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Debts owed to you by a family trust - are they protected if you separate?

By Fiona McGeorge - 12 Jul 2018

New Zealand has one of the highest rates of Family Trusts per capita in the world. But a lot of these Trusts are not being managed correctly which then impacts on the protection a Trust can provide, particularly in the event of a relationship break down/separation.

Often when a couple establish a Trust they may lend money to the Trust (usually to enable the Trust to purchase a house) which means the Trust is then recorded as having a debt owed back to each of the partners. This debt is sometimes gradually forgiven during the relationship or other times it remains owing as a way of trying to protect separate money which each partner has contributed.

Even though these debts owed by the Trust are recorded in each partner's separate names, does that protect the money as separate property?

In a recent case we successfully argued in the Family Court, the Court confirmed that debts owed by a Family Trust to each of the partners was not their separate property if the money was lent to the Trust during the parties' relationship. Instead, the total debt owed to both parties was combined and classified as a relationship asset which was to be shared equally. For some people this will be the outcome they intended, but for others it could be a shock.

If you have lent money to a Family Trust and you are in a relationship and you want to keep the money you lent to the Trust as your separate property, then you should enter into a Contracting Out Agreement with your partner to record this money as your separate property. Relying on the structure of a Trust in this circumstance will not protect you if your relationship ends.

If you would like to discuss a Contracting Out Agreement or other issues in relation to protecting your assets in the event of a separation, contact our specialist relationship property lawyer, Fiona McGeorge.


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