Fortune Manning Explain The Risks Related To Family Trusts And Relationship Property

The team at Fortune Manning are keen to point out the risks related to family trusts and relationship property, as these have become much more involved over the past few years and affect far more people and to a far greater degree than in past years

Family trusts are a popular way of protecting property and managing assets, and by transferring the ownership of assets to a trust, a settlor (a person who transfers property to a trust) is able to take risks, whether in business or otherwise, while the trust assets are protected. However, there are circumstances where a family trust will not hold up.  The Courts have the power to “bust” trusts in some situations, and make orders relating to trust property that may be very different to what the settlor wanted or intended in setting up the trust.

Recently, the Supreme Court considered a situation where a number of trusts had been used to circumvent the requirements of the Property (Relationships) Act 1976. The outcome of the case has implications for the establishment and ongoing operations of trusts, and serves as a timely reminder of the importance of regularly reviewing the structure of people’s personal affairs. 

The facts of the case will sound familiar to many readers.  Mr and Mrs Clayton began living together as de facto partners in 1986, and married in 1989.  Before they married, they entered into a relationship property agreement which provided that Mrs Clayton would make no claim against Mr Clayton’s separate property, and that if they separated after three years, Mrs Clayton would be entitled to $30,000.  They had two children, before separating in 2006. Over the course of the marriage, Mr Clayton had developed a successful business.  He had set up a number of trusts over this time, with a view to protecting the assets transferred to the trusts.

With the first of the trusts, the Vaughan Road Property Trust (“VPRT”), the Court held that the particular combination of powers that Mr Clayton held in relation to the trust amounted to a property right, with the same value as the net assets of the VPRT.  It was therefore relationship property to be divided between Mr and Mrs Clayton. 

The second trust, the Claymark Trust, had been set up for business purposes which the Court also found was relationship property to be divided between the two.  The Court decided that the trust was a “nuptial settlement,” because the trust made continuing provision for Mr Clayton in his capacity as Mrs Clayton’s spouse, so the trust was split equally between Mr and Mrs Clayton.

These cases show that if property is put into a trust during a relationship, it is highly likely that the property will still be treated as relationship property in the event the relationship ends. The Claymark trust decision also has implications for inheritance trusts, where a trust is set up by parents for their daughter or son during the daughter’s or son’s marriage.  If the trust document is not carefully drafted, there is a risk that the daughter’s or son’s spouse could claim half of the assets in the trust.

For those who have a family trust, or are thinking about establishing one, it is essential they seek legal advice to ensure the trust will work for them, in the way they intend.  A lawyer will be able to advise them on the risks and help them to secure their hard-earned assets for the future. For further information on funeral trust funds and Fortune Manning please go to http://www.fortunemanning.co.nz .