Trusts: Protecting Assets or Defeating Relationship Property Rights

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Trusts: Protecting Assets or Defeating Relationship Property Rights

Family trusts are widely used in New Zealand. They can be set up to achieve a number of purposes including asset and estate planning purposes or to obtain a tax advantage, but to what extent can trusts be used to defeat relationship property claims?

There are a number of legal mechanisms available to a spouse or partner who discover their relationship property rights affected by their spouse or partner transferring assets to a trust. The following are just some of the ways in which property transferred to a trust can be brought back into the pool of relationship property assets and available for division by the parties in the event of separation.

Property (Relationships) Act

The Property (Relationships) Act provides that the Court can order trustees of a trust to transfer property or pay compensation where property has been transferred to a trust “in order to defeat the claims or rights” of any person under that Act. The Courts have interpreted the phrase “in order to defeat” to include a person who transfers assets to a trust in circumstances where they must have known that by doing so they would be detrimentally affecting their spouse’s rights or claims under the Property (Relationships) Act.

The Act also provides that if a spouse or partner has disposed of relationship property to a trust and that transfer “has the effect of defeating the claim or rights” of the other spouse or partner then the Court can order the other party to pay compensation or to transfer some other property to the party who has lost out. The Court also has a discretion to order the trustees of the trust to pay compensation to the affected spouse or partner out of the income of the trust.

Sham Trust

It may also be possible for the party who has lost out because of the transfer of property to a trust to argue that the trust is a sham. A sham trust is a trust which is not genuine and is merely a facade. A sham trust is where the settlor of the trust never intended to give up control of the assets so that the trust is in effect just a fiction. In that case the Court can treat the assets as still belonging to the person individually so that they remain part of the relationship pool of assets.

Alter Ego Trusts

Similar to a sham trust is an alter ego trust. An alter ego trust is a trust under which the control of the trust property never really leaves the control of the settlor and the settlor treats the trust as their alter ego. It is a trust where the trustee has such control over the assets of the trust that they are in effect an extension of that person. In that case, the Court does not invalidate the trust as such but the Court can find that the trustees hold certain trust assets on a constructive trust for a spouse or partner, again bringing the trust assets into the pool of relationship property assets to be divided between the parties in the event of separation.

Section 182 of the Family Proceedings Act 1980

This section applies only to parties who were married but who have dissolved their marriage. It is not available to de facto partners on separation.

Pursuant to this section, the Court can enquire into any “ante-nuptial or post-nuptial settlement” made on the parties. An “ante-nuptial or post-nuptial settlement” is a trust which is made in contemplation of marriage and with reference to the interests of the married couple or their children. The Court has a broad power to modify such trusts in any manner that the Court thinks appropriate. It is used by the Court to provide relief to a spouse where the dissolution of the marriage has altered the circumstances of the parties so that the legitimate and reasonable expectations of the parties in the context of which the trust was established are no longer appropriate.

Accordingly, a spouse could argue that the trust was established on the underlying premise that the marriage would continue and that on dissolution of marriage that premise ceased to apply. That fundamental change therefore necessitates a review of the trust and a reallocation of the property in the trust to spouses and/or children of the marriage.

In conclusion, a trust may or may not be an effective method to avoid a relationship property claim depending on, among other things, when the trust was established, when assets were transferred to the trust and how the trust has been administered.

For more information on this topic, please contact Cathy Fisher on (09) 915 2412 or email