Uncertainties in law commission’s retrospective family trust plan

The Law Commission says family trusts created since 1977 should be open to retrospective judicial modification.

Auckland barrister and trusts specialist Anthony Grant discusses some of the implications of what that might mean for judges grappling with trust issues.

In its "Review of the Law of Trusts" (Report 130, 13 August 2013) the law commission says:

"It is essential that New Zealand trust law be largely consistent with overseas trust law, in particular the trust law of England and Wales, Australia, Canada and other common law countries to which New Zealand often compares its law ...": [2.23]

The widespread use — and perceived occasional abuse — of family trusts in New Zealand has led some judges to try to create new ways to set them aside and distribute their assets more "fairly".

The problem is not unique to this country.

The same is true, for example, in England.

But the judges there have stuck to principle and said that the law cannot mean one thing in the Family Division of the High Court and another thing in its other Divisions.

Munby J's statement in A v A [2007] 2 FLR 467 is almost profound in its simplicity and logic:

"There is not one law of 'sham' in the Chancery Division and another law of 'sham' in the Family Division, There is only one law of 'sham', to be applied equally in all three Divisions of the High Court, just as there is but one set of principles, again equally applicable in all three Divisions, determining whether or not it is appropriate to 'pierce the corporate
[21]

This statement was approved by the English Supreme Court in Prest v Petrodel [2013] UKSC 34.

Expanding on Munby J's theme, Sumption J said:

"Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different. If a right of property exists, it exists in every division of the High Court and in every jurisdiction of the county courts. If it does not exist, it does not exist anywhere," [37]

The courts in England, Australia and New Zealand all have statutory power to modify "nuptial" trusts. In that sense the three countries run in tandem, in the way that the law commission says is "essential" for us.

But s182 of the Family Proceedings Act, the section that the countries have in common, does not go as far as the commission would like it to go.

The commission wants it to go much further. It says that judges should be able to extract any item of relationship property, or its uninflated value, from a family trust, and give it to a "disadvantaged" spouse.

Not only that — and this verges on extraordinary — judges should be able to do so retrospectively — right back to 1 February 1977.

And this, in the face of Parliament's refusal in 2001 to make the very change that the law commission says should be made.

Here is an important question of principle.

If family trusts should be open to modification in this way by spouses, why not by creditors?

A trust can be more harmful to creditors than a spouse. What principle justifies a distinction of this nature?

Next, consider what the commission's proposal would mean.

Parties to mid-nuptial agreements will have ordered their lives on the basis that property in trusts that was originally relationship property will devolve in accordance with the arrangements recorded in the agreements.

So, too, will parties to pre-nuptial agreements (who co-habited before marrying or having a civil union), and parties to post-nuptial settlements.

The many people who have entered into such agreements during the course of the last 36 years will not have been advised that property in family trusts that was originally relationship property, could be extracted from the trusts in accordance with the commission's proposals.

The certifying lawyers were not at fault for not advising about this since they were not to know that the law would be changed in the way the commission proposes, and that it would be changed retrospectively.

There must be a possibility that if the commission's proposals in this regard are enacted, many agreements on which people have placed reliance, will be at risk of being unsettled, and unsettled comprehensively, since s 21M of the PRA stipulates that "If an agreement purporting to be made under ... s 21A ... is avoided or is invalid or unenforceable ... the provisions of this Act have effect as if the agreement had never been made."

Not only may provisions relating to trust assets be ineffective, but so will every other clause of all such agreements.

Next, consider what the commission's proposal would mean for many typical family trusts.

The trustees (probably the parents) have lent money to a child to enable him/her to buy a home. The child raises a family and orders the family's life around the certainty of the financial provision that was made many years earlier by the Trust.

If the child's parents separate later in life, are the children to have the loans called up and their houses taken from them, or the commitment to pay school fees, taken away?

This is the commission's answer:

"The court must not make any order against the trustees if it would be unjust to do so because beneficiaries of the Trust have, in good faith, altered their position in the belief that they could rely on the ability of the trustees to distribute funds": [19.19]

The court would be required to "weigh the overall fairness of ordering compensation from the Trust" [19.20] and "proper consideration will be given by the Court to the interests of the beneficiaries". [19.21]

In other words the rights of beneficiaries will be completely unknown and no principled system for assessing them is proposed.

Although the commission says, "It is essential that New Zealand trust law be largely consistent with ... the trust law of England and Wales, Australia, Canada ..." it does not suggest that its proposal is remotely "consistent with the trust law" of those countries and so far as I am aware, it isn't.

The commission says:

"We recognise that there are legitimate reasons for establishing trusts and that consequently the courts should not interfere with trusts lightly" [19.10].

But it is conceivable that, quite apart from the hugely objectionable aspect of retrospectivity, the uncertainties created by the commission's proposals would cause many couples to avoid the use of trusts altogether and thereby deprive the couples and their likely beneficiaries of all the benefits that the law ought to encourage them to receive.