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We're separating and our assets are all in trust. Does that mean I get nothing?

By Telise Kelly - 18 Aug 2019

The Property (Relationships) Act 1976 determines what is and is not "relationship property" and which assets should be divided equally between de facto partners and spouses on separation. It also defines "separate property" as assets owned by one partner alone and not to be shared equally. But in a country with the highest number of trusts per capita in the world, what happens if your assets are held in trust?

Trust property is not relationship property, or for that matter separate property, because trust property is owned by the trustees of a trust and not by the spouses or partners personally. Even if both spouses are trustees of the trust, the existence of the trust puts those assets into a category of their own. As a result, the Property (Relationships) Act has, according to the Law Commission, been struggling to deal with trust property since its inception. All may not be lost, however. With the law as it stands, there are a number of ways in which a spouse or former de facto partner may have an entitlement to trust property, itself. It is a patchwork of legislation and law developed by the Courts themselves - some say an imperfect patchwork - which sit alongside the Property (Relationships) Act, endeavouring to make up for its shortcomings.

The Property (Relationships) Act may only apply to trust property, in limited circumstances:

  1. Trust property can become relationship property in circumstances where one or either party receives distributions from a trust which was settled by one or both of the spouses or partners.
  2. If there has been a disposition of property to a trust made by, or in the interests of, one spouse, in order to defeat the rights of the other spouse under the Act, the Family Court may make orders either setting aside the disposition to the trust (as if it never happened) or compensating the other spouse for the disposition made.

Alternatively, in some cases, one or both of the spouses or partners may have such significant interests or powers over the trust that the interests may themselves constitute "property" in the hands of the spouse, and may therefore be subject to the Property (Relationships) Act. Whether or not a spouse's interest in a trust is capable of being classified as "property" depends on the nature of the particular interest. Importantly, that does not mean that the trust's assets fall into the pool as either relationship property or separate property. Rather, it means that the spouse's interest in the trust does. Whether the interest is classified as relationship property or separate property then must be determined in accordance with the ordinary relationship property criteria.

Then there is the Family Proceedings Act 1980. If the parties have been married and their marriage has been dissolved, one or either of them may also have the ability to ask the Family Court to inquire into the existence of any agreement or understanding between them during their marriage as to the intended use of the trust property. If the Family Court agrees to exercise jurisdiction over the trust's property, it may apply trust property to the benefit of one or both of them or their children, or vary the trust. In exercising this unique jurisdiction, the Family Court assesses how the reasonable expectations a spouse had of the trust, during marriage, should now be fulfilled, following dissolution of the marriage. Before the Family Court will make such an inquiry, however, it must first be satisfied that the marriage has been dissolved and that the trust is a "nuptial settlement." Whether or not your family trust could be considered a nuptial settlement depends on the particular circumstances of your marriage and the terms of the trust deed.

Another possible recourse is to a body of case law which has been developed by the courts of equity over hundreds of years, with respect to claims of "constructive trust". In the context of a modern day separation, these cases are typically run where one partner has made significant contributions to a trust's asset(s), because they had a reasonable expectation that they would benefit from the trust. The courts have considered that where it would be unconscionable for the trustees of the trust to refuse to yield an interest in the trust property to the contributing spouse, the court may hold the trustees to account and make an award of compensation or property to the contributor, against the trust's assets. In other words, the courts may be persuaded to provide compensation to a party in circumstances where there has been enrichment of the trust, if it would be otherwise unjust for the trust to expect to retain that benefit. In some circumstances, the award of compensation, itself, can be determined "relationship property" and available for equal division between the parties. In those circumstances, the contributions do not necessarily have to be that of the claiming spouse - it could be the other spouse's contributions have created this interest, which interest is then shared between them.

In summary, the prevalence of trusts in the asset planning of most families in New Zealand raises significant complexities when a relationship breaks down. The Law Commission has recommended sweeping changes to the landscape of this area of law, including giving the courts greater powers to share trust property to ensure a fairer and simpler way to resolve these issues. However, until those recommendations are considered and adopted we must work within the confines of what we have. To understand what recourse you may have to the assets of a trust following the break-down of a relationship, contact Telise Kelly or any member of our Relationship Property team.


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