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March 22, 2017Can You Trust Your Trust?
The following hypothetical scenario is very common:
Jess has decided to purchase a residential property. Jess is currently single, but is aware of the reality that at some point in the future she may enter into a relationship, and that her new partner may wish to move into her property with her. She wants to make sure that the property is safe and will not be subject to any relationship property claims in the future. Having talked to her friends and family, Jess transferred the house into a trust. Jess now believes her property is safe.
Jess may very well be correct; holding assets in a trust is generally an effective asset protection structure. However, that is not always the case. In fact, more and more often we are seeing trust property becoming vulnerable to claims by a spouse or de facto partner who has moved into the trust property.
Relationship Property Basics
Under New Zealand law, when you have been in a relationship with someone for 3 years (sometimes less), and the relationship ends, the property of the relationship is generally required is to be split equally. Put simply, relationship property is property which is used as part of the relationship. The family home is explicitly included as relationship property. (Further information on this matter can be found here:https://www.wakefieldslaw.com/flatmate-or-de-facto-partner/.)
But my property is in a trust; so it can’t be relationship property?
There are a number of ways that an ex-spouse or de facto partner can make a claim against the trust assets including arguing the trust is a sham trust or a constructive trust.
‘Sham Trusts’
If you have a trust, but the trust isn’t active then a court may rule that the trust simply doesn’t exist. This is known as a ‘sham trust’. If a trust doesn’t exist in reality then the assets that the ‘trust’ holds could instead be regarded as relationship property. For example, if Jess was the sole trustee and made all the decisions about the house, thinking only about her needs and not any other beneficiaries, then her trust may be held to be a ‘sham’.
Things to do to ensure that your trust is not a sham:
- Have more than one trustee, including an independent trustee.
- Include prohibitions on self-dealing for trustees who are also beneficiaries.
- Consider who has power of appointment.
- Operate the trust as a separate ‘entity’.
- Keep trust assets separate from your assets.
- Keep good records, including dated resolutions and financial records.
Constructive Trusts
Jess meets Dave, who moves into the house. Dave contributes to the mortgage, paints the house and fixes the weatherboards. Dave and Jess then break up. Does Dave have a claim to the trust’s property?
In this scenario it is very likely Dave will be able to make a claim against the trust’s property. Where a spouse or de facto partner makes contributions to a property, they may accrue a corresponding financial interest in the property. These contributions can be direct or indirect; this includes staying at home raising children whilst the other spouse/de facto partner goes to work to pay the mortgage.
To minimise the risk of this scenario:
- Prevent your spouse/de facto partner working on trust property.
- If your spouse/de facto partner works on the property, pay a salary or management fee in compensation.
- Ensure independent trustees keep actively involved in all the trust’s affairs.
- Don’t allow your spouse/de facto partner to have an expectation of an interest in the property; and
- Enter into a Property Relationship Agreement (commonly known as “Pre/Post Nups”)(see:https://www.wakefieldslaw.com/for-richer-for-poorer-contracting-out-of-the-property-relationships-act-1976/)
Final Things to Check
Ensure:
- Your will works alongside the trust.
- You have the correct number of trustees – many trust deeds require that there be a specific number of trustees.
- Consider appointing an independent trustee, if your trust doesn’t already have one.
For a trust ‘check-up,’ or if you would like any further information, please call 04 970 3600.
