Trust busting: Is it the beginning of the end for hiding relationship property?

Trusts have been used, and abused, for centuries to keep assets safe from the grasp of others, but there are signs they may be losing their grip. In this two-part series, Jane Phare looks at what one Auckland academic describes as a form of “financial abuse” in relationship property disputes.

Start delving into why relationship property disputes go on for so long, leaving parties emotionally and financially crippled, and it’s not long before the famous Clayton versus Clayton trust-busting case crops up.

It’s referred to in law journals, by lawyers battling to get a fair relationship settlement for their clients and by the Law Commission, charged with sorting out the hopelessly out-of-date Property (Relationships) Act 1976.

It was a case in which Rotorua businessman Mark Clayton tried his darndest to stop his ex-wife Melanie from getting her share of $30 million worth of assets, including companies, snuggled away in trusts, and for years Mrs Clayton tried just as hard to access those trusts. She was successful in the end, but not before a long, bitter and expensive battle involving multiple appeals that ended in 2016.

Leading the charge behind that historic win was Auckland QC and divorce guru Lady Deborah Chambers. She took a closer look at “this funny old section 182” of the Family Proceedings Act, which she describes as a cut and paste from English law. In the UK it was a major “trust-busting” provision but in New Zealand it was sitting idly outside the Property (Relationships) Act and largely ignored – until Chambers had a go at it.

“Clayton really blew some fire on its embers and it’s now a major remedy for when property’s been put into a trust during a marriage.”

It’s a case that has been quoted in courts overseas, including Australia, the UK, Hong Kong and Singapore. And it sparked the interest of the New Zealand legal fraternity, many of whom are involved with family trusts. The Ministry of Justice estimates there are 300,000-500,000 such trusts in this country.

Statistics New Zealand 2017-18 data shows that 19 per cent of 336,000 households have involvement with a trust, meaning at least one member of the household is a settlor, beneficiary or trustee.

Too much power busted trust

The main issue that caused the failure of Mr Clayton’s appeals boiled down to him having too much power over the trusts, a warning for those who consider trust property their own.

Chambers: “If a husband has put everything in trust and he can legitimately open the trust cupboard and take the assets out for himself, then we will treat his powers under the trust deed as property.”

People want to have control over the trust and their property for most purposes, she says, but not to own it for other purposes like relationship property disputes, tax and – before the new Trusts Act came into effect in January this year – to access rest-home subsidies.

“That’s what trusts are all about. They’re all about this cloak over the true position and using that cloak when you want to, but pulling it back when you don’t.”

But Section 182, which allows for a “nuptial settlement” where a trust has been settled during a marriage, won’t work in many cases. That section doesn’t cover de factorelationships, an anomaly the Law Commission says needs to be addressed and included in a proposed new Relationship Property Act.

And that anomaly is why Chambers gives different relationship advice depending on her client. She’ll advise some people, usually women, to definitely get married because they are better protected in the event of a split. And she’ll tell others, usually men, that they should not marry their de facto partner to avoid Section 182.

Why do you laugh, she asks during the interview. “That’s what lawyers do. They find holes in the fence and they climb through without getting the barbed wire in their knickers.”

She’s known on the divorce circuit as someone who’s not to be messed with. Lawyers say those who discover their ex has engaged Chambers need a very good lawyer to go up against her.

Chambers is against the very existence of trusts – because they are open to misuse – and thinks there needs to be a wider public discussion on the issue.

“In what circumstances is it legitimate to use a trust structure in 2021? I don’t really understand why our politicians put up with them because they seem to me to be a pretty obvious tax hole. And they are obviously used by wealthy people and middle-class wealthy people to avoid the obligations that everyone else, and in particular the working class, have.”

She doesn’t understand why the Government increased the tax rate to 39c in the dollar for income over $180,000, but family trusts weren’t included in that category. But she thinks the arguments could become academic anyway, and that trusts may well be facing the beginning of the end.

“I mean there’s a whole lot of nails in the coffin of trusts now, because the law keeps changing against them.”

Leading law academic Professor Mark Henaghan, of the University of Auckland, welcomes the sound of those nails being hammered into the trust coffin. He uses the term “financial abuse” to describe the tactic of using trusts to stop a spouse or partner from getting a fair share of relationship property.

He points out that financial abuse is recognised under the Family Violence Act 2018 as a form of psychological abuse. Henaghan co-wrote an article for the Australian Journal of Family Law, which published a special edition on financial abuse last year.

In it he argues financial abuse can be just as coercive and controlling as any physical form of violence, causing the victims extensive harm both emotionally and financially. He describes it as a form of “social entrapment” which can go on years after a relationship ends. That coercive control over a claimant partner is permitted by the legal system, he says, because once relationship property, including companies, is put in a settlor-controlled trust, then extensive litigation is needed to access it.

A “financially abusive partner” is often a trustee of the trust, or the other trustees will act in accordance with their wishes. In that way the “abuser” retains control of the assets and continues the financial abuse post-separation. University of Auckland sociologist and researcher Vivian Elizabeth uses the term “paper abuse” to describe how coercive control can be maintained through court processes.

Henaghan argues that claimants should have simple and inexpensive access to relationship property, whether it’s in a trust “or any other form of legal fiction such as a company”. Although the legal system has made concessions for the claimant partner in more recent times, it has not gone nearly far enough to stamp out this form of abuse.

Nor do the Law Commission’s recommendations on trusts go far enough, Henaghan says. Some spouses or partners will still walk away with nothing or very little relationship property, and the recommendations will keep the door open for ongoing litigation. He argues that relationship property should legally trump all other interests and that courts should have wide powers to access assets held in trust or companies.

High-conflict, high-net-worth relationship property cases can go on for years, costing both sides hundreds of thousands of dollars. Two cases with which the Herald is familiar cost much more: one woman spent $2 million with little outcome after seven years; another went through $1.5m before settlement was achieved after eight years.

Chambers puts some of those barriers and uncertain outcomes down to judicial attitudes. Some judges will come down hard on trusts while others think there’s “nothing wrong” with the trust structure.

“The same argument in front of a judge who’s got one view is going to give you a different result under Clayton.”

She, Henaghan and others point a finger at the trust industry, which Chambers says is full of lawyers who think trusts are “perfectly legitimate”, have been round for 400 years and see no reason why they shouldn’t be used.

Henaghan: “It’s a big industry. Lawyers are paid to create them and helping to administer them. I’m on a charitable trust and just to change a couple of clauses cost us $8000. It’s a money-making machine.”

Chambers thinks trusts should only have a place under very limited circumstances, such as providing financial protection for a disabled child. But for other reasons? Doubtful.

Henaghan believes trusts could be justified when trying to keep assets within a family, known as dynasty trusts.

“But then you’ve depriving anyone who marries into that family.”

He acknowledges it’s difficult for farmers because their assets and land holdings can be worth millions of dollars.

“But that’s part of entering a relationship and they need to realise that.”

Trust-busting a nightmare for some

Many of the readers who contacted the Herald after its series on fighting relationship property disputes through New Zealand’s legal system, starting with the Family Court, told stories of discovering that what they thought was joint property was in fact protected in a trust to which they had no rights.

One woman sold her own home after living with her partner, invested the money in what she thought was a joint home, had two children and, when the relationship came to an end, discovered the house had been put into trust. She had to leave the house and stay with friends, which meant the Family Court would not allow her children to stay with her until she could afford permanent accommodation.

But in order to fight the trust issue, she was forced to quit her job and go on legal aid, meaning she couldn’t afford to rent accommodation for her and the children.

Another woman contacted the Herald this week to tell how her self-employed ex-partner and the father of her two children had put his property and companies in trust to avoid paying her child support. She had already spent $150,000 in legal, forensic accountancy and mediation fees to settle relationship property and now finds herself without child support.

Her ex declared an income of around $35,000, meaning he only needed to pay minimal child support contributions. But he hasn’t paid that, she says. He owes around $6500 from the past three years and is now accruing overdue fees. The amount doesn’t even cover one of her children’s school fees, she says.

“The IRD are supposed to be chasing but because it’s all hidden [in trusts] they can’t touch it.”

To add insult to injury, when Covid-19 hit businesses last March, the woman was told she now had to pay her former partner child support because one child was living week-and-week-about with the two parents. The ex-partner’s income had been affected by Covid, while the woman was still employed fulltime.

She questions why the Family Court and the IRD are not more closely linked. The IRD must be able to see the tax returns of the companies in trust, and therefore the income, she says.

“But [the IRD] can’t touch it. It is so morally wrong. It’s the whole dishonesty of it that gets me.”

In the end, the woman cancelled her child support application and is still waiting for the overdue amount.

It’s cases like these that Henaghan has spent years fuming over. He has a law degree but has never practised, instead teaching law for more than 40 years, including 19 as dean of Otago University’s law faculty before moving to Auckland.

It means he’s free to be outspoken about a legal system he thinks is wrong and unfair, a view backed by years of pro bono work and listening to the stories of desperate Kiwis, mostly women, battling high-conflict and complex relationship property disputes.

Trusts are on his hit list. As far as Henaghan is concerned, New Zealand’s sociallegislation says property and assets acquired during a relationship should be part of the property split. Why then, he wants to know, does New Zealand allow trusts to block that legislation?

“Wealthy people can protect their property if that’s what trusts are meant to do but the poor people can’t afford to set up trusts and they have to pay 50/50. So there’s so much unfairness in as well. To me, it’s unethical.”

The court can order compensation if a claimant can show a trust setup during a relationship had the effect of depriving that person of relationship property.

No compensation if everything's in trust

“But when everything’s in trust, there’s nothing to pay compensation [with]. So you have no remedy basically under that section.”

He’s familiar with cases where, worn down by years of expensive litigation and trying to find out the contents of trusts under discovery, people have just abandoned the fight.

“Lawyers will play that game. They’ll slow it down until the other party gives up.”

Chambers doesn’t think it will be long before the trust wall of protection begins to collapse. Already it’s being picked at by case law, determined challenges and legislative changes.

“You can see there’s a general march, which Clayton is part of in the common-law world, to start really looking hard at these trust structures with worldly realism.”

Increasingly people, including judges, will ask “who really owns this property, who really has control?” she says. That march towards the end, in relationship property law at least, isinevitable.

“That argument will be won because it’s common sense. The trust industry and certain lawyers argue against it but they’re on the losing side, I’ve just got no doubt about that.”

• Monday, why trusts can work well, what the Law Commission recommends and 10 tips to navigating trusts.

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