Controlling The Settlor: Disincentivising Settlor Control Over Trusts Through The Property (Relationships) Act 1976

Abstract

A recent discretionary trust trend is the tendency of settlors to retain extensive control over, and ability to benefit from, trusts settled. This control-benefit nexus allows the settlor to avoid the application of various legal regimes (such as relationship property and insolvency law) while continuing to deal with and enjoy the trust property as if they were its legal owner. In these cases, the trust externalises the settlor’s legal obligations onto those outside the trust, and the settlor is afforded an unjustifiable benefit. Whether, and in which cases, New Zealand trust law deems settlor-controlled trusts to be invalid is unsettled, but it is unlikely the courts will interfere with the validity of trusts in any but the most extreme cases of settlor control. Existing non-trust legal regimes in New Zealand provide minimal disincentive to settlors who wish to retain control over their trusts. The law as it stands therefore effectively permits settlors to establish trusts for subversive purposes while neglecting to provide a remedy to claimants against the settlor. This paper argues that statutory reform is required to prevent the injustices caused by settlor control.