law of Trusts and undermines the fundamental notions of accountability and responsibility which the law requires of trustees.”

The Property (Relationships) Act is set on a collision course with trust law, if Mr Grant is correct, via contentious Family Court decisions made in favour of disgruntled litigants.

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*Michael Coote is a freelance financial journalist whose publication list includes interest.co.nz, the National Business Review, New Zealand Investor, The Press, and the New Zealand Centre for Political Research.