Legal disputes over property held in trusts after relationships break up will "go through the roof" if the Government picks up Law Commission recommendations, a leading trusts lawyer has warned.
The commission yesterday released its recommendations for a long overdue tidy-up of the law around trusts which hundreds of thousands of people use to hold assets, such as the family home, businesses and land.
While the thrust of the commission's recommendations deal with trusts' basic legal foundations with an entirely new Trust Act, it also makes recommendations around tackling the use of trusts to shield property after marriages, civil unions, and defacto relationships break up.
It wants an amendment to the Property (Relationships) Act to give courts the power to make orders requiring cash or property to be paid out of a trust to compensate a disadvantaged ex-spouse or partner. The order would only apply where the disadvantaged partner's rights are defeated by property being held in a trust and there are not enough assets outside the trust to pay them. At present courts can only make orders for payments from trust income rather than the assets themselves.
But trust law expert Bill Patterson, who was part of the group of lawyers who worked with the commission on the review, warned against the property law amendment.
"If they pass that particular piece of legislation, litigation is going to go through the roof."
At present courts had very limited ability to interfere with trusts.
"The rules are that if relationship property has been put into a trust and has the effect of defeating the relationship property claim, you don't look at the trust first, you can only interfere with the trust to the extent of income.
"You can't bust the trust.
"If this recommendation goes through it's going to be open slather. I just shudder, the courts are going to be overloaded with fights."
Mr Patterson said he recognised people had concerns about the property act "but there are so many other things that are wrong with that act it's just a pity they don't get a group of top-end family law practitioners who are seeing this stuff all the time and sort it out".
Law Commissioner Geoff McLay defended the commission's decision to include the recommendation, saying that during the review "this was one issue that people kept on coming back to".
"What's happening is courts are perceiving a degree of injustice as a result of the distribution of assets to trusts.
"It was a strongly held view of the commissioners that this was something that perhaps ought to have been done a while ago. The time to do it was now."
The National Council of Women yesterday welcomed the move with national president Barbara Arnold saying that in most disputes the amendment would affect, women were disadvantaged.
Changes intended to clear confusion
A rejig of laws around trusts may aid the Inland Revenue Department and others who challenge the use of the structures to shield assets, the Law Commission says.
The commission's review of trust law released yesterday recommends a new trust act which would clarify the role of trustees, who administer trusts and the property held within them, and the rights of beneficiaries in whose interests the assets are held.
Law Commissioner Sir Grant Hammond, who led the review, said there was confusion in the community about trusts, and the principal legislation dealing with them, the Trustee Act 1956, was "sadly in need of modernisation".
"In parts it is unreadable ... outdated and convoluted. We believe a new Trusts Act is essential."
Trusts were long used to shelter income from tax but that has happened less since the top personal and trust tax rates were aligned. Nevertheless, the 2007 Tax Working Group estimated income sheltering using trusts costs the taxman about $300 million a year.
Law Commissioner Geoff McLay told the Herald courts were already able to determine whether trusts were being used for anything other than their stated purpose and effectively decide they didn't exist.
However that had given rise to "some very confused case law".
A key recommendation in the review was that courts would be able to find that a trust had no legal standing if the person who established it continued to manage the assets it held "as if they are their own personal property".
"We say that ought to be in the statute for clarity," Professor McLay said.
• The characteristics of a trust are outlined in a new act.
• The act sets out mandatory duties for trustees.
• Mandatory requirements for the provision of information to beneficiaries.
• Trustee liability for breach of trust or dishonesty, or gross negligence cannot be limited.
• New rules around trustee appointment and removal, and change of trustee powers.
• The Property Relationship and Family Proceedings Acts are amended to give a disadvantaged spouse or partner access to property that has been transferred to a trust.
• The Family Court should have jurisdiction to resolve issues in respect of relationship property.