What the future may hold for separating couples with a trust
When a marriage, civil union or de facto relationship breaks down, the couple will usually divide their property according to the Property (Relationships) Act 1976 (the PRA). However, these two people often hold property in a trust rather than personally.
The PRA has limited remedies to access property which has been put in a trust, and this can result in unfairness when a couple separates if there are no assets that they own personally.
The Law Commission has undertaken a review of the PRA and proposed that the legislation be changed to make it easier to access trust property when a couple separates.
The situation now
In its current form, the PRA gives very limited access to trust property. As a result, New Zealand courts have found a number of other methods to dismantle a trust when a relationship breaks down. For example, the courts have developed ways to help partners who make valuable contributions to trust property in the expectation that their relationship would continue and they would continue to receive benefits as a result of their work or contribution.
Going to court is, however, very expensive. It is already time-consuming to pursue a division of relationship property under the PRA. It can be unrealistic for many people to try and bring a separate claim to try to attack a trust. Attacking a trust can sometimes mean bringing claims in two different courts at the same time, or it can mean more expensive High Court proceedings, rather than less expensive Family Court hearings. This means some people cannot pursue what might be their 'fair share' of relationship property if there was no trust involved.
Law Commission proposal
Late last year, the Law Commission released its Preferred Approach Paper which sets out a proposal on accessing the assets of a trust. The commission proposes that the PRA contains a single, comprehensive remedy that will allow a court to make orders when a trust holds property that was produced, preserved, or enhanced by a marriage, civil union or de facto relationship. The amended section of the PRA is expected to apply in three different situations:
1. Where property is put in trust during a relationship or in contemplation of the relationship, and putting the property in trust has had the effect of defeating either of the partner's rights
2. Where trust property has been sustained by relationship property
(i.e. income) or by the actions of either partner, or
3. Where any increase in the value of trust property, or any income from the trust property, is due to either partner's actions or to the use of their relationship property (i.e. income).
Family Court will have significant power
This proposed provision will give the Family Court significant power. It is expected to apply when one partner uses their income during a relationship to improve or maintain a trust-owned property, rather than spending their income on assets which are jointly owned or benefit both parties.
The section is also expected to apply when, in the early stages of dating, one party thinks that the relationship might last long-term, and puts their home in trust to protect against the possibility of a future claim from the other. If that home later becomes the family home, and would otherwise have been divisible under the PRA, the court may be able to access it despite the home having been put in trust.
Early days yet
One unknown is the definition of what is 'reasonable contemplation' of a relationship. If the relationship has not begun and the couple is only casually dating, can they still put their assets in trust and expect protection? What if one party 'reasonably contemplates' the relationship but the other does not? It is not at all clear when it will be safe to put property in trust.
If the Law Commission's proposal becomes law, the best option is likely to be to formally contract out of the PRA. If both parties have independent legal advice and agree not to claim against trust property, the court is much more likely to respect that.
If you are contemplating a long-term relationship and are unsure how to safeguard your assets, please don't hesitate to contact us.