Can trust powers be relationship property and when debts can be divided?

Tuesday 16 June, 2020

Trust powers

In 2016, the Supreme Court held that powers to manage a trust can be relationship property in certain circumstances. If the trust deed essentially gives one party the right to allocate all the assets under the trust to themselves, unhindered by the normal fiduciary duties placed on trustees, those powers are properly classified as rights which give that party an interest in the trust and its assets.  That interest can be part of the relationship property pool and subject to division.

Since the Supreme Court decision, there have been several cases where parties have unsuccessfully argued that trust powers are relationship property. The courts have held that trust powers will only qualify if the party is entitled to exercise powers of distribution or resettlement for their benefit without recourse to other trustees. If the party must rely on a compliant trustee or act in breach of trust to benefit themselves, they do not have an interest in the trust and its assets.

In the latest case involving trust powers, the High Court disagreed with the Family Court, which held that the appellant, Mr P’s, power to remove any trustee and replace them with a trustee of his choosing gave him a sufficient degree of control over the assets of the trust that the power should be classified as a right or interest for relationship property purposes[1].

The High Court pointed out that the power to appoint new trustees is a fiduciary power and must be exercised in the beneficiaries’ best interests, even if the person exercising the power is not a trustee. The trust deed also required that there be two trustees at all times, required to act unanimously, and the trustees would be obliged to act in the best interests of all the beneficiaries, not just Mr P. If Mr P tried to use the powers of distribution or resettlement for his own benefit, he could be in breach of his fiduciary duty to the other beneficiaries, who could take action against him for breach of trust. The High Court concluded that Mr P’s powers under the trust deed did not amount to property under the Property (Relationships) Act, because they were all subject to fiduciary obligations.

Relationship debts

The Court also had to calculate the value of the relationship property pool and make orders for the division of property. Due to debts, there was negative equity in the relationship property, so the Court had to consider whether it was able to make orders dividing the relationship property if there were only debts to divide. Section 20D of the Act provides that the value of the relationship property that can be divided is calculated by ascertaining the total value of relationship property and deducting any relationship debts owed by either or both partners.

The Court held that where there was negative equity in the relationship property, it had no power to make an order dividing it, because there was not any property to divide. The Court considered that this conclusion was supported by section 11 of the Act, which refers to the entitlement to share equally in relationship property, as “entitlement” can only refer to positive equity. The Court also held that any order dividing the relationship debt would be inappropriate, because the debt was Mr P’s current account debt to a company of which Mr P was sole director, and in which Mr P’s family trust owned 98% of the shares. The Court concluded that it had no power to make orders dividing the relationship property.

Conclusion

Although this case is good news for parties with powers of appointment for trusts, it poses risks for relationships where relationship property debts outweigh assets. If the debts are all in one partner’s name, that person risks being left with full liability in the event of a relationship breakdown. If you do not want to risk being stuck with relationship debts, talk to our Family Team about how they can help.