How do I protect my assets when starting a new relationship? The Ex-Files with Jeremy Sutton

Is a trust the best way to protect my assets from a new partner? Photo / 123RF

OPINION

Q: I have just started a new relationship. I would like to establish a trust to protect myself from any relationship property claim. I am thinking about appointing two family members who live overseas, my sister in London and my cousin in Paris. I have a few questions:

1. Do you have any recommendations in relation to the trust in respect of the new relationship?

2. Will there be any tax consequences of having overseas trustees?

3. Is it okay for the trustees to meet remotely or do they need to meet in person?

A: The new relationship

You should not rely on the trust to protect your assets from a relationship property claim by your new partner. In the past, some considered it sufficient to transfer assets to a trust before a “de facto relationship” began. However:

1. You may already be in a “de facto relationship” depending on how a variety of factors (set out in the legislation) are interpreted. To some degree this is subjective.

2. Even if you are not, a transfer of a property to a trust shortly before the beginning of a de facto relationship should not be relied on. Recently, the Supreme Court set aside the transfer of a property to a trust shortly before a couple moved in together because the court found the transfer was made “in contemplation of the de facto relationship”.

Therefore, were you to establish a new trust and transfer your assets to that trust, there are provisions in the legislation that a judge could use to enable your partner to receive a share of or compensation for those assets.

You and your new partner should negotiate and sign a contracting out agreement (“pre-nup”) setting out how your respective assets are to be divided in the event of your separation. You may still wish to establish a trust, but it should not be for the main purpose of protecting your assets from a relationship property claim for this relationship.

Tax consequences of having overseas trustees

I asked Sybrand van Schalkwyk, tax specialist with SVS Tax, whether having overseas trustees is a good idea. This is what he had to say: “Having overseas trustees is not a good idea from a tax perspective as that may create exposure to income tax, capital gains tax and other taxes in the jurisdiction where the trustee is tax resident. In addition, costly disclosures may have to be filed with the tax authorities where the trustee is resident or otherwise significant penalties may arise, even if there is no tax to pay.”

Most common law countries (such as Australia, United Kingdom and the United States) tax trusts based on where the trustees are resident and will consider a trust tax resident there in some cases even if only one trustee is resident in that country (for example Australia).

The taxation of trusts is complicated in New Zealand. The nation has a settlor-based regime. In other words, as long as the settlor is resident in New Zealand the trust will always be taxable in New Zealand on its worldwide income. It is therefore not possible to shelter the income of the trust by using foreign trustees, in case that is what you were thinking by appointing the foreign trustees, but it sounds like that was not your plan.

Whether the trustees could meet remotely

By this stage you are probably re-thinking the appointment of your overseas-based sister and cousin. However, there is nothing in the legislation or case law preventing the trustees meeting remotely. The important point is that the trustees should have a formal meeting regularly (at least once a year) and written minutes of those meetings should be kept and signed by all trustees. The trustees need to keep a structured paper trail of all decisions and meetings.

Jeremy Sutton is a barrister and family lawyer at Bastion Chambers.