Relationship Property and Trusts

How much can you really trust your trust? Is your trust still protecting your assets including your family farm and business?

Many of you will be aware that there have been recent changes to New Zealand trust law. But are you aware of the risks your trust may face with respect to a relationship property claim? 

There is a common misconception that if you have a family trust owning assets, such as the family farm, it will protect those assets from a relationship property claim. Unfortunately this is not always the case. 

There has been recent developments through the Courts that have made some trusts vulnerable to a relationship property claim.

Picture this....

Mike’s trust owns a dairy farm. Mike’s parents settled Mike’s trust some years ago. Mike and his parents are the trustees of Mike’s trust. Mike is their only child and he has worked on the farm since he was 15. He is a beneficiary of Mike’s trust. Mike worked hard on the farm and has barely had time to even think about meeting anyone. 

But one day Mike met Molly. Molly came from a farming family. She spent a lot of time on the farm with Mike. Mike thinks it is a match made in heaven. Molly moves in with Mike and helps with the fencing, milking, rears the calves and also helps Mike renovate the homestead on the farm that Mike lives in. 

Molly doesn’t have any assets aside from a couple of horses. Mike would like to marry Molly but he is not sure that he would want Molly to have a share in the farm at this early point in their relationship. Luckily, the farm is owned by Mike’s trust so Mike thinks it is protected from a relationship property claim.

Mike and Molly get married, however the relationship starts to gradually break down. After about four years of marriage Molly calls it quits and moves out. Mike is shocked to receive a letter in the mail from Molly’s lawyer in which Molly makes a claim against the assets of Mike’s Trust. Mike is even more shocked when he sees his lawyer and is told that Molly may have a valid claim against the farm and is entitled to a half share of the homestead.

Where a spouse or partner makes contributions to trust assets that lead to an increase in the value of those trust assets, that spouse or partner may have a claim for a share of the trust assets. Contributions can be income earned or work done and may also include contributions to the household. The homestead on the farm is treated as relationship property where the parties have been in a relationship for three years or more. Relationship property is divided equally at separation. 

While this is only one example, what is clear is that the mere ownership of assets in a family trust is not a complete protection from claims by your partner or spouse.

You can however, protect yourself and your assets. This can be done by way of a contracting out agreement (also known as a “pre-nup”). 

If you have assets in a trust then you should seek legal advice to ensure that your trust is providing the protection you want.

If you have any queries about relationship property and trusts, get in touch with us.