The Limits of Trusts in Relationships
It’s important to have the right legal structures in place when dealing with relationship property - especially if you're trying to protect your assets.
When Dave separated from his wife, he had enough funds from their settlement to put a deposit on a new house. He also applied for his KiwiSaver to be withdrawn under the “second chance, first home” regime. He was determined to protect his assets if he got into another relationship and decided to set up a trust to put his new home in.
A year later and Dave was back on the dating scene. He went on a few dates before meeting Kate who he immediately clicked with. Their relationship got quite serious quickly and within a couple of months Kate moved into Dave’s property. They came to an arrangement early on that Kate would pay a fixed amount to Dave each fortnight to cover the costs relating to the house and that they would split the utility costs.
Things went well for the first couple of years. However, just over three years into their relationship, Kate said that she didn’t think Dave was “the one” anymore and she had decided to move across to Sydney.
Dave was sad that the relationship had ended but was relieved that he had set up a trust for the house to go into.
That was until he received a letter from Kate’s lawyer. Dave found the letter to be very aggressive - it said that while the property was in a trust, Dave had only set the trust up to ensure that Kate’s rights under the Property (Relationships) Act could not be asserted. It said that Dave had applied relationship property to the trust and Kate was making a claim for that relationship property and for the increase in value of the property from the start of their relationship. She was also claiming half of what Dave had saved from his salary, during the relationship.
Dave was flawed. He didn’t know what to do, other than to get his own legal advice. So, Dave went to see a lawyer recommended by a friend who specialised in both trusts and relationship property. She firstly told him not to be too alarmed by the aggressive tone of Kate’s lawyer’s letter. She said that often lawyer’s letters could read like that, but once you cut through the tone, it was more of a fact-finding letter.
She did tell him though that the law around trusts and relationship property had changed quite a bit over the last ten years and that trusts were no longer a guaranteed way of protecting your property in the event of a relationship property breakdown – in particular, the family home could still be at risk. She said it was likely that the value of the property at the time that Kate moved in would not be claimable by Kate, but that any payments that Dave had made off the mortgage using his salary (which is relationship property) would potentially be claimable and even some of the natural increase in value of the property. She said this area of law was very nuanced and could in the end come down to negotiating an amount to pay Kate to satisfy any claim that Kate may have.
This was distressing to Dave – he had set up the trust confident that he would be protecting his assets.
He asked the lawyer, “What more could he have done?” She advised that trusts were a very important part of asset planning and protection, and could, in some circumstances, keep assets very separate. However, there was a different set of rules for the family home and that her advice would always be to enter into a contracting out agreement (or prenup) to make sure it was clear that your partner was agreeing that she or he would not have a claim against any property whether that be in a trust or not.
If you are in a relationship and want to make sure that your partner does not have any claim on assets either in your own name or in a trust, you need to take appropriate legal advice. Having the right structure in place, can save significant stress later.
If you feel you could use some specialist advice for your personal situation contact our Trusts & Wealth Protection Team.
