Dan operates a large dairy farm owned by his family trust. The trust was established by Dan’s grandfather. The trustees of the trust are Dan’s parents. Dan is a beneficiary of the trust and an only child. Dan grew up on the farm and always intended to work the farm when he had finished his university degree. There was an understanding between Dan and his parents, partly verbal and partly written in letters to Dan, that when it was time for the trust assets to be distributed, that the farm was “earmarked” for Dan.
Dan met Kylie a few years ago and fell in love. After they married, Kylie moved into the farmhouse and she and Dan took over the operation of the farm from Dan’s parents. At this time, the farm was worth about $1.2 million. Kylie and Dan had three children. Kylie cared for the children, helped out on the farm when she could and did the accounts for the farming partnership. Kylie and Dan reinvested in the farm over the years and it did well with its value increasing significantly to about $4.5 million.
Sadly after 17 years together, Dan and Kylie separated. Kylie moved into town with their youngest child leaving Dan alone on the farm. Dan has received a letter from Kylie’s lawyer. Kylie is making a relationship property claim for a share of the farm. Dan thinks this is not possible as the farm is not his or Kylie’s, its owned by his family trust. Will Kylie be successful?
There are an increasing number of decisions from the Court in which trusts have been “busted” by the Court. As a result, farm assets have been divided as part of a relationship property claim. Even trusts which have been established for many years are not safe from claims.
In a case similar to Dan’s situation, the Court found that the ex-wife had a successful claim. This was because the Court found that a constructive trust existed in favour of her ex-husband. A constructive trust is a trust which is able to be construed from the circumstances. Although there is no written trust deed, a set of circumstances creates a trust situation, where ownership of assets is held for the benefit of someone else. The Court relied on the fact that there was an understanding and agreement between the ex-husband and his parents that the farm would one day be his, meaning that the farm was his separate property. Because the ex-wife had done work on the farm and relationship funds had been reinvested in the farm, she was entitled to a half share of the increase in value of the farm.
In Dan’s situation, it is possible that Kylie would successfully make out a claim for a half share of the increase in value of the farm, being $3.3 million, over the duration of the marriage. How could Dan have prevented this from happening?
A trust does offer protection from a relationship property claim, however it cannot be relied upon as the sole means of protection. The best protection is a contracting out agreement. A well drafted contracting out agreement can provide that any assets which either party receives as a beneficiary of a trust will be their separate property. The contracting out agreement will also ensure that the other spouse does not have a claim to any increase in value of the other’s separate property. We are able to review your current farm ownership structure and provide you with advice as to how best protect your family farm from a relationship property claim. Contact kirsty@gallie.co.nz or shelley@gallie.co.nz.