The Ex-Files: Jeremy Sutton - When is a trust protected from a new marriage?

Family trusts are a stable of New Zealand property ownership. Photo / 123RF

OPINION:

Q: I settled a trust with my first wife around 15 years ago. She passed away five years ago, and I have since remarried. Nothing has changed with the trust which continues to own my home, a bach and some shares. No new assets have been purchased. I am a beneficiary of the trust along with my children from my first marriage and any future grandchildren.

My current wife is not a beneficiary, but we live in the trust-owned home and we use the bach. I also receive income from the dividends from the trust-owned shares. Is the trust protected from my new relationship?

A: Family trusts are a stable of New Zealand property ownership. Subsequent de facto relationships and marriages are becoming more common, which means the scenarios in which these trusts operate are more complex.

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.

Claims under the Property (Relationships) Act 1976

Generally, once you are in de facto relationship or marriage for more than three years, if you separate you have to share half of the property that was accumulated during the marriage, ie the "relationship property". Special status is given to property such as the family home and chattels and these assets will be shared regardless of whether you owned them prior to the relationship or not.

However, the Property (Relationships) Act 1976 only applies to property which you each personally own. Relationship property does not encompass property owned by a trust, even if one or both of the parties to the relationship are trustees or beneficiaries.

There can be claims made against trusts in circumstances where a trust acquires property during the relationship which defeats a party's rights under the Act. The Court has the power to set aside dispositions which are made in order to defeat the claim or rights of a party under the Act and can compensate for relationship property transferred to the trust.

In your circumstances, because the trust has not acquired new assets during the relationship it is unlikely that there would be any grounds for a claim against the trust under the Property (Relationships) Act 1976. The benefits you receive from the trust do not give rise to a claim, but it is important going forward that you do not contribute funds to the trust or use the trust to purchase assets which would otherwise fall into the property pool.

Nuptial settlements

In circumstances where parties are married, another claim that can be brought against a trust is under section 182 of the Family Proceedings Act 1980. These claims centre on the issue of whether a trust is a "nuptial settlement".

A nuptial settlement is one 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.

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 the parties if the marriage had continued against the position now that the marriage has ended and order an adjustment be made to compensate for that difference in position.

A trust settled during the relationship where one or both the parties are beneficiaries is generally likely to be a nuptial settlement.

Where a trust has been settled prior to the marriage the situation is more complex. It will depend on when the trust was settled and whether there have been any amendments to the trust deed or new settlements onto the trust.

For example, a trust that is settled during the de facto relationship but prior to the marriage for which only one party is a beneficiary, is still likely to be a nuptial settlement because there is sufficient proximity between the settlement and the marriage.

In your situation, where the trust was settled well prior to your current relationship and for an entirely different family unit, there was not sufficient proximity between the settlement and your current marriage for the trust to automatically be a nuptial settlement.

However, what has happened with the trust since it was settled can determine whether it subsequently becomes a nuptial settlement.

For example, in a recent Supreme Court decision, a trust that was settled well prior to the relationship for the benefit of the husband and his children from a previous marriage became a nuptial settlement when the trust deed was amended to include the wife as a beneficiary.

Settlements of assets into a trust during the relationship can also cause a pre-relationship trust to become a nuptial settlement. For example, if the trust purchased a new family home for you and your wife, this could open the door to a claim.

As it currently stands, it is unlikely your trust would be treated as a nuptial trust. The trust was settled well prior to your relationship, it owns the same assets it owned prior to the relationship, and the trust has not been amended to include your current wife.

Additional protection

To ensure your assets are fully protected, you can enter into a Contracting Out Agreement (a prenup), which is a legal agreement between you and your wife, outlining how you will divide your assets if you separate. These agreements can address trust property.

In your situation an Agreement would be wise if the circumstances with the trust are going to change in the future, for example if you and your wife want to purchase a new family home through the trust. Utilising an agreement will ensure your trust assets remain protected.

• Jeremy Sutton is a senior family lawyer specialising in divorce cases where there are significant assets, including family trust and complex business structures.