Imagine this. You’ve just met the perfect person, with whom you wish to share the rest of your life. Things are great. The relationship is moving quickly – you soon move in together and start to purchase things together. You know that this is true love, so you don’t bother with a contracting out agreement (a “prenup”).
Let’s also say, that prior to the relationship, your parents gifted you a house – how kind! During the relationship, you decide to create a trust, the “Love Trust”, to which you transfer the property. You are the settlor of the trust, and the three trustees are yourself and two independent Trustees. The discretionary beneficiaries are yourself and your new partner. You and your partner live together on the property. Your partners contribute in various small ways to the property, but they don’t pay rent or any outgoings.
Three years have passed, and the relationship isn’t working out. After separating, you decide that it would be best to remove the property from the trust’s assets. You form a company and move the “Love Trust” property into the company’s asset base.
But, oh no! Your ex-partner is now claiming that they have a beneficial interest in the property. You want to know, does your ex-partner have any claim to any of the Love Trust’s equity?
Under the PR Act, your ex-partner may have a claim to the trust’s equity, if they satisfy certain criteria. In deciding whether your ex-partner would have a claim, the Court would ask the following questions. Firstly, since the relationship began, was relationship property disposed of into a trust? Secondly, did this disposition have the effect of defeating your ex-partner’s claim on the property? Lastly, would this claim be better made under a different section of the PR Act? If the Court is satisfied with the answers to the questions above, then they can make various orders, including that you pay your ex-partner a sum of money from either relationship or separate property.
Arguably, the elements could be proven, given that the property was the family home you shared together, and it was disposed of into a trust during your relationship. Furthermore, had the property not been transferred, it is likely that your ex-partner would have had a claim to it, given that the property was your family home, and likely would have been considered relationship property under the PR Act. Accordingly, there is a possibility that your ex-partner could have a claim to a portion of the trust’s equity.
Even if you can avoid some of the above factors, you’re not out of the woods yet. The FPA also allows ex-partners to claim against certain assets. The FPA gives the court the power to vary nuptial settlements (usually trusts) following the dissolution of a marriage or civil union and make such orders for the benefit of the parties or either of them. This is a wide discretion given to the court to vary, amend or resettle a trust as a court sees fit at the end of a relationship. It is a significant threat to trusts which are considered to be nuptial settlements.
Let’s vary the fact scenario a bit. Let’s say that before the relationship, you transfer the property into the trust. Are you still liable to your ex-partner then?
Potentially. Unlike the above scenario, your ex-partner can’t easily rely on the PR Act. However, under common law, it is possible that a “constructive trust” could have formed. If a constructive trust has arisen your ex-partner may be entitled to a portion of the trust’s equity. To show a constructive trust has arisen, your ex-partner would need to prove four factors. Firstly, they made contributions to the trust (whether direct or indirect). Secondly, they had an expectation of an interest in the trust assets. Thirdly, that that expectation is reasonable, and fourthly, that they should reasonably expect to yield an interest.
In the fact scenario above, we said that your ex-partner didn’t pay rent or outgoings and that they only made minor contributions to the property. However, it is important to note that contributions need not be financial. The contribution can be entirely indirect – for instance, if your ex-partner contributed to the groceries while you paid the mortgage. So, depending on how your ex-partner contributed to the property, it’s possible that they could have a claim. The success of that claim would be dependent on how much evidence your ex-partner has and what weight is given to their contributions by the Court.
With all the above said, cases are always dependent on their own peculiar facts so the outcome of one case may not necessarily fit all case scenarios.
The moral of the story – trusts are by no means a watertight way of securing assets against the claims of ex-partners. The best solution to protecting your property against ex-partners is to enter into a contracting out agreement. Read all about these amazing agreements here, and for further information, contact the friendly team at Wakefields Lawyers today on (04) 970 3600 or email email@example.com.
– Frankie Flaws (Solicitor) & Kent Gammon (Senior Associate)