Trusts not always the safeguard you might expect

Luckily, there are other ways to protect yourself when an ex makes a relationship claim

It is a fairly common misperception that a family trust is an effective barrier to all relationship property claims by an ex-spouse or ex-partner of a beneficiary of a trust. This is not always the case.

A trust settled during a relationship will be unlikely to protect the assets that have been transferred into that trust during the relationship.

A trust settled prior to a relationship commencing will offer some measure of protection from a relationship property claim, but this is not guaranteed.

Many farms are owned by a discretionary family trust with the goal being to ensure that the farm will be protected and retained for future generations. In some circumstances however, an ex-spouse or partner will be able to successfully make a claim against the farm (and potentially livestock, plant and equipment and other assets owned by the Trust), even though the farm has been held in a family trust for a number of years.

Where an ex-spouse or ex-partner has made contributions to a trust asset and those contributions have caused, or in part caused, an increase in the value of those assets, those contributions will give rise to a claim for up to a half share of the increase in value.

Contributions may include foregoing income in order that it be reinvested in the farm and carrying out work to improve the farm, for example.

Another way in which an ex-spouse (not an ex-de facto partner) can make a claim against trust assets is under section 182 of the Family Proceedings Act 1980. In order to successfully make a claim under section 182, an ex-spouse must show the trust is a “nuptial settlement”, meaning it is sufficiently connected to the marriage, and that the exspouse has a reasonable expectation of an interest in the trust assets.

The courts have taken a wide approach to what is considered a “nuptial settlement” including trusts settled by third parties, such as parents or grandparents. For this reason, it’s very important that the trustees of a trust that owns a family farm consider taking steps to protect the farm if a new partner of a beneficiary moves onto the farm and in particular if that partner starts working on the farm. However, all hope is not lost. There is another way, besides a trust, to protect the family farm and other assets from a claim. This is by way of a Contracting Out Agreement, also known as a ‘ pre-nup’.

A Contracting Out Agreement enables couples to enter into an agreement to contract out of the equal provisions of the Property (Relationships) Act 1976. The agreement can make provisions declaring that an interest in the family farm or business remains separate property and not subject to equal division.

A Contracting Out Agreement is not only suitable for protecting the family farm, people also consider entering into one in the following situations:

When one party brings significant assets to the relationship;

When one partner has received an inheritance they wish to protect as their separate property but which they wish to use for the benefit of the relationship;

When the partners have children from a previous relationship and wish to preserve assets from their first relationship, for the benefit of their children; or

When one partner has a significant amount of debt that the other does not wish to become liable for.

If you need advice as to how to protect your assets contact your legal advisor.