Relationship Property and Trusts: A Messy Marriage

In two recent Supreme Court decisions in Clayton v Clayton the law relating to relationship property and Trusts have been clarified. Mr and Mrs Clayton were married for many years, had two daughters together, and later divorced. The assets were primarily held in a number of Trusts. A number of different challenges were made to the Trusts, including that they were a “sham” or “illusory”. In the end, the Court continued to give support to ensure that assets accumulated during long relationships are shared more evenly, whether they were held in trust or not. This News shall tell you some more about the difficult intersection between relationship property and Trusts.

Relationship Property

If your relationship comes to an end, either by separation or because of death, the Property (Relationships) Act 1976 applies. Relationship property generally includes the family home and chattels (furniture, vehicles, etcetera), and any other property that was acquired by the couple during the relationship. The Act presumes almost always an equal or 50/50 division of their relationship property, unless there are extraordinary circumstances that makes equal division repugnant to justice or one party is left at a serious economic disadvantage because of a division of functions during the relationship (e.g. the stay at home parent) . There is also a need to take into account the interests of any children of the relationship; in particular it provides greater powers for the Court when deciding on how and when relationship property should be divided.

Separate Property

Separate property generally includes property acquired prior to the relationship and is kept separate during the relationship (for example a rental property and its income); property acquired by succession, inheritance, or gift via a third party or as a beneficiary under a Trust (usually a Family Trust) settled by a third party; property purchased with the proceeds of a separate property; and heirlooms, taonga and chattels used principally or solely for business purposes.

Protection of your Property Interests

If a couple do not want the Act or the provisions under the Act to apply they can enter into a Contracting Out Agreement (previous to 2001 this was referred to as a pre nuptial agreement) at any stage of the relationship but, to be effective, it should be done before the third anniversary of the commencement of the relationship. While it’s not the easiest thing to bring up with your partner, especially if you are in the initial stages of a promising relationship, it is important that you give the provisions of the Act some thought and to consider your options with your partner and your lawyer. We recommend this even if you have set up a Family Trust(s) or made arrangements to try to protect your property prior to entering a relationship. We often see this when there is property and children from a previous relationship. A Contracting Out Agreement can provide security and certainty for both parties’ property (assets and liabilities) acquired prior to and during the relationship and how that property is to be divided whether on separation or death.

The Trust Factor

Property held by a Trust generally falls outside of the Act, as Trust owned property is neither separate nor relationship property. This is why many people choose to set up a Trust before embarking on a second or new marriage/relationship – as this structure was a means of protection for property acquired prior to the commencement of a relationship. However, in the case of property being transferred to a Trust during or in anticipation of a relationship, this can be considered within the Act if it is that the transfer has the effect of defeating the equal sharing provisions of the Act.

Clayton v Clayton – What now?

Returning to Clayton v Clayton, the Supreme Court was asked to use a “trust busting” provision (section 182 of the FPA). The presence and needs of the children were a pervasive factor in the Court’s thinking. It considered that Courts were empowered to exercise orders in respect of assets of the Trusts, and in exercising that discretion indicated an objective test looking at:

“The Applicant, as part of the family unit, would have continued to benefit directly or indirectly from the Trust. This of course includes any current distributions to the family that the Trust provides, as well as possible future distributions, including the case of need.”

Since no formula, presumption or rules were set down to deal with individual cases, it is now more difficult to know when a Trust is vulnerable to attack. But it is safe to say that more extreme family trusts (those that favour one person above others) are at least as vulnerable now as they have ever been. The uneasy relationship between Trusts and relationship property remains. 

Are Trusts useful as Part of Nuptial Agreements?

A Trust remains a good way to protect property interests for you and/or your children. For example, if the Family Trust lends to your child, as a beneficiary, money (gift to a beneficiary) to buy a property, that property or at least the portion of the gift, could in essence remain the separate property of your child. There are however exceptions, including if the property becomes the family home or if relationship property (e.g. income) is applied to the property or the other partner assists with renovations of the property. Accordingly, even with Trust property interests in order to provide security and certainty, we still recommend entering into a Contracting Out Agreement.

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