Recent changes to the Trusts Act have created a lot of complexity and questions for Trustees, and left many people wondering if a Trust is worth it at all...
Retaining assets in your own name exposes them to:
Relationship property claims.
Creditor claims; and
On your death, claims under the Family Protection Act from family members who seek to challenge your will.
It is perfectly understandable to expect that assets owned prior to commencement of a 'spousal' relationship should be separate property and should not become available to one's spouse.
Nonetheless, unless steps are taken to achieve that, pre-relationship assets will invariably become relationship property and will be divided between both parties equitably at the end of the relationship.
While this result can, and often is, overcome by contracting out of the Property (Relationships) Act 1976 (PRA), more commonly, (and I suggest, more reliably), pre-relationship assets can be protected by settling them on a trust prior to commencement of the relationship.
Trusts established either during a relationship or in contemplation of it are a different story. Attacks on them have greater foundation but this does not mean trusts are not always effective.
Attacks on them are difficult. The various bases for attacking trusts that have been established either during a relationship or in contemplation of it are discussed below.
Intentions to bequeath your assets are of course prescribed in your will.
But those intentions will be overturned by a successful claim under the Family Protection Act.
It may surprise you that potential claimants under that Act are not limited to your children but also include your spouse or civil union partner, a de-facto spouse, children of a de-facto relationship, grandchildren, stepchildren and in some instances your parents.
Invariably, you will intend that one or more of these categories of potential claimants does not participate in your assets on your death.
Where you retain assets in your own name (noting that the Family Protection Act does not extend to assets held in a trust), you become exposed to that result.
Personal Ownership Contrasted with Trust Ownership
In contrast to the discussion above, trust ownership of assets will:
As against relationship property claims, protect the assets except to the extent the person has a beneficial interest in the assets, the person's control over the trust itself constitutes relationship property for purposes of the PRA, the trust is in some way invalid (fails intention or is a sham) or a claim under either section 182 of Family Proceedings Act or section 44C of the PRA is successful.
As against creditor claims, protect the assets except to the extent the person has a beneficial interest in the assets, the person's control over the trust itself constitutes relationship property for purposes of the PRA, the trust is invalid, or it is established that a settlement has been made on the trust with the intent to default the interests of creditors; and
Defeat a claim made under the Family Protection Act, again subject to the trust being valid.
Suitability of Trusts for Succession Planning
Readers will be well versed with the flexibility that trusts offer in providing for multiple beneficiaries.
Trusts remain suitable in this respect notwithstanding anything contained in the Trusts Act 2019, and notably will defeat claims brought under the Family Protection Act.
Perhaps one gloss on this is the disclosure obligations to beneficiaries.
Those obligations favour a narrow class of beneficiaries - unlike before - which in turn limits, to some degree, the flexibility around trusts.
This can to some extent be overcome by appointing or removing beneficiaries from time to time but there are limits to the extent it is appropriate to do so.
Written by Peter Speakman of Speakman Law and summarized by Paul Davies.
If you need legal help with your trust, please contact peter@speakmanlaw.co.nz.