Trust Interests and Relationship Property Claims
Do you have a trust holding assets like the family home? Trusts are a popular way of protecting property and managing assets. However, there is misunderstanding that if a trust owns relationship property assets, this will serve as a complete barrier to a potential relationship property claim.
If you are in a qualifying relationship under the Relationship (Property) Act 1976 (“PRA”), your assets become subject to potential redistribution if that relationship ends. Generally, relationship property assets include the family home and household chattels, as well as any other property that was acquired during the relationship. The default position is that these relationship property assets are divided on a 50:50 basis. This aims to recognise the equal contribution of parties to the relationship, whether monetary or not.
When can someone make a claim against the trust property?
If your relationship property assets are held by a trust, they are not exempt from relationship property division.
The below are some examples where this may occur:
- If the property was already in a trust before the relationship began and there is a loan secured over the property. If either party contributes towards the loan payments from income or other funds earned during the relationship, it can be argued that those payments were made from relationship funds and hence a claim can be made against the trust assets.
- If one party contributed to the “improvement” of the family home (defined widely) then they may have an ability to claim against the trust.
- If one party has all the relationship assets in a trust, but you have made contributions (in money or services) to acquiring, preserving or enhancing the trust property, you could make a claim. Your contributions must exceed the benefits received. For example, you invest money into a trust-owned family business and work for that business without receiving income.
From these examples, one thing is clear, simply owning assets in a trust does not fully protect them from claims by your partner or spouse on separation.
Your options: Contracting Out Agreement
If you do not want the default positions of the PRA to apply, and seek to protect you and your partners respective interests in relationship and trust assets, you can enter into a Contracting Out Agreement. A Contracting Out Agreement needs to be entered into prior to separation. It can be made at any stage during the relationship and can determine how your property is to be divided on separation or death. This agreement would be followed in the first instance, rather than the general default position. While discussing these matters with your partner can be uncomfortable, it is an important conversation to have.
Conclusion
Although having your assets in a trust can be useful, it does not necessarily trump the provisions of the PRA. To prevent claims being made against relationship property held by trusts on separation, it is recommended you speak to a lawyer about entering a Contracting Out Agreement during your relationship. This allows you to and your partner to discuss and agree on a fair outcome in the event you and your partner separate (or upon death).
Special thanks to Law Clerk, Juliette Lidgard, for her assistance in writing this article.
