In the second of a two-part series, Jane Phare looks at why it will become harder to hide relationship property in trusts, and talks to industry experts about how to set up trusts properly, including tips on what to watch for.
There's little doubt that the power of trusts, often used to protect assets from a former spouse or partner after an acrimonious split, will diminish within the next couple of years. The question is, by how much.
That decision is in the hands of Justice Minister Kris Faafoi and ultimately the Government after the Law Commission was tasked with reviewing the outdated Property (Relationships) Act 1976 (PRA) to bring it in line with a changed society.
READ MORE IN THE SERIES:
• Trust busting: is it the beginning of the end for hiding relationship property?
No longer are mum, dad and the kids the norm. Often there are second and third marriages and relationships, and different sets of children, to consider. Setting up a trust, or trusts, has become the go-to measure to protect assets from the grasp of outsiders.
The issue with trust property is that it generally falls outside the PRA. As a result, a spouse or partner wanting a fair share of relationship property is forced to take on lengthy, expensive and often crushing legal battles.
The commission wants the Family Court to have greater powers to divide trust property that was "produced, preserved or enhanced by the relationship". But because tampering with trust powers is a complex and contentious issue, it's a decision the Government is unlikely to make in haste.
It's waiting for the commission to complete its review of the law of succession (after death), due by the end of this year. However, some predict that with an election year on the horizon, changes to the PRA, including trusts, won't see the light of day until after 2023.
During the Herald's investigation into New Zealand's flawed system for settling relationship property disputes, trusts were often at the centre of some of the worst case studies. But industry experts say if they are set up and managed well, trusts don't need to add to the pain of a relationship split.
Sally Morris, a partner in Auckland law firm Morris Legal, has seen an increase in the number of clients wanting to set up discretionary trusts, often referred to as "mum-and-dad" trusts.
Morris recommends what she calls a "bespoke package" for people wanting robust protection of their pre-relationship property. That includes a contracting-out agreement under section 21 of the PRA, known as a prenup, as well as a trust. And they should have an up-to-date will. Agreements should be updated at least every five years or when family circumstances change, she says.
"A lot of the problem that we're seeing at the other end is because there might be agreements, but they're 18 or 20 years old so they're no longer fair."
Morris thinks all couples who own assets before they enter a relationship should consider an agreement under section 21. She points out that there is no jurisdiction under the PRA for dealing with offshore property. Add misused trusts into the mix and the issue of dividing property becomes extremely complex and expensive.
Auckland QC and divorce lawyer Lady Deborah Chambers agrees that both a contracting out agreement and a trust are needed if acting for a wealthy person who wants their assets protected.
"My question is, should that be right?"
Couples entering into a contracting-out agreement are required to get independent legal advice before signing but setting up a trust requires no such safeguards. Chambers has acted for women who have been married for 30-odd years and have had no idea the family home was in a trust to which she had no access.
It's an issue the Law Commission has picked up on but has stopped short of recommending legal advice when settling property on trust. Instead, it favours amending section 44C of the PRA to allow a court greater access to a trust that holds relationship property. Partners will still be able to contract out of settling claims under the new act.
Poorly managed trusts can make settlements complicated
So do trusts add an unnecessary layer of complexity to relationships, particularly in the event of a split? Yes and no, Morris says.
"I think that trusts have a very important role to play still in asset, estate and succession planning. Our firm sets up trusts for people every day and often when we deal with people at the end of the relationship, the trust actually does offer the protection that they intended it to."
The problem comes when people misuse trusts, often because they have been set up without good advice and people don't fully understand their obligations as a trustee or their entitlements as a beneficiary.
"People just treat the trust property as though it's their own and it's not. When you settle a trust, you're transferring ownership of the property to the trustees."
Bethan Read, special counsel for Morris Legal, warns that all parties need to understand the terms and powers of a trust, including who is the settlor, who are the trustees, and who holds the power to change the trustees or beneficiaries.
Family Court to have more power over trusts
The Law Commission wants the court to have broader powers over trusts that would include ordering one partner to pay compensation to the other, ordering the trustees to distribute capital from the trust, varying the terms of the trust, and resettling some or all of the trust property on a new trust or trusts.
Lead commissioner and vice-president of the Law Commission Helen McQueen admits that finding middle ground was "challenging" because of opposing views. Many in the industry warned the commission not to "throw the baby out with the bath water".
McQueen: "We absolutely acknowledge that trusts have a legitimate purpose. They're a very long-standing legal construct. "
The opposing views on the issue are obvious from the responses to the commission's proposals. The New Zealand Law Society supported the recommendations, saying that the "inappropriate, misguided or unfair use of trusts has resulted in much litigation and injustice".
But the Auckland District Law Society thinks the recommendations go too far, arguing that the amendments are too broad and "inconsistent with the spirit of trust law and the principles of equity". Other critics say the proposed amendments will still leave trusts open to disputes and years of litigation.
Chambers agrees, saying every scenario is different, including the terms of the trust, where the wealth came from, and who contributed. The law will need to allow discretion in order to achieve fairness but that will introduce uncertainty.
"No matter how much case law (there is), how robust trusts are and no matter which of the Law Commission's recommendations are followed, there will always be litigation around trusts as long as they exist."
Children are tackling their parents' trusts
Increasingly she's seeing (adult) children having a go at their elderly parents' trusts because as beneficiaries they have more ability to contest.
"They get impatient and don't want to wait. That's happening all the time, " she says. "It's not their money but they've got rights on it. And if you put it in a trust, that's your risk."
Chambers, who questions whether trusts should exist at all, warns that people need to be "very careful" before using a trust because the law has changed so much, including the Trust Act 2019 which gives beneficiaries wider powers.
And her final warning: "The risk is that one of your kids marries some dreadful divorce lawyer!"
10 tips: what you need to know about trusts
• Both parties need good legal advice and to understand how a trust operates.
• Parties will need to relinquish control of the trust assets because they are no longer "owned" by individuals.
• Review the trust regularly, particularly if family circumstances change such as the birth of a child.
• If you have a pre-relationship trust, keep trust property separate; don't add property acquired during your relationship or pay a mortgage of a trust property with your income.
• If you set up a trust during a relationship to protect separate property, the same applies. Your partner should not be a trustee or beneficiary.
• Only include beneficiaries in the trust who you want to benefit now. You can always add others in the future.
• Trust the trustees. They have significant duties and there are steps you can take for non-compliance.
• You can be a trustee of your trust but don't be the only one, and always have at least one trustee who isn't going to benefit from the trust.
• Question whether you really need a trust.
• If you're already in a relationship, it may be too late to settle a trust for protection on divorce.