Q: I have a family trust that owns my family home and a couple of rental properties. I set up the trust after the breakdown of my first marriage to protect my assets for my children in case I got into another relationship. I met my current wife about 6 years ago and we had a child together. She stayed home to look after the children as I earned enough from my salary and the income from the rental properties to support us. We have since separated and she is threatening to take me to court as she believes she is entitled to a share of my home and rental properties. Can she do this?
A: Family trusts are incredibly common in New Zealand. Many people set up a family trust to try to protect assets for the benefit of themselves and their children. Trusts can offer some protection against a claim made by a future spouse but they are not bulletproof. There are several ways that a partner may be entitled to claim an interest in trust assets, whether they are a beneficiary of that trust or not.
How can trusts protect assets from a relationship property claim?
For couples who are married, in a civil union or de facto relationship of more than three years, the rules of the Property (Relationships) Act 1976 (PRA) will apply if they separate. The PRA governs how their relationship property will be divided. It will be divided 50/50.
Trusts can offer some protection against these rules as trust property is not relationship property so the PRA does not apply. However, there are some ways that a spouse or partner can still have an interest in trust property if they separate. Typically this is where relationship property has been transferred to a trust or where dispositions to a trust have been made in order to defeat their rights under the PRA.
One way that your partner could claim to have an interest in the trust property is if the trust is a "nuptial settlement". A nuptial settlement is a settlement that makes some form of continuing provision for one or both parties to a marriage in their capacity as spouses. There must be a connection or proximity between the marriage and the settlement.
Often whether a trust is a nuptial settlement will depend on when the trust was settled, the terms of the trust, in particular who the beneficiaries are, and any subsequent transfer for property to the trust or variation of the terms.
If the court is satisfied that there is a nuptial settlement, it has the power to make an order to vary a settlement. Typically, the court would compare the position of your wife if you had remained married in contrast to her position now that you are not. The court would then order an adjustment be made in her favour.
In your case, while you were married, the trust benefited both you and your wife as you lived in the trust-owned family home and income from the rental properties that was used to fund your lifestyle. Presumably, now that you are separated, your wife no longer receives those benefits.
If the court considers the trust is a nuptial settlement, then it is likely that the Court would find grounds to make some form of order.
In deciding how to vary the nuptial settlement, the court will consider six key factors which include:
- the extent to which your wife would have benefited from the trust had the marriage continued;
- the terms of the settlement and how the trustees are exercising or are likely to exercise their powers in the changed circumstances;
- who established the trust, and the source and character of the assets vested in the trust;
- the length of the marriage;
- the existence and needs of other beneficiaries; and
- the needs of children of the relationship (whether natural or stepchildren).
In cases where there have been long marriages and the positions are vastly different, the court can use its discretion to order that the trust be split into two new trusts. However, for shorter marriages the adjustment tends to be much more modest. Recently, the Supreme Court awarded a 15 per cent share of the assets owned by a trust settled by the claimant's husband. In that case the trust assets were pre-relationship separate property and the relationship was of relatively short duration lasting 6 years.
Important things to note
Unlike most of our relationship property laws, nuptial settlements only apply to those who have been married or in a civil union. The law does not apply to couples who are in long-term de facto relationships.
Before your wife can apply to the court for an order varying a nuptial settlement, your marriage must have been formally dissolved. In New Zealand, spouses can only apply for a dissolution of their marriage two years after separation. This is difficult for some people as they feel as though they cannot move on until the marriage is dissolved.
The law in this area is still developing and is currently uncertain. The recent case in the Supreme Court does provide some guidance but it is possible that the position could still change. The Law Commission reviewed relationship property law in 2018 and found that the law regarding nuptial settlements is out of step with the general principles and procedures that apply when a couple separates. The Government is yet to act on the Law Commission's recommendations, but it is likely that changes will eventually come.
Once your marriage has been formally dissolved, your wife could apply to the court for an order varying the trust on the basis of a nuptial settlement. You will need to get independent legal advice to advise you on the merits of her claim.
It would be best to try and negotiate the division of your property before it reaches this stage as court proceedings will take significant time and money which often prevents both of you from moving on. A family lawyer will be able to advise you on your position and help negotiate an agreement between you.
This article was first published with the NZ Herald.