TRUSTS AND RELATIONSHIPS

Breaking up is not hard to do.
Its just not easy to deal with the aftermath from a legal perspective.
What’s the starting point”
If parties go their separate ways, the starting point is that once they’ve been together for three years or more, most assets are either relationship property and will be divided equally.
Relationship property and separate property
Separate property can be retained by the partner who owns that property at separation. Separate property will include gifts, estate distributions to one or other of the parties, and trust distributions to that party from a Trust formed by someone else.
Blended families
Many people though, have Trusts that one or other of them formed before their relationship started, or Trusts formed by one or both of them during their relationship.
This is often the case especially with blended families where, for example, he was previously married and they had one child before she left him; and her first partner died but not before they had two children. Now they are together and have a child of their own as well.
Situations like this are common these days.
How do you cater for everyone fairly?
With great difficulty.
Trust property
Because a Trust is a separate legal entity, Trust property is neither separate property nor relationship property.
So how is trust property treated? And where does it sit in the event of a relationship breakdown?
However in basic terms, a distribution from a Trust formed by a third party to one or other partner will be the separate property of that partner unless it becomes intermingled with relationship property, in which case it can lose its “separate” character and become relationship property.
Trusts formed prior to the relationship
Where a partner establishes a Trust prior to the relationship starting, the assets held by that Trust will be outside the relationship property net, on the face of it at least. The new spouse or partner may not even be a beneficiary of that Trust, and often this is by design, because of the partner’s desire to protect the assets of that Trust for the children of their first relationship.
What about the family home?
But what if one of the assets of that Trust is the family home which they now live in, and the new partner has contributed to the upkeep of that property? In that situation the family home may be relationship property because under relationship property law the family home and chattels are classed as relationship property.
Other property owned by a Trust might also be regarded as “property” which is to be dealt with under the relationship property regime. Mostly it will not be, because beneficiaries of a Trust only qualify to receive anything from the Trust at the discretion of the Trustees of the Trust.
Can the trustee’s powers be relationship property?
This very issue has been very topical of late. In Clayton v Clayton, substantial assets had built up in a Trust during the relationship of the husband and wife. The husband was settlor, sole trustee and a primary beneficiary of the Trust as well as having (supposedly in his personal capacity) the power to remove beneficiaries.
When they separated the husband exercised these powers for his own benefit. The Supreme Court found that the unconstrained nature of the powers held by the husband amounted to “property”, and because the assets had accumulated during the relationship, they were relationship property.
So it pays not to treat Trusts as failsafe in the relationship property situation. We strongly recommend that, if you have a complicated family situation or have any queries at all, you contact us for specific advice on phone 03-4500000 or scott@queenstownlaw.co.nz.