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:
- 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.
- 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.