Is Your Trust Too Centred on You?

In Official Assignee v Wilson, Chisholm J rejected the idea that "alter ego trusts" are a separate category that can simply be set aside. He emphasised that the orthodox sham test (common intention to mislead) still applies:

"The underlying common intention requirement for a sham has been consistently adopted by the Court of Appeal and is clearly binding on this Court. If alter ego trusts were to be automatically recognised as shams that underlying requirement would be negated. The result would be that a halfway house between a conventional sham trust and a valid trust would be created … I accept that view. It seems to me that to adopt a halfway house would be to effectively re-write the traditional understanding of a sham."

The Court of Appeal upheld this approach, stating:

"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."

So, in New Zealand:

• Actual control alone is not enough to invalidate a trust.
• "Alter ego" is not an independent legal cause of action.
• To disregard a trust you still need to show a sham, invalidity (e.g. no intention to create a trust, no certainty of beneficiaries or property), or rely on specific statutory powers (for example, under relationship property legislation).

Several Australian family law decisions — and a small number of New Zealand decisions — have used "alter ego" language in the context of relationship property or spousal support claims. These often aim to do justice between spouses, but they can be misleading if treated as general trust law.

Key cases include:

• Ascot Investments v Harper — Gibbs J indicated that sham transactions may be disregarded and that companies which are mere puppets of a party may, in some circumstances, be looked through in family property proceedings.
• In the Marriage of Kelly (No 2) — the Full Court treated the assets of a family trust under the control of one party as a financial resource.
• In the Marriage of Ashton — the trust assets were effectively treated as the husband's property for matrimonial property division because he had de facto ownership and control, even though he was not a named beneficiary, and used the trust assets as if they were his own.
• In the Marriage of Stein, Davidson, and Gould — similar reasoning, focusing on how the trust was used and controlled in reality.

New Zealand decisions such as Prime v Hardie and Glass v Hughey applied some of these Australian concepts, sometimes treating a trust being the "alter ego" of one party as if that were enough to treat the trust assets as that person's property.

With respect, the better view — reflected in Official Assignee v Wilson — is that:

• "Alter ego" descriptions may be evidence of how a trust is used in practice;
• but they do not, by themselves, justify ignoring the trust as if it were never validly created, unless the proper sham or invalidity tests are met, or a statute gives that power.

Putting the cases together:

• A trust will not be set aside as a sham or nullity just because one person has significant influence or practical control.
• However, if a person consistently treats trust assets as their own, ignores trustee duties, and uses a trustee company as a mere puppet, courts (especially in family disputes) may:
  • treat the trust assets as a resource available to that person,
  • impose constructive trusts or other equitable remedies, or
  • scrutinise whether the trust was ever validly constituted.

That is why proper trust design, trustee selection, and day-to-day administration are so important.