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The Family Trust – a cast-iron shield or a leaky vessel?

The Court of Appeal’s decision in Judd v Hawkes Bay Trustee Company Limited should make all trustees sit up and take notice.  The concept of a constructive trust being imposed on an express trust has gradually emerged as a novel way of ensuring that a trust is not used as a means of defeating a claim by someone who has a reasonable expectation of receiving a benefit particularly in the context of relationship breakdown.  This case is a prime example of its application.

Following a six and a half year relationship with Richard Hodgkinson, Michelle Judd was able to successfully argue that the Richard Hodgkinson Trust held a share in the family home on trust for her.  Ms Judd followed the well-trodden path established by Lankow v Rose and the Court agreed that her contributions to the property gave her a reasonable expectation of a share in it.  Had the property been owned by Mr Hodgkinson this would not be surprising.  However, neither the fact that the property was owned by a trust rather than Mr Hodgkinson himself, nor that she knew this at the outset, prevented Ms Judd’s claim from succeeding.

Anyone who has property in a trust believing that the mere existence of the trust shelters them against such a possibility may need to re-consider.  The key factors that allowed Ms Judd to succeed in this case were that:

  • Mr Hodgkinson behaved as though the property belonged to him and the two trustees (Mr Hodgkinson himself and his co-trustee) ran the property entirely for his benefit.
  • Mr Hodgkinson’s co-trustee sat back and let Mr Hodgkinson do exactly as he pleased.  He knew of Ms Judd’s contributions but nevertheless was content to allow the Trust – and Mr Hodgkinson –  to take the full benefit without accounting to Ms Judd for the value of her contributions.
  • Crucially, the parties did not enter into a Relationship Property Agreement.

What are the lessons from this case?

The trust remains a pivotal part of asset and succession planning.  However, if its primary purpose is to protect assets from becoming relationship property, it is also vital to have Relationship Property Agreement in place.   Further, once a trust has been set up it cannot be safely left to rust.  The Court noted that Mr Hodgkinson’s co-trustee abdicated responsibility and allowed Mr Hodgkinson to run the show essentially for his own benefit.    Trustees should ensure that they meet regularly to review the purpose of the trust, ensure it is still fit for purpose and ensure that it is not simply a thinly disguised arrangement which permits one party to treat the Trust assets as if they were his or her own.

 

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