Statistics show that nearly half a million people New Zealanders have a private trust. While family trusts can be an effective tool for protecting family assets what happens when a relationship and family unit breaks down? Can you claim trust assets as relationship property? And how does the court calculate such entitlements?
The recent Court of Appeal case Vervoort v Forrest  NZCA 375 deals with these issues.
Facts of the case
In this case Ms Vervoort brought applications against her ex de facto partner and the trustees of his Trust, the William Duffy Family Trust.
Mr Duffy’s Trust was set up prior to the relationship and owned a number of assets both in New Zealand and overseas.
The parties were in a relationship for 12 years. When the relationship commenced each party had their own income, assets, and each had non-dependent children.
However, throughout the relationship Mr Duffy used the assets from the Trust to pay for their lifestyles. The Trust purchased a lifestyle block in Coatesville that was the parties’ family home. Ms Vervoort claimed she helped to maintain the property by redecorating, cleaning the house, mowing the lawns and looking after the swimming pool and animals contained in the property.
Following their separation Ms Vervoort made a claims stating that the Trust was a sham and therefore the trust assets were relationship property, and that there was a constructive trust for her benefit imposed on the William Duffy Family Trust.
The High Court did not accept this position.
Court of Appeal decision
Was the William Duffy Family Trust a sham?
A trust will be a sham where the parties settling the trust do not in fact intend to create the usual rights and obligations which flow as a consequence of a trust.
The intention to create different rights and obligations must be held by those settling the trust.
As Ms Vervoort discovered it can be difficult to prove such an intention exists.
Ms Vervoort’s claim in this regard failed as, despite Mr Duffy having de facto control of the Trust, there was no evidence that he did not intend to create a trust and he followed the formalities of a trust structure.
As it stands now New Zealand law does not recognise de facto control of a trust by a single trustee who is also a beneficiary, as qualifying grounds to establish a sham. This is the case even where the other trustees are clearly not involved.
The Court of Appeal also considered whether the Trust became a sham after its inception.
It is possible for the situation to arise where an originally valid trust becomes a sham because there has been a deliberate change in the trust arrangement.
However, the circumstances and evidence of this case did not show a deliberate pretence developing.
Was there an enforceable constructive trust?
The criteria for a constructive trust in these circumstances are:
- the claimant made contributions, direct or indirect, to the property in question.
- the claimant had an expectation to share in the property;
- the expectation was a reasonable one; and
- the defendant, being the owner(s) of the property, should reasonably expect to yield an interest.
Contributions need not be monetary and can include other services such as work performed to improve or maintain the property. The contributions can also be indirect. For example, the claimant’s contribution may be buying all the household groceries while the other party pays the mortgage.
It is a crucial requirement that there is a causal connection between the contributions and some enhancement or preservation of the property.
A significant development in this case was the Court of Appeal’s acceptance that traditional trust principles of unanimity and non-delegation must bend to the practical realities when one trustee is in absolute control of all trust activities and the other trustees have effectively abdicated their trustee responsibilities.
Constructive trusts as an equitable principle plays on the consciousness of the property owner. The Court of Appeal here found that it was not only the conscience of Mr Duffy affected, but in a different sense so is the conscience of the other trustees who both gave Mr Duffy carte blanche to do as he wished with the assets of the trust. While the other trustees had no knowledge of the situation their consciences were “activated” by their practical surrender of their trustee role to Mr Duffy.
Therefore the Court found that there was no bar to Ms Vervoort’s constructive trust claim.
However, Ms Vervoort’s claim ultimately failed because she could not show this causal connection. The Court of Appeal found that the contributions she made to the trust property were merely cosmetic and did not significantly add value in any way.
She did not put money into the Trust and was not able to show that her contributions assisted Mr Duffy in maintaining and/or building the trust assets.
Ms Vervoort was only allowed to make a claim on the small amount of relationship property that was not owned by the trustees.
Lessons from this case
When your family assets are in a trust you do not have an automatic entitlement to them. This means that to access the assets an application will need to be brought to establish your claim.
When such a claim relies on equitable principles including sham or constructive trusts it can be difficult to show you have a valid case. However, these claims are not impossible, certainly with constructive trust claims for which the law is developing.
If your contributions have helped your partner or their trust, grow their assets then you may be entitled to a share in that property. And remember those contributions do not need to be monetary but can include performing work or services or even taking care of matters at home or family expenses which allow your partner to concentrate their energy and income elsewhere.