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Palmer, Jessica --- "Controlling the Trust" [2011] OtaLawRw 3; (2011) 12 Otago LR 473

Last Updated: 1 April 2013

Controlling the Trust

Jessica Palmer*

I Introduction

Given the prevalence of trusts,1 it is becoming increasingly common for creditors and spouses of both settlors and beneficiaries to cry foul and seek to find ways to access property held in trust. The general gist of the claim is that the reality is quite different from the appearance: property apparently held in trust is really subject to the control or directions of one party (who is usually the settlor and/or a beneficiary) who has either no real understanding of what a trust is or no intention of giving effect to the trust. In the last ten or so years, the way in which this claim has manifested itself has changed but the underlying concern has not.2

In some cases, the trust is attacked in wholesale fashion with the aim being to have the trust itself declared invalid. In other cases, the trust is essentially affirmed by the aggrieved party and what is sought is de facto performance of the trust by recognising a proprietary interest in a beneficiary who does not have such an interest but in favour of whom one can be created by the trustee pursuant to some potential exercise of their trust powers in the future.

This article will evaluate some recent cases in which courts have been asked to find, or have themselves declared, some reasonably common trust scenarios to be penetrable. I will suggest that while the cases may appear somewhat vexing, as a matter of traditional trusts law the answer is generally quite straightforward. Of course, it may be that vexation arises because the answer that trusts law gives is unsatisfactory. For those who think that is the case, some possible options for reform are also

* Senior Lecturer in Law, University of Otago.

1 Of trusts that file tax returns, the most recent records show there was one

trust for every 17 people in New Zealand in 2008-2009 and trust usage is

estimated to be much higher in New Zealand than in similar jurisdictions

such as the United Kingdom, Canada, and Australia. See New Zealand

Law Commission, Some issues with the use of trusts in New Zealand (Review

of the Law of Trusts, Issues Paper 20, 2010) 7; N Peart, M Henaghan and

G Kelly, “Trusts and relationship property in New Zealand” (2011) 17

Trusts & Trustees 866.

2 There are various statutory mechanisms arising in particular contexts

that enable courts to look through trusts to different extents. Much has

been written, for example, on the “trust-busting” provisions available

in property relationship disputes such as s 44 and s 44C Property

(Relationships) Act 1976 (see N Peart, “The Property (Relationships)

Amendment Act 2001: A conceptual change” (2008) 39 VUWLR 813;

N Peart, M Henaghan and G Kelly, “Trusts and relationship property

in New Zealand” (2011) 17 Trusts & Trustees 866; see also the regular

columns by A Grant in the NZ Lawyer (published fortnightly). The

concern of this article however is to consider the judge-made or common

law approaches that have developed in response to this problem.

considered. First, it is necessary to consider the source of the concern - control exercised by someone other than the trustee - and how orthodox principles of trust law deal with this potential problem.

Talking about whether a party is in control of a trust is problematic because the trust is not itself an entity or person as far as the law is concerned. It is simply a relationship. It is therefore not possible to control something that does not exist. Rather the claim being made must really be that the trustee or the property subject to the trust is being controlled to such an extent that the controller should be considered the absolute owner. If the controlling party can direct the trustee to do with the property whatever the controller wills, surely, the claim goes, it is a nonsense to say the property is held on trust for another. But once the issue is framed in this way, this precipitates a further question: is there anything objectionable about a trustee being controlled by another such that the trust should somehow be defeated or ignored? In other words, what is the extent to which a party other than the trustee can control trust matters (usually, by holding powers of appointment and removal of trustees and/or beneficiaries) without there being a need for the law to intervene and in effect treat the party as the “real” owner of the trust property in such a way as to make any trust redundant?

These questions ought to be answered by considering the nature of the trust relationship and the rights and obligations flowing from it. The first step, in my opinion, is to distinguish cases of control authorised by the trust deed from cases of unauthorised control.

II Unauthorised Control

Unauthorised factual control can easily be dismissed as irrelevant in determining whether someone other than the trustee or any beneficiary with a vested interest can be considered as having a proprietary interest in the trust fund.

In our law, a party cannot generally acquire complete ownership

(vindicatable against the entire world) solely by virtue of factual control.3

The presence in a person of factual control alone must therefore be an

insufficient basis upon which that person can be said to be absolute

owner and the trust undermined.4

Where a trust (that is, the trustee or the trust property) is subject to the

3 Sharrment v Official Trustee [1988] FCA 179; (1988) 18 FCR 449 at 470-471.

4 That a party’s unauthorised control cannot itself justify a proprietary

interest is supported by the doctrine of trustee de son tort whereby

someone who exercises such control is treated as if he were a trustee of the

express trust (usually understood as effected by a constructive trust): see

further A Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson

Reuters, 2009), chap 13.4.2.; DFC NZ Ltd v Goddard [1992] 2 NZLR 445

(CA); Lyell v Kennedy [1889] UKLawRpAC 36; [1889] 14 AC 437. In other words, Equity does not

allow unauthorised control to be used to impinge upon the trust, but

instead treats the trust as effective and requires the controlling party to

account as if he were a trustee.

unauthorised control of another, this alone should not justify handing over title to the controller; rather, it should require of the trustee that he or she regain the control which they are obliged to exercise as part of their fiduciary duty owed to the beneficiary. Any claims that an outsider may have against the controller should not, on the basis of the control alone, be met by stripping the trustee and beneficiary of their lawful interests in the trust property. The courts must require more before legitimately created proprietary interests are to be arrogated to a factual controller.

An individual’s unauthorised control of a trust may amount to an actionable wrong such as knowing receipt of trust property or dishonest assistance of a breach of trust. It will likely also be a failure by the trustees properly to administer the trust. But it is no more than that. It is not a ground for rejecting the validity of the particular trust being abused.

...trustees who allow a third party such as a settlor to assume substantial and effective control would have abdicated their fiduciary duties and would be in breach of trust. The control and misuse therefore only arises because of a breach by the trustees of their fiduciary duties under the trust. Is it right that a court should deprive beneficiaries of their beneficial interest and transfer their beneficial interest to the settlor simply because the trustees have not properly fulfilled the obligations imposed upon then by law?5

Attempts have nevertheless been made to use unauthorised control as a reason to undermine trusts, most commonly in the guise of claims of alter ego and sham trust. While the former has been rejected in New Zealand, the latter is available but the presence of unauthorised control is not its sole basis or even a sufficient element of establishing such a claim.

A Alter Ego

Where a person exercises some form of control over the trustee which is not itself authorised by the trust deed, it has been said in some cases6 that this rendered the trust the alter ego of the controller and enabled the controller and parties claiming through him or her to access trust property. The alter ego refers to control being exercised by an individual over an entity to such an extent that the entity is recognised as merely an extension of the individual and not as a separate entity notwithstanding its appearance. The individual asserts factual control in a way that he or she is not entitled to or obliged to by the authorising instrument. In the context of a trust, the trustee should ordinarily manage the affairs of the trust. If control is exercised by another, the trust is said to be the alter ego of that person:7

5 Re the Esteem Settlement; Abacus (CI) Ltd and Grupo Torras SA v Sheikh Fahad

Mohammed Al-Sabah [2004] WTLR 1 at [103].

6 Prime v Hardie [2003] NZFLR 481 (HC); Glass v Hughey [2003] NZFLR

865 (HC); Begum v Ali (FC Auckland, FP 004/128/00, 10 Dec 2004, Judge

O’Donovan); O v S (FC Dunedin, FAM 2004-002-80, 12 Dec 2006, Judge

O’Dwyer); ECB v KDB (FC North Shore, FAM 2003-44-1031, 31 Aug 2005,

Judge Ryan).

7 O v S (FC Dunedin, FAM 2004-002-80, 12 Dec 2006, Judge O’Dwyer) [44].

Where the assets of a trust fund are dealt with and treated for practical purposes as if they were one party’s absolute property or under a party’s absolute control, the trust in question is in effect the alter ego of the party...

The claim has found success in Australia in the context of property division following divorce. There the relevant statute allows the Court to take account of financial resources available to either spouse and courts have interpreted this to include property over which either spouse has de facto control.8

However, as a matter of common law in the absence of an authorizing statute, the alter ego concept cannot be used in this way. All that it is apparently necessary to show, in order to look past a trust structure and declare it to be the alter ego of an individual, is the presence of sufficient control by that individual such that he himself treated the trust property as his own. In my opinion, as has been explained above, this surely cannot amount to a sufficient justification to reject the validity of a trust and deem the controller the true owner. Notwithstanding the cases that support the alter ego concept, it was properly rejected by the Court of Appeal in Official Assignee v Wilson:9

Actual control alone does not provide justification for looking through/ invalidating a trust. The uptake of control by someone other than an authorised person cannot be sufficient to extinguish the rights of the beneficiaries under a trust. It is difficult to see the alter ego trust operating in New Zealand as an independent cause of action.

Hence, the concept of alter ego and any other notion that is triggered by factual control alone ought not to be relied upon to justify intervening in a trust.

B Sham Trusts

The doctrine of sham trusts, employed to set aside a trust that has merely the appearance of a valid trust, but is in fact not intended by the settlor and trustees to be a true trust, has been accepted by the New Zealand Court of Appeal in Official Assignee v Wilson.10

As a matter of principle, a trust is only a sham because there was no true trust intention as is required for the valid creation of a trust. Control by the settlor or another is relevant only in so far as it may illustrate a sham intention. For this reason, sham trusts are not responding directly to the perceived problem of control and accordingly do not represent a threat to traditional trust law in the way that the other mechanisms of judicial intervention considered herein do.

The threshold required to be met by a claimant alleging a sham

8 Family Law Act 1975 (Cth), ss 79(4) and 75(2)(b); N Peart, M Henaghan and G Kelly, “Trusts and relationship property in New Zealand” [2011] Trusts & Trustees 1, 8. The Property (Relationships) Act 1976 (NZ) does not have an equivalent provision.

9 [2007] NZCA 122; [2008] 3 NZLR 45, [70] per Robertson J; see also [126] per Glazebrook J.

10 [2007] NZCA 122; [2008] 3 NZLR 45.

trust is rather high, as Official Assignee v Wilson demonstrates. The Official Assignee argued that a family trust that had been settled by the bankrupt (for the benefit of his children) prior to his insolvency was a sham and that the trust assets ought to be held for the benefit of the Official Assignee and any creditors of the settlor. The trust had acquired a house which was occupied by the settlor and his family. The settlor had paid the deposit, and the balance of the purchase price was funded by a bank mortgage, personally guaranteed by the settlor, and a loan from a company controlled by the settlor. Mortgage payments and outgoings were paid by the settlor and there was no formal lease or rental agreement. The settlor subsequently wished to renovate the property but the trustees were unwilling to borrow further funds in addition to the significant mortgage already existing on the property. The trustees thus sold the property to the settlor a year after its acquisition at the original purchase price.

The following year, a second house was purchased by the trust into which the settlor and his family moved, with the deposit being paid for by the settlor and the balance of the purchase price being provided by mortgages secured against both houses. The first house was eventually sold and the proceeds were used to discharge one mortgage and significantly reduce the other. Outgoings were paid by the settlor and renovations carried out on the property were funded by a loan from the settlor ’s partner to the trustees. The settlor was then adjudicated bankrupt. It was accepted by the Court that the settlor exercised influence over the trustees (his solicitor and his mother in law) and that the trust suffered from defective administration and management on the part of the trustees. Nevertheless, the lack of any mutual sham intention was fatal to the sham allegation.

So, in order successfully to establish a sham trust, a mutual sham intention must be shown and is generally taken to require some type of fraudulent intention by at least one of either the settlor or trustee. As for the evidence of such intention, neither broad powers vested in the settlor nor significant control exercised by the settlor on the facts on their own will suffice. In addition, administration of the trust that is lacking in formal accounts and record-keeping, and having trustees who are submissive to an enthusiastic settlor will not be determinative of a sham. Thus, as a matter of fact, sham is a difficult allegation to establish.11

III Authorised Control

While it has been quite simple to dismiss the presence of unauthorized control as a legitimate reason to enable a court to look through or past a trust, the presence of authorized control vested in someone other than the trustee presents more of a challenge. It has become very common

11 For more on sham trusts, see J Palmer, “Dealing with the Emerging Popularity of Sham Trusts” [2007] NZ L Rev 81; M Conaghen, “Sham Trusts” [2008] CLJ 176.

in trusts in New Zealand for the settlor to retain some extent of control or to vest that control in someone other than the trustee. All of this is usually effected in the trust deed using specific powers of appointment and removal of trustees and/or beneficiaries. The practice of retaining control in this manner was made possible in New Zealand’s recent trust history by the abolition of estate duty. Successive Estate and Gift Duties Acts included in the scope of dutiable property any property over which the settlor reserved certain rights or powers that could be taken to mean he or she derived a benefit from the trust.12

The question raised by the divesting of power traditionally held by a trustee in favour of a settlor retaining the like or granting it to a third party, often known as a protector or enforcer, is: how much control can a settlor or other third party be allowed to have over a trustee before it threatens the very existence of the trust? In other words, when is a trust not really a trust because control is vested in someone other than the trustee?

The question must be answered by considering the fundamental attributes of a trust, and determining whether control vested elsewhere than in the trustee vitiates any of those attributes. The trust is not an entity. It is a relationship between an owner of property at law (the trustee) and another (the beneficiary) in whose interests the owner must act in relation to the property. It is not true to say that the beneficiary is necessarily the beneficial or equitable owner of the property because he or she may be a discretionary beneficiary who has nothing more than an unenforceable hope or expectation in relation to the property. Nevertheless, the beneficiary does have the right to hold the trustee personally accountable for his or her actions in relation to the property. While it may be possible for a trust deed to reduce the extent of the trustee’s accountability by limiting or exempting him or her from liability, it is now well accepted that there is a core of obligations that must always be owed because, without these obligations, there is nothing for which the trustee must be accountable to the beneficiary and therefore no trust relationship.13 While there is debate as to the precise content of such core obligations, the minimum necessary appears to be that the trustee must act honestly and in good faith for the benefit of the beneficiaries.14 This requires that they consider whether to exercise their powers, bringing an independent mind to bear on their trustee functions.15

12 For example, a general power of appointment, s 8 Estate and Gift Duties Act 1968; see further W Patterson, “When is a trust a trust?” Paper delivered to the Legal Research Foundation conference A Modern Law of Trusts 2009.

13 Armitage v Nurse [1998] Ch 241, 253 per Millett LJ.

14 The Privy Council recently endorsed this view in Spread Trustee Coy Ltd v

Hutcheson [2011] UKPC 13 although their Lordships were in disagreement

about whether or not liability for a trustee’s gross negligence could be


15 Re Mulligan (Deceased) [1998] 1 NZLR 481.

Trustees have a fiduciary duty to their beneficiaries. They must exercise their discretion only in the interests of the beneficiaries. In order to exercise a discretion trustees must first be aware that they have a discretion and secondly must apply their mind to the exercise of that discretion (see Turner v Turner [1984] Ch 100). This exercise must be carried out in good faith in the sense that the trustees must not only be open to the possibility of deciding not to give effect to a request put to them but also be quite prepared to do so if of the opinion that this is the right course.16

These fundamental principles serve to establish that as long as a purported power in the hands of the settlor or another does not impinge on the trustee’s duty and ability to act honestly and in good faith, considering potential transactions with trust property to be in the interests of the beneficiary, then the trust is nevertheless valid, and the beneficial interest in the property cannot be stripped from the beneficiaries in favour of the controlling party.

Hence, a trustee’s obligations to exercise his or her discretion in the management and administration of the trust for the benefit of and in the best interests of the beneficiaries is not in any way limited, fettered or excluded by a standard power to appoint and to remove trustees, for example. An appointor ’s power does not of itself render the trustee subservient to the appointor ’s wishes – the trustee is still able to, and indeed is required to, exercise their own powers and duties honestly and in good faith in so far as the beneficiaries are concerned. Given that this is the core and necessary content of a trust, and that it survives despite the presence of an appointor or protector, the appointor ’s or protector ’s power cannot therefore be said to render the trust invalid.

This does not leave the trust or control of it unregulated and the beneficiary without any recourse against questionable conduct. The trustee must still observe his or her fiduciary duties and it may also be the case that the holder of the power likewise holds it in a fiduciary capacity and is therefore subject to similar duties. The concern caused by control can be ameliorated by the law of trusts as it currently stands, not because the presence of control is itself illegitimate but because that control may cause or be evidence of a breach of trust:17

...if trustees were to come under the control of a settlor so that they did not consider the matter in good faith in the way we have described but simply went along with the settlor ’s request because it was the settlor ’s request, such a decision would be reached in breach of their fiduciary duties and would be liable to be quashed.

The reservation of settlors’ powers does not of itself compromise the integrity of the trust. Rather, the particular content and extent of some such powers may compromise the legitimacy of the trust, while, with the inclusion of others, the trust will nevertheless remain enforceable.

16 Re the Esteem Settlement; Abacus (CI) Ltd and Grupo Torras SA v Sheikh Fahad

Mohammed Al-Sabah [2004] WTLR 1 at [122].

17 Re the Esteem Settlement; Abacus (CI) Ltd and Grupo Torras SA v Sheikh Fahad

Mohammed Al-Sabah [2004] WTLR 1 at [122].

Accordingly, the content of any power that purports to grant control over trust affairs to someone other than the trustee must be carefully examined to determine whether it effectively strips the trustee of any accountability, in which case there can be no valid trust.18 If it does not, the trust must stand and intervention in the trust in order to allocate trust property by exercise of the control authorised by a particular power is entirely inappropriate.

It becomes necessary to test these propositions in the context of the various cases where requests are made for judicial intervention on the basis of control. The cases arising on this point can be grouped, for the purpose of clearer analysis, into two types. In some situations, a creditor or disaffected partner is seeking to attack and override the trust and is relying on the debtor/other partner ’s control over the trust property as a means of showing that the trust is, in essence, illusory. On the other hand, in some cases the claim is that the controlling party is entitled by the terms of the trust to receive trust property (or to be considered for a distribution) and that since it is probable that such an outcome will likely result in the future, the court ought, in effect, to force the trustee to distribute property to the controlling party now so that a creditor or partner can settle their own separate claim against the controlling party who happens to be the debtor or other partner.

A Illusory Trusts

1 No true separation of legal and equitable estate: Harrison v Harrison

The validity of a trust was questioned in Harrison v Harrison.19 Under the terms of the trust deed, the husband and wife settlor-beneficiaries had reserved to themselves significant control by virtue of powers of appointment and removal of the trustees who in turn had complete discretion of appointments to beneficiaries. In addition, the sole trustee was a company of which the settlors had effective control as its major shareholders. In addition to the husband and wife, the beneficiaries also included the couple’s children, remoter issue and partners and others. All were discretionary beneficiaries. The case concerned an application for an interim distribution in the context of a relationship property dispute. Notwithstanding that it was accepted that the trust could not itself be considered a sham because the parties had intended to create a trust, Fogarty J nevertheless stated:20

In short, the husband and wife have the ability at any time, without the need to give any reason to the other contingent beneficiaries, to vest the entire assets of the ‘trust’ to themselves. It appears that the intention of the husband and wife when entering into the deed was to retain complete control over the use and enjoyment of all the assets transferred to the

18 It may of course be possible to argue that the power was not intended and thus can be rectified in the trust instrument in order to retain a valid trust.

19 Harrison v Harrison (2008) 27 FRNZ 202 (HC).

20 Ibid, [26].

trustee; until at some later date when they might decide to transfer some or all of the assets to other persons. Given the ability and the apparent intention, there is a serious argument, which the parties may yet engage in, that, upon a substantive analysis, for the time being the legal and equitable estates unite in the husband and wife.

Apart from the inaccuracy of suggesting that the husband and wife held legal title to the trust assets, given that it was vested in the corporate trustee; there are serious difficulties as a matter of trusts law with the suggestion that the husband and wife held the equitable estate to the exclusion of others. To do so is to ignore the other beneficiaries of the trust to whom the trustee owes a fiduciary duty to perform the trust honestly and in good faith21 and to consider their interests in any exercise of its power to appoint capital. Fogarty J’s willingness to disregard a trust that satisfies all the core requisites of a valid trust is disconcerting for the unsettling effect it could have on the law of trusts and the potential that it has to deny discretionary beneficiaries their already vested right to be considered for appointment and distribution of trust property by the trustee

In granting leave to appeal, the Court of Appeal indicated, albeit without detailed reasoning, that it would likely consider itself bound to observe the constraints of the trust structure in determining what property could be considered relationship property available for distribution between the spouses: 22

The legal structures which the parties have mutually created must be the starting point for an assessment of what property is available for distribution at an interim stage and later, in relationship property proceedings, unless or until the framework is altered.

While the motivation for Fogarty J’s analysis may be understandable

– the trust property was always effectively controlled by the settlors

to the extent that they considered it was still their own – his Honour ’s

analysis of the equitable principles is with respect mistaken. The scenario

presented in Harrison v Harrison may very well be one that requires

some corrective response from the law, but that cannot be achieved by

suggesting that the settlors had not properly divested themselves of

one or other of the legal or equitable interests because of the control

that they retained.

It is instructive to test this reasoning by considering variations to the scenario. As Peart has noted,23 had the settlor been the sole trustee and sole beneficiary, then Fogarty J’s reasoning would have been correct: but that was not the situation. She also suggests that his reasoning might have held true had the settlor been the sole director and sole shareholder of the corporate trustee. In such an instance, the corporate veil could be lifted

21 Armitage v Nurse [1998] Ch 241 (CA).

22 [2009] NZCA 68 (10 March 2009), [22]. The case later settled.

23 N Peart, “Relationship property and trusts: unfulfilled expectations”

NZLS Relationship Property Intensive, 2010, p 7.

to recognise the settlor as the controlling mind of the corporate trustee.24

But if that is so, why can a similar outcome not also be achieved where a settlor is controlling a human trustee? That is, can it be said that because the trustee is subject to someone else’s control, the veil should be lifted to identify the controller as the true trustee in the same way the corporate veil is lifted in company law? It is true that the company is being put to one side on the basis that it is merely a mask for the settlor, but this is occurring as a matter of company law, not as a matter of trusts law. The trust in such a scenario is set aside, not because trusts law deems control a sufficient ground upon which to do so, but because company law deems control a sufficient ground upon which to look through a company to the controlling person. That person happens also to be the sole beneficiary and at this point the law of trusts asserts its fundamental requirement that he cannot also be the trustee - and accordingly there is no trust. The trust fails because a trustee cannot be accountable only to himself, not because someone is controlling the trustee.

Piercing the corporate veil is made necessary because of the legal fiction of the company as a juristic legal person, unable to act apart from the actions of other natural legal persons. The same is not true of trusts. The veil of a trust cannot be pierced as if it were a company. A trust is not a separate legal entity, it is simply a relationship. The party obligated in the trust relationship is the trustee and it cannot say, unlike the company, that it is helpless to act but for another ’s assistance. The trustee must act independently in meeting its obligations to beneficiaries.25 Thus, while control, as a matter of company law, justifies lifting the corporate veil, control, as a matter of trusts law, does not justify sidestepping the trustee who has a positive duty to act independently.

2 No fiduciary duty: B v X

A second recent decision of relevance is B v X,26 where in the context of a dispute over child support, Fogarty J offered a different reason for looking through a trust.27 Notwithstanding that his Honour ’s decision on this point was obiter,28 his reasoning could nevertheless be used to

24 Of course it would first be necessary to establish some sort of impropriety on the settlor ’s part when acting in his capacity of company director and/ or shareholder, in order to justify lifting the corporate veil: Re Securitibank Ltd (No 2) [1978] 2 NZLR 136 (CA).

25 See also Re the Esteem Settlement; Abacus (CI) Ltd and Grupo Torras SA v

Sheikh Fahad Mohammed Al-Sabah [2004] WTLR 1 at [105].

26 HC Auckland, CIV 2010-404-002861, 16 March 2011, Fogarty J.

27 In this particular context, it was also possible to rely on a statutory power

to determine that someone is benefitting from a trust and thus trust

property can be included in an assessment for child support: s 105(2)(c)

(i) Child Support Act 1991. Fogarty J relied however on general principles

of trust law.

28 The dispute concerned the appropriate amount of child support due by

the father to the mother. The dispute was resolved by determining the

father ’s income taking into account drawings from the business and a

apply to trusts in other contexts to assist other types of claimants.

In the particular trust with which the Court was concerned, the father, B, had settled shares of his business and his house on trust for the benefit of himself, his children, any spouse and any charity. There was an unfettered power of appointment of income and capital to any of the beneficiaries, the power being held by the “appointor”, who was the father B. The Court rejected the mother ’s contention that the trust was a sham because the father had no deceitful intention in relation to the trust.29

However, after explaining that a trust is a relationship, that the trustee is subject to control by equity and, specifically, fiduciary law, and noting that “equity looks beneath the surface”,30 Fogarty J proceeded to rule that on the facts before him, B did not in reality owe any fiduciary obligations to the beneficiaries:31

It simply defies reality to find a fact that because of the execution of the deed he had fiduciary obligations, that is the obligation not to pursue his self interest in looking after himself and his family, but had accepted a different and potentially conflicting obligation in favour of his children as discretionary beneficiaries, let alone other potential beneficiaries, such as any unnamed and yet unidentified charity. Looking at the realities no fiduciary obligation was created by the execution of this deed.

With the greatest of respect, it is not clear how an obligation on B to look after himself and his family cannot be co-existent or consistent with the fiduciary duty he assumed as trustee to act in the interests of his beneficiaries which included himself and his family.32

A more significant problem with this analysis is the same objection made to his Honour ’s approach in Harrison v Harrison – it ignores the other beneficiaries and the rights they have against the trustee to hold him accountable. At one point, his Honour described the trust as one that “did not impair the father in any way from using the assets to benefit himself, and, to the extent he wanted, for the children, in the same way that he could have done but for the trust.”33 That cannot be correct. As a matter of trusts law, the trustee is bound to perform the trust according to its terms and to exercise his powers according to what he believes will best achieve the purpose of the powers he has been granted.34 While it is possible that the father in this case could achieve under the trust

drop in income caused by the father ’s choosing to work on a development project.

29 HC Auckland, CIV 2010-404-002861, 16 March 2011, Fogarty J, [85] and


30 Tito v Waddell (No 2) [1977] 1 Ch 106, 240 per Megarry VC.

31 HC Auckland, CIV 2010-404-002861, 16 March 2011, Fogarty J, [96].

32 In addition, even if it could be said that there is a difference, there is no

explanation of the basis for the former familial duty. Is it merely moral, or

does it give rise to specific legal obligations, and, if so upon what basis?

33 HC Auckland, CIV 2010-404-002861, 16 March 2011, Fogarty J, [83].

34 L Smith, “Mistaking the Trust” (2010) 40 Hong Kong Law Journal 787.

similar outcomes to those achievable if there had been no trust, he could only do so while complying with these additional trust duties. In other words, his ownership of the assets was fettered in a way that it would not have been had there been no trust. So again, even if it could be said that he owed no fiduciary duty to his children, as Fogarty J opined, that does not explain why he could not undertake fiduciary obligations to a particular charity.

His Honour concluded that there was no trust and only, at most, a general power of appointment.35 But, with respect, this surely was not a general power of appointment: B was not free to appoint income and capital to whomever he wished. His freedom was fettered to the extent that he could only appoint to a limited class of objects and additionally he had actively to consider an appointment to any of them.36

A focus on the supposed “realities of the case” must not sacrifice the parties’ perfectly legitimate executed intentions simply because a better explanation could be offered or a fairer outcome achieved. To do otherwise would be to put a great number of legitimate New Zealand trusts at risk.

These first two cases considered were both decisions of one Court and it can be said, with respect, that they are simply not sustainable. However, judicial discomfort with trusts that show similar characteristics has been seen elsewhere, as is illustrated by the following case.

3 Extensive powers combined with trusteeship: BQ v DQ

A third case worth mentioning here comes not from New Zealand but from Bermuda. Ground CJ, sitting in the Supreme Court of Bermuda, adopted a very similar approach to that taken in Harrison v Harrison. In BQ v DQ,37 two family trusts were created inter vivos by the settlor, a wealthy businessman, for the benefit of his children and grandchildren following his death. The settlor was initially the sole trustee (although later joined by his second wife). The settlor had powers to revoke the trusts, to appoint and remove trustees, and, unusually, to release the trustee from any liability. The trustee had the power to appoint income and capital to the settlor during his lifetime. Two of the beneficiaries applied for a declaration that, on account of the businessman’s control as settlor and trustee, the trusts were invalid as inter vivos settlements (and thereby revealed by a subsequent will and securing tax advantages).

In his judgment, Ground CJ surveyed English, American and Canadian law and opined that “a key question” in a case of this kind is the degree of accountability of the trustee,38 referring to Millett LJ’s irreducible core

35 HC Auckland, CIV 2010-404-002861, 16 March 2011, Fogarty J, [96].

36 The Court of Appeal has recently given leave to the mother to appeal.

Issues on appeal include whether the trust was a sham and whether the

trust amounted to a general power of appointment: Darby v Bolton [2011]

NZCA 474.

37 [2010] SC (Bda) 40 Civ (16 April 2010).

38 Ibid, [18].

content of a trust outlined in Armitage v Nurse entailing that the trustee

must owe obligations to the beneficiaries in order for a trust to arise.39

He then described the way in which the arrangement had been operated

while the settlor was alive, concluding that the settlor had exercised

“essentially sole and unfettered dominion”40 over the trust property.

Ground CJ ruled that “the concatenation of rights and powers in the settlor, when coupled with the fact that he was the sole trustee at the time of the constitution of the Trusts, rendered this trust illusory during his lifetime”.41 As has been explained above, this finding could only be correct if one of the powers so retained by the settlor had the effect of vitiating any of the obligations owed by the trustee to the beneficiaries so that there was no accountability. The clause that did appear to have that effect provided as follows:42

The written approval of the Donor [the settlor] of any trust transaction during his lifetime shall be a complete release of the Trustee (including the Donor) of any liability or responsibility of the Trustee to any person with respect to this transaction.

In my view, it is possible to construe this clause as negating any underlying and continuous accountability of the trustee to beneficiaries such that it was indeed correct to find the trust invalid or “illusory”. The effect of this clause is to enable the settlor to render the beneficiary’s right to hold the trustee to account meaningless.43 However, that does not appear to be the reasoning adopted by the Bermuda Supreme Court for several reasons.

First, Ground CJ indicated that, had an independent trustee been appointed at the time of the trust’s creation, this clause would not have prevented the trust from being valid. The clause was only relevant to the trust’s validity because it meant that “the Settlor as Trustee could not effectively be called to account during his lifetime”.44 Surely, however, since this extensive power enables the Settlor to suspend any Trustee’s accountability, not only his own, it must render the trust ineffective, regardless of who happens to be the trustee?45 An absolute power of indemnity cannot be a legitimate power because it has the effect of excusing the trustee from any and all obligations to the beneficiaries at the settlor ’s whim. It must either be struck from the deed or it must render the entire trust invalid.

39 [1998] Ch 241 at 253.

40 BQ v DQ [2010] SC (Bda) 40 Civ (16 April 2010), [28].

41 Ibid, [29].

42 Ibid, [7].

43 See further D Waters, “Settlor control – What kind of problem is it?” (2009)

15 (1) Trusts and Trustees at 12-17.

44 BQ v DQ [2010] SC (Bda) 40 Civ (16 April 2010), [29].

45 An argument could perhaps be made here that had an independent

trustee been appointed, the trust would have been valid up until a time

when the settlor exercised his power to release the trustee from liability.

In this way, the clause would act much like a power of revocation.

Secondly, the presence of this particular power to release the trustee from liability was not alone considered determinative. Rather, it was the “concatenation of rights and powers in the Settlor”, his role as sole trustee and the way in which he ran the trust’s affairs as if the property were his own that together justified the trust being set aside. With the greatest of respect, and again with some sympathy for the judge who was understandably influenced by the factual reality of how the trust had been poorly administered, these reasons should not have determined the outcome. As a trustee for beneficiaries other than himself, the businessman was obliged to act honestly and in good faith notwithstanding that, as settlor, he had significant powers. The presence of other beneficiaries cannot be ignored. Although his Honour bolstered his conclusions with reference to “the de facto situation”, the businessman’s actions do not demand a finding of an invalid trust: rather they are relevant to whether he committed breach of trust.

The outcome of the case was right, but the reasoning was not, and accordingly its contribution to trusts law ought to be approached with caution. The unique power reserved to the settlor, to absolve a trustee from any future liability, sets this case apart from most trusts and is what makes the particular trust illusory. In addition, there was not as such an aggrieved party in the event the trust were to be ruled invalid – the beneficiaries of the invalid trust would instead receive beneficial interests pursuant to other trusts created under the settlor ’s will. While the Court was ably assisted by amicus curiae,46 the absence of any real negative impact (apart from that which would be suffered by HM Revenue and Customs) no doubt made the outcome more palatable and hence easier to reach.

The Court also gave a second alternative reason for finding the trust invalid. Ground CJ found that the way in which the settlor operated the trust, together with the documented legal advice he received when settling the trusts, showed that he had no intention to create an inter vivos trust because he did not intend to “fetter his unhindered control and enjoyment of the settled assets during his lifetime”.47 To the extent that the Court is here relying on the settlor ’s control of the trust to reach a finding of no legitimate intention to set up a trust, it is, I suggest, an entirely orthodox and acceptable way to deal with control. To reiterate, the issues of who controls a trust and how he or she does so cannot be sufficient grounds on their own to invalidate a trust, but they may be relevant factors in proving that other distinct grounds which are sufficient to invalidate a trust have been met, such as an absence of settlor intention to create a trust48 or a vitiation of any trustee accountability to the beneficiaries.

46 Francis Barlow QC.

47 BQ v DQ [2010] SC (Bda) 40 Civ (16 April 2010), [30].

48 Antle v Canada [2010] FCA 280, 61 ETR (3d) 13.

B Enforcing the Trust

1 Forcing performance

The examples all considered under the heading “Illusory Trusts” above seek to invalidate the trust in order to get the property into the hands of the true controller. However, the same outcome has been achieved by tacitly accepting the validity of the trust but assuming that someone’s control over that trust would eventually result in the controlling party receiving some benefit from the property and thus making it permissible to treat the controlling party as the owner. For example, in Matarangi Beach Estates Ltd v Dawson, 49 the vendor of land requested a decree of specific performance against the purchasers following their failure to settle. The purchasers argued that specific performance would be inappropriate because they were financially unable to complete the contract. The purchasers had few assets of any significance. The house in which they lived had been settled by them on a family trust of which they were beneficiaries and a corporate trustee had been appointed. The Court ruled that the house was to be considered an asset of the purchasers for the purpose of determining whether they had sufficient finances to complete the contract. Associate Judge Hole said at [14]:

I consider that the appropriate way of looking at the defendants’ financial situation is to do so globally and ignore the fact that the home is settled in a trust. This is a device which has been used for the benefit of the defendants. If the home were sold, and the trustee agreed, it would be possible for the trust to lend the net proceeds of sale to the defendants to enable them to complete their purchases. In the circumstances, it is unlikely that the trustee would disagree.

Although the Judge may be taken to be rejecting the trust in the first part of this passage, it is clear that in fact he considers looking through the trust justifiable because, given the need, the trustee would indeed enter into transactions to benefit the defendants. The practical likelihood that the settlor-beneficiaries could access the trust assets on demand led the Court to overlook the trust. While the Judge’s presumptions regarding the actions of the trustee may have proved correct had the purchasers been required to complete the contract, that surely does not justify the Court in effect forcing upon the trust a sale of its asset and loan of the proceeds.

Nevertheless, a comment to similar effect has recently been made by the Supreme Court in Penny and Hooper v CIR.50 The case concerned two surgeons who had each structured their practice using a company owned by family trusts, of which the surgeons were discretionary beneficiaries. The surgeons were paid below-market salaries and the rest of the income was held or distributed by the trusts. These unremarkable arrangements secured a tax advantage based on the differing marginal tax rates applicable to companies and individuals. The issue was whether these arrangements amounted to tax avoidance. In a unanimous judgment

49 HC Auckland, CIV 2008-404-001817, Hole AJ, 15 September 2008.

50 [2011] NZSC 95.

delivered by Blanchard J, the Supreme Court held that they did on the basis that the salaries paid were set artificially low and that the surgeons would benefit from the trusts. Despite the trustees of both trusts being “independent” - solicitors and accountants – the Court said:51

Although neither taxpayer was a trustee each could naturally expect that the trustees whom they had chosen would act as they in fact did, and that the benefits of the use of the funds would thereby be secured without the impost of the highest personal tax rate.

It is difficult to know with certainty what it was about these arrangements that led the Court to make such a statement. It remains to be seen whether this reasoning is limited to parties who have significant involvement in the generation of the trust’s wealth,52 or to the particular context of tax avoidance, for example. It is unclear whether the Court intends the approach to have more general effect to include other relevant parties who could reasonably expect that trustees will make appointments and distributions in their favour, including among them those who have significant powers of control.

With all due respect, such an approach should be treated with significant caution. Regardless of whether or not a party’s apparent control of a trust will likely lead to a distribution or transaction in its favour, the law of trusts can have no role in effectively forcing the trustee to do just that. To do so would be contrary to the principle that a trustee is entitled and obliged to act independently. Further, the courts have always resisted interfering in a trustee’s exercise of power:53

[I]t is generally understood law that the Court will not normally control Trustees in the exercise of their discretionary powers unless they are shown to have acted ultra vires or in bad faith.

2 The Bundle of Rights

(a) The Concept

A somewhat more sophisticated device to achieve much the same outcome is the bundle of rights notion. There have been moves in recent case law to categorise powers of control and a discretionary beneficiary’s interest as part of a bundle of rights capable of being considered as property of some value.54

51 Ibid, [35].

52 A Grant, “The Supreme Court – tax avoidance – and consequences for

trustees” NZ Lawyer, 23 Sept 2011, 13.

53 Craddock v Crowhen (1995) 1 NZSC 40,331 at 40,337 per Tipping J (HC).

54 The discussion here of the bundle of rights notion is concerned specifically

with its application to powers that grant significant control. Inclusion of

a beneficiary’s discretionary interest in the bundle of rights is, however,

equally problematic but for a different reason: just as control cannot give

rise to a proprietary right; likewise a discretionary beneficiary has only

a mere hope or expectation and not a proprietary interest in the estate:

Gartside v Inland Revenue Commissioners [1967] UKHL 6; [1968] AC 553.

In Walker v Walker,55 the Court of Appeal was concerned with a trust in the context of a relationship property dispute. The trustee was a company of which the husband was the sole director. The husband and wife settlors had transferred relationship property (including a family business) to the trust in return for a debt back. As settlors, they retained powers of appointment and removal of directors of the company and power to remove the corporate trustee and appoint themselves trustees. The husband and wife were also discretionary beneficiaries. Upon separation, the husband proposed to buy out the wife’s interest in the debt owed to them by the trust. The parties were at odds over the valuation of that debt.

The Court ruled that the debt had to be understood as part of a bundle of rights that included the following “items of property”: the directorship of the trustee company; the shares held by the trustee company; the power to appoint and remove directors of the trustee company; the power to appoint and remove the trustee; and the husband and wife’s discretionary interests under the trust.56 The Court described these assets together with the debt as forming a “very valuable package” because they conferred control over the business, the major subject of the trust. The bundle or package of rights idea has become reasonably popular, particularly in the Family Court in cases concerning property relationship disputes. 57

However, doubt has been expressed judicially about the idea in the High Court recently in The Financial Markets Authority v Hotchin.58 In that case, Mr Hotchin had settled several trusts and retained powers of appointment of trustees and beneficiaries. The Financial Markets Authority applied for asset preservation orders over the trust property under the Securities Act 1978 pursuant to an investigation of Mr Hotchin for suspected breaches of the same statute. The Authority argued that Mr Hotchin’s control over the trusts justified the granting of preservation orders and relied on a provision in the Act which confers a discretion on the court to make orders against third parties in respect of assets they hold on behalf of the person under investigation. However, Winkelmann J rejected the orders in relation to the trusts on the basis that control rests

55 [2007] NZCA 30; [2007] 2 NZLR 261.

56 Ibid, [49].

57 The bundle of rights notion has been mentioned or used with approval

in Harrison v Harrison [2009] NZFLR 687 (CA), [10]; R v R [2010] NZFLR

555 (FC), [69] (for criticism of this case, see N Peart, “Relationship

property and trusts: unfulfilled expectations” NZLS Relationship Property

Intensive, 2010, p 13); Dyas v Elliott [2010] NZHC 607; (2010) 11 NZCPR 252 (HC), [24];

NJM v CJM FAM-2009-004-2761, FAM-2009-004-2762, 11 February 2010,

Auckland, [45]; JG v JBG (FC North Shore, FAM 2007-044-591, 13 July

2010, Judge Ryan); SMB v GAC (FC North Shore, FAM 2007-044-946, 19

Nov 2010, Judge Ryan), bundle of rights mentioned but not discussed

on appeal: SMB v GAC (HC Auckland, CIV 2010-404-8320, 25 July 2011,

Peters J); LTEP v JMP (FC Auckland, FAM 2008-004-000715, 20 April 2011,

Judge Burns).

58 HC Auckland, CIV 2010-404-8082, 6 May 2011, Winkelmann J.

with the trustee and, in any case, that control over assets does not equate to beneficial ownership of those assets.59 Although the bundle of rights terminology was not used, the Court’s rejection of it in this context was clear, albeit brief:60

Powers of appointment of trustees, and even of discretionary beneficiaries, are not sufficient to give Mr Hotchin control over the assets of thr Trusts, because that control rests, at law, with the trustee once appointed.

The position, as a matter of legal authority, is thus unclear in New Zealand. The legitimacy of the bundle of rights depends on being able to say with certainty that the powers and rights making up the bundle equate to property. Hence the question this raises is whether it is appropriate to classify powers as property. Powers have not traditionally been considered property and often Fry LJ’s famous statement about a power to appoint property to oneself being no more property than the power to write a book or to sing a song is cited as the explanation.61 But this was not a universal rule. Property subject to a general power of appointment exercised by will, for example, can be treated as property of the appointor for the purpose of satisfying his or her debts.62

However, property can be a very broadly construed concept.63 It is not fixed and often context and purpose are important, as was emphasised recently by the Privy Council in TMSF v Merrill Lynch.64 That case concerned a controller of several companies and investment banks based in Turkey, Mr Demirel, who had misappropriated significant funds totalling approximately US$830m. Demirel had settled two discretionary trusts in the Cayman Islands, with assets of about US$24m. The beneficiaries were Demirel, his wife, and any children and remoter issue (of which there were none) and a charity as the residuary beneficiary. The trust deed contained a power of revocation in Demirel’s favour:

This Trust may be revoked, amended, varied or altered in any manner whatsoever from time to time and at any time by the Settlor by deed and delivered to the Trustees provided always that no such revocation, amendment, variation or alteration shall take effect until actual receipt of such instrument by the Trustees or with the written consent of the Trustees thereto if such revocation, amendment, variation or alteration would increase or extend the obligations, liabilities or responsibilities of

59 As noted by the Judge, the Act also contained a provision conferring a discretion to make preservation orders in respect of assets controlled but not beneficially owned by the person under investigation but this discretion did not extend to cases such as the present where legal title to the relevant property vested in a third party (the trustees).

60 HC Auckland, CIV 2010-404-8082, 6 May 2011, Winkelmann J, [131].

61 Ex Parte Gilchrist; Re Armstrong [1886] UKLawRpKQB 112; (1886) 17 QBD 521 at 531.

62 Beyfus v Lawley [1903] UKLawRpAC 44; [1903] AC 411, 413; see also A Molloy, “The vulnerability

of asset protection trusts revocable by the settlor” (2011) 17 Trusts &

Trustees 784. But it is understood to be an exception granted by equity,

rather than a rule of property law: O’Grady v Wilmot [1916] 2 AC 231.

63 Jones v Skinner (1835) 5 LJ CH (NS) 87, 90 per Lord Langdale MR.

64 [2011] UKPC 17, [33].

the Trustees.

TMSF, acting essentially as receiver of the banks, successfully gained judgment in Turkey against Demirel personally for US$30m. It then secured judgment in the Cayman Islands to enforce the Turkish judgment. In addition, it sought to appoint receivers over the power to revoke and orders against Demirel to assign the power to the receivers in order to access the trust assets. TMSF’s application was rejected at first instance on the ground that the power to revoke was not, in principle, property capable of being the subject of receivership and, on first appeal, that as a matter of policy the court should not allow receivership of a power of revocation in the absence of empowering legislation because it enables one creditor effectively to jump the queue. In delivering the advice of the Privy Council, Lord Collins made it clear that equity might at times consider the holder of a general power as owner “for all practical purposes”.65

The Board held that Demirel’s right of revocation could be regarded as tantamount to ownership and that interests of justice required such “in order to make effective the judgment of the Cayman court recognizing and enforcing the Turkish judgment”.66 Clearly of importance, as Lord Collins noted, was the absence of any duties attaching to the power which could thereby fetter Demirel’s interest:67

In the present case the power of revocation cannot be regarded in any sense as a fiduciary power, and the [trustee does] not suggest otherwise. The only discretion which Mr Demirel has is whether to exercise the power in his own favour. He owes no fiduciary duties. As has been explained, the powers of revocation are tantamount to ownership.

Thus, according to the Board, an absolute power of revocation (that is, unconstrained by any fiduciary or other procedural duties), held by a settlor who, along with his spouse, is the only discretionary beneficiary with any real prospect of benefit, can be said to be property for the purpose of receivership by a creditor (and only where this conclusion is not precluded by legislation). However, the case is likely to be authority for far more than that and should encourage greater analysis in New Zealand of the particular powers in the trust deed of any given case where the bundle of rights idea is employed.

In order to gain access to trust assets, it cannot be enough to claim that certain powers give their holders control and thus a proprietary interest in the trust property. It is always first necessary to determine whether the power is unfettered to the extent that it permits the holder to gain access to, and therefore benefit from, the trust property without any element of subservience to the trustee or accountability to the beneficiaries. The two examples used by the Privy Council as powers that could be considered proprietary are powers of revocation and general powers

65 Ibid.

66 Ibid, [59].

67 Ibid, [62].

of appointment which by their exercised can be used to benefit directly from the trust property.

But what of powers to appoint and remove trustees and/or beneficiaries as are typically encountered in New Zealand trusts, the former being included in the bundle of rights in Walker v Walker? Neither of these powers gives direct control of the trust property so, without more, they ought not to justify recognising a property interest. However, where they are held by a trustee who is also a beneficiary (a fairly common scenario), it could be said that the combination of these factors gives the holder control and direct access.68 But this overlooks the trustee’s obligations of accountability to the beneficiaries that require the trustee to perform the trust for a proper purpose and not capriciously or wantonly; and actively to consider the beneficiaries and whether any power should be exercised in their favour.69 To the extent that these obligations fetter a trustee’s ability to benefit himself, then he cannot be said to own the property of the trust absolutely. Of course, it may be thought by some that this is not enough to say that the trustee is truly bound to the beneficiaries and hence the property should be considered his. That is to draw into question what lies at the core of a trust and would render all discretionary trusts suspect – a result with far-reaching consequences.

Where the trustee retains ultimate control of the property through its powers of appointment and advancement, being the point made by Winkelmann J in Hotchin, or where the controlling party’s own power is fettered by some condition or duty (where the power is held as a trustee or in some other fiduciary capacity), being the point made by Lord Collins in TMSF, then the power cannot be proprietary in nature.

(b) Value

Proponents of the bundle of rights doctrine could perhaps now argue that the lack of direct and unfettered access to the trust property is not a prerequisite. The interest being identified as belonging to the controlling power is not a proprietary interest in the trust assets themselves but a distinct interest of some value that arises from the personal rights (or powers) of control held by the controlling party, in much the same way as a contractual option to purchase, for example, might be considered property. The rights and powers that make up the bundle of rights form a proprietary interest which exists quite apart from the trust fund itself. Thus the trust is neither being invalidated nor unduly interfered with and no direct access to trust property is necessary.

However, this employment of the bundle of rights notion as rendering powers capable of being property rights suffers from some significant weaknesses. First, its value is not inherent in the power itself but in the

  1. The same could be argued of wide exemption clauses: L Smith, “Mistaking the Trust” (2010) 40 Hong Kong Law Journal 787.
  2. Re Gulbenkian’s Settlement [1970] 1 AC 508 (HL); McPhail v Doulton [1970] UKHL 1; [1971] AC 424 (HL).

potential of the power to be used effectively to force the trustee to act for the benefit of the holder of the power. In other words, control only has value because of the likelihood that it can be used to affect trust transactions. This is surely just a disguised mechanism for forcing trustees to effect particular outcomes in much the same way that the Court in Matarangi Estates did. Yet, as explained above, such an approach is inconsistent with the trustees’ right and obligation to exercise their own discretion.

Secondly, and consequently, it is difficult to see how a power can have any value when such value is dependent on the power being used to subvert the trustee’s performance of his or her duties to the other beneficiaries.

To say there is value (in the sense in which we are interested [that is ascribing a monetary value]) in a power of appointment of a trustee in a discretionary trust, one must assume that the appointor will appoint a trustee who will prefer the interests of the settlor as beneficiary to the interests of any other beneficiaries. Thus such a value is predicated on a trustee not discharging his or her duties as trustee and on exercising the discretion inappropriately. To say that there is monetary value in the right to appoint someone to breach his or her fiduciary duties is at the very least troublesome...That appears somewhat inimical to the rule of law. It would be perverse to ascribe a monetary value to such a power.70

In my opinion, there is much to be said against recognising a power as property whose only real value is a mere likelihood of realisation of an expected distribution from a trustee. When explained in this way, the bundle of rights is no more proprietary than is a discretionary beneficiary’s interest.

IV Legislative Responses

The attempts that have been discussed here by some practitioners and judges to ignore trust structures, albeit unconvincing, show that there may be an understandable concern about the extent of control that some parties are able to exercise over trust assets while at the same time eliminating any exposure they may have to third party claims to the property. The law of trusts as it presently stands does not provide a solution to this “problem” because it does not consider it a problem. Control does not undermine the trust concept as long as a trustee remains accountable to his or her beneficiaries. It is therefore wrong to use existing trust principles to set aside otherwise valid trusts. The result will be a confused and incoherent law of trusts.

As a matter of trust principles, control vested in someone other than the trustee is not objectionable where a trustee remains accountable to the beneficiaries. However, it may be that there is a significant societal consensus that the extent of control currently enjoyed by many settlors

  1. S Griffiths “Valuation of interests in discretionary trusts” NZLS Relationship Property Intensive, 2010, 60.

is objectionable as a matter of practice because it enables people to avoid proprietary claims by creditors. This is of course part of a wider debate about the utility and morality of trusts in general.

However, given trusts are not likely to be abolished any time soon, the problem of control, if it is considered a nuisance that needs to be corrected, could be resolved by legislation that allows courts to look through otherwise valid trusts for the purpose of attributing beneficial rights to trust assets to the controlling party. In other words, if control is to be accepted as a sufficient ground upon which to justify recognising proprietary rights in the controller, then it ought to be done by Parliament. The general principles of trusts and property law do not currently provide justification for courts to do it such that any attempt by a court is, with the greatest of respect, wrong albeit that in some quarters the motivating concern may be a laudable one. Setting aside or looking through a trust on account of control exercised by another amounts to judicial appropriation of property rights from a rightful owner to that other. It ought not to be done without authorising legislation.

Such legislation already exists in specific contexts. For example, s 58 of the Criminal Proceeds (Recovery) Act 2009 allows the court to treat a person as having an interest in property if they have “effective control” over the property, notwithstanding that they may not have either a legal or equitable interest in it. Less explicit but still effective are provisions in the Child Support Act 199171 and the Legal Services Act 200072 that enable the court to take into account “financial resources” and prior settlements into trust when assessing liability for child support and “financial means” when assessing eligibility for legal aid.

A provision of more general application could be enacted to deal with the problem of control. It could essentially provide a test which must be met in order for property otherwise validly subject to a trust to be treated as if it were owned absolutely by an individual. The test could require that the person who is to be treated as owning the trust property must, for example, have sufficient control to divert assets to him or herself authorised by the trust deed coupled with a serious likelihood that he or she will do so. It is very difficult to formulate a provision in a more detailed manner than this that still responds to the relevant nuisance. The vagueness of the test and the broad discretion it necessarily would bestow on the courts should be clear signs that reform along these lines ought to be considered very carefully before it is seen through.

V Conclusion

At the outset of this paper, I tried to show that the “problem” of control currently being experienced in New Zealand trusts needs to be set within a correct understanding of what a trust is. A trust is simply a means for

71 Section 105(2)(C)(i) and (ii).

72 Section 12. See Petricevic v Legal Services Agency (HC Auckland, CIV 2011-

404-002633, 3 June 2011, Wylie J).

holding property that gives rise to a relationship of rights and obligations between the trustee and beneficiary. Where control is vested in someone other than a trustee and renders the trustee’s obligations and therefore his or her accountability otiose, then and only then can it be said that the trust’s integrity is threatened.

The current focus on bundle of rights would be better refocused on to considering the individual powers and rights that fall within the so-called bundle and whether any of them effectively undermines the trustee’s role as owner of the asset but holding for the benefit of another. This calls for fresh work to be done on analysing the powers commonly used in today’s trust deeds to determine their scope and effect and to make clear which powers cannot legitimately be contained in a trust deed without threatening its validity. It may be time to sift the wheat from the chaff, so to speak.

Notwithstanding the foregoing analysis, if it is felt there are other reasons why trusts ought not to be tolerated, then a political debate is necessary to decide what functions trusts should and should not be permitted to perform and to legislate for these accordingly. This is not an issue reserved for a trust lawyer. Aside from defining and analysing how a trust performs and the legal rules and principles that relate to it, the question of what purpose a trust should be allowed to serve is not a legal question.73

73 A Beever, “The Law’s Nature and the Judicial Function” (2003) 20 NZULR


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