When a relationship ends, separating partners often face tough conversations about dividing property. If a trust is part of the financial arrangements, things can become even more complex. Many people in New Zealand use trusts to protect family assets and plan for the future. While trusts can be effective tools, they are not immune to court scrutiny.
In some cases, the courts can “look through” or even override a trust if they believe it has been used to prevent a fair division of property. Understanding how this works and what steps you can take to protect your interests is essential if you have a trust and are going through a separation. Let’s explore the circumstances that impact trust disputes.
The Importance of Trusts During Separation
Family trusts are commonly used to safeguard assets from business risks, creditors, or future claims. They allow people to hold property such as a family home or investments outside their personal ownership, sometimes in the belief that these assets will be protected should the relationship end.
However, the courts take a close interest in how a trust is structured and managed. , Simply putting assets into a trust will not always shield them during a separation.
Can Trust Assets Be Considered Relationship Property?
Assets in a trust are generally excluded from the relationship property pool, but there are a number of exceptions. Courts can look beyond the trust deed to see how the trust operates in practice. The courts may decide trust assets should be shared if:
- One partner has excessive control over the trust, such as being the settlor, sole trustee, and a beneficiary.
- The trust is a sham and was never genuinely intended to operate as a trust.
- Assets were transferred to the trust for the purpose of evading the other partner’s rights under relationship property law.
- Relationship property has been disposed of to the trust.
- The trust was established during or has some connection to the marriage.
How Constructive and Trusts Work
Even if a trust is valid, the courts can use equitable remedies to enforce fairness. Both remedies allow the courts to acknowledge a partner’s contributions, even when the legal ownership of the assets sits with a trust.
Constructive trust: These may be imposed when one partner has made significant contributions to trust property, and it would be unjust not to recognise their interest. For example, if a partner has invested considerable time or money in improving a trust-owned property, they could be awarded a beneficial share.
Section 44C of the Property (Relationships) Act 1976
Section 44C is one of the main statutory tools for addressing trust-related disputes during separation. It allows the court to order compensation if relationship property has been transferred to a trust in a way that disadvantages the other partner’s rights. Key points here are:
- It only applies to relationship property, not separate property.
- There is no need to prove intent, only that the transfer had the effect of reducing the other partner’s entitlement.
- The usual remedy is compensation, rather than removing the assets from the trust.
This provision is designed to prevent transfers aimed at avoiding the fair division of property after separation.
How to Protect a Trust During a Relationship
The most effective way to protect a trust from a relationship property claim is by entering into a prenuptial agreement (known as a contracting out agreement in New Zealand).
Talk to Sharon Chandra to Know How Your Trust Stands
Trusts can be a powerful tool, but they are not guaranteed to protect assets during separation in New Zealand. Courts can and do examine trusts and break into trust structures.
If you are separating and a trust is involved, it is important to speak to a lawyer experienced in trust disputes and relationship property. Sharon Chandra is a trusted family lawyer who can provide guidance and expert advice. To get the best chance of protecting your interests and following the right legal steps, get in touch today.