The Ex-Files: Jeremy Sutton on what happens to assets in a trust following a break-up

The treatment of assets in trusts after a separation is complicated by archaic law. Photo / 123RF

OPINION

Q: My wife and I established a family trust during our marriage. The trust owned most of our assets including the family home and our tech services and recruitment business. We have a few separate items of value purchased before we married, including shares. If we were to separate, how are these assets of the trust treated and how is our separate property treated when it comes to dividing our relationship property?

Trust assets

Trust assets are not relationship property so the Family Court cannot make orders dividing the assets under the relationship property legislation.

To divide the trust assets, you would need to apply for orders under section 182 of the Family Proceedings Act 1980 to vary the trust deed to allow the trust’s assets to be divided equally between the spouses.

Section 182 derives from legislation originally drafted in 1867 when women could not own property in their own names. At that time, it was common for the husband to be gifted money by the wife’s family for the purpose of buying a family home. Back then, the section was used by the court to avoid the wife being left empty-handed in the event of separation.

Recent case law has seen the provision used by the court in quite different circumstances – to divide assets of family trusts following the breakup of a marriage.

What are the requirements in a section 182 ‘nuptial settlement’ application?

The parties’ marriage or civil union needs to have been dissolved, which can occur two years following separation. This claim is not open to parties in de facto relationships (yet another indication the legislation is outdated).

The court will consider whether there has been a “nuptial settlement” – where assets have been settled on a trust during or in contemplation of the marriage/civil union.

The court will then look at whether there is a disparity between what the spouse’s financial position is now and what it would have been if the marriage/civil union had not been dissolved.

What usually happens when there is sufficient goodwill between parties upon separation

Family trusts remain relatively common in New Zealand. When a couple separate, how the trust assets are to be divided and the steps for implementation are simply recorded in a Separation Agreement. In a “typical” long marriage, trust assets will usually just be treated like relationship property – to be divided equally. The Separation Agreement will not be technically binding in respect of how it deals with trust assets, but it is still the easiest and most practical option for recording division of trust assets at the end of a relationship.

Separate property assets

Shares and bank accounts that have been acquired before the relationship and kept separate remain the person’s separate property.

Summary

It is risky to assume that because assets are held by a trust, they are immune from claims from an ex-spouse. By acquiring assets in a trust structure, it will normally create complications in a separation. While trusts can offer some protection from relationship property and Family Protection Act claims, consideration should be given to recording arrangements in a Contracting Out Agreement.

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