Trust Busting: K v K is a 2022 High Court decision illustrating how trust assets can still be divided by the Court between separating spouses

In K v K, Mr and Mrs “K” had established a typical family trust during their marriage. The trust owned most of their assets: the family home, a forest and a takeaway business. Following their separation, Mr K had access to the family home and the business income while Mrs K resided with her mother. Mr K refused to co-operate in dividing up the trust’s assets.

Trust assets are not relationship property so the Family Court could not make orders dividing the assets under the relationship property legislation.

Mrs K’s lawyers applied for orders under section 182 of the Family Proceedings Act 1980 to vary the trust deed to allow the trust’s assets to be divided equally between the spouses.  The proceedings were transferred to the High Court.

Section 182 derives from legislation originally drafted in 1867 when women could not own property in their own names. At that time, it was common for the husband to be gifted money by the wife’s family for the purpose of buying a family home.  Back then, the section was used by the Court to avoid the wife being left empty-handed in the event of separation.

Recent case law has seen the provision used by the Court in quite different circumstances – to divide assets of family trusts following the breakup of a marriage.  

What are the requirements in a section 182 “nuptial settlement” application?

The parties’ marriage or civil union needs to have been dissolved. This claim is not open to parties in de facto relationships (yet another indication that the legislation is outdated).

The Court will consider whether there has been a ‘nuptial settlement’ – where assets have been settled on a trust during or in contemplation of the marriage / civil union.  

The Court will then look at whether there is a disparity between what the spouse’s financial position is now and what it would have been if the marriage/civil union had not been dissolved.

What was the outcome?

Mrs K’s lawyers had little difficulty satisfying requirements.  There was a nuptial settlement because the assets were transferred to the trust during the marriage.  Mrs K’s financial position (living with her mother and with no access to the business income) was worse than if the marriage had continued.

An order was made to divide the trust assets equally on both parties subject to adjustments.  Unsurprisingly, Mr K was also removed as a trustee.

What usually happens when there is sufficient goodwill between parties upon separation

Family trusts remain relatively common in New Zealand.  When a couple separate, how the trust assets are to be divided, and the steps for implementation are simply recorded in a Separation Agreement.  In a “typical” long marriage trust assets will usually just be treated like relationship property – to be divided equally. The Separation Agreement will not be technically binding in respect of how it deals with trust assets, but it is still the easiest and most practical option for recording division of trust assets at the end of a relationship.  Mr K would have avoided unnecessary Court involvement had he just divided the trust assets equally with Mrs K from the outset.

Further consideration

The case also re-iterates that itis risky to assume that because assets are held by a trust that they are immune from claims from an ex-spouse.  This case was relatively clear in that the trust was established during a “traditional” marriage and the assets were then transferred to the trust.  In Preston v Preston, a 2022 Supreme Court decision, the Court went further: an order was made even though the trust was established prior to the marriage beginning and it held assets owned by the husband prior to the relationship beginning. In Preston the parties had only been together 5 years and although both had children from previous relationships, there were no children of the marriage.  Regard was had to the fact that the wife was added as a beneficiary of the trust during the marriage.

While trusts can offer some protection from relationship property and family protection act claims, consideration should begiven to recording arrangements in a Contracting Out Agreement.