Laura and Craig had owned their
family business for a number of years.
They had started it from scratch and now it was a successful business,
importing and distributing merchandise to the restaurant industry. They had transferred the shares in the business
to a family trust a number of years ago.
Laura and Craig’s daughter, Juliet, had joined the business after
leaving school. She had started at the
bottom and worked her way up into a management position.
Juliet had recently married and
Laura and Craig were looking to wind down their involvement in the
business. They went to their lawyer with
a proposal to transfer the majority of shares in the business to Juliet. However, they wanted to make sure that the
transfer of shares to Juliet was protected, so that if something happened to
Juliet’s relationship with her new husband, Mark, he wouldn’t have a claim
against the shares.
Business shares in a trust
Laura and Craig’s lawyer advised
that the best form of protection would be for Juliet and Mark to sign a section
21 agreement contracting out of the provisions of the Property (Relationships)
Act (otherwise known as a pre-nuptial type agreement). Laura and Craig floated this idea with Juliet
who said no way. She was newly married
and there was no way she was going to ask her new husband to enter into that
kind of agreement. The next suggestion
from the lawyer was that a trust be set up for the benefit of Juliet and that
the shares be transferred to that trust.
Juliet would be able to say who the beneficiaries and the trustees of
the trust were. In essence it would be
her inheritance trust. Laura and Craig
agreed to do that.
The impact of Clayton v Clayton case
Three years later, Juliet and
Mark’s relationship did fall apart.
Juliet was devastated and to add insult to injury, Juliet received a
letter from Mark’s lawyer demanding information regarding the trust her parents
had set up for her. The letter said that
in light of the recent Supreme Court decision in Clayton v Clayton, the fact
that Juliet had the power to appoint and remove trustees and beneficiaries of
the trust amounted to rights which were relationship property. That property
had a value and Mark wanted half of the value of the trust assets.
This very recent case has changed
the law as we know it relating to the establishment of trusts. Very careful considerations need to be made
and all trusts should be reviewed in light of this new case.
Contact Tammy McLeod, partner and trust law specialist.