Many people believe that family trusts are a foolproof way to protect assets from being split up when a relationship ends.  However, this is not necessarily the case.  

Recent case law has confirmed grounds on which the assets of a trust may be claimed against as part of a separation and division of property.

Assets put into trust in contemplation of relationship – Sutton v Bell

This case drew considerable attention as it progressed from the Family Court through the High Court, Court of Appeal, and eventually the Supreme Court.  

Mr Sutton and Ms Bell met in 2003 and became romantically involved.  Mr Sutton owned an Auckland property and the two agreed between themselves that it should not be considered relationship property, though this was not cemented by a contracting out agreement (also known as a pre-nuptial agreement or ‘prenup’).

In late 2004, shortly before the couple qualified as being in a de facto relationship under New Zealand law, Mr Sutton put the Auckland property into a trust.  This was done at Ms Bell’s suggestion.

The Courts have the power to set aside transfers of property (such as the transfer of the Auckland property to the trust) deemed to have been made in order to defeat the relationship property claims or rights of any person.

In Sutton v Bell, the decision hinged upon whether Mr Sutton knew that the transfer to the trust would have the effect of defeating a relationship property claim by Ms Bell against the Auckland property.  Plainly, Mr Sutton was aware that it would.  

The fact that the two had discussed putting that property into the trust specifically for that reason and were not legally in a de facto relationship when the transfer was made were not enough to prevent the Courts from “busting” the trust.

Notwithstanding the discussions that it should not be considered relationship property, the Supreme Court ultimately decided that the transfer of the Auckland home to the trust should be set aside (that is, treated as void).  The Auckland home was accordingly deemed relationship property to be divided between Mr Sutton and Ms Bell.

Claim against trust set up by third parties – C v C

This Family Court case showed that if somebody is receiving benefit from a trust and ceases to receive that benefit after separation, then the trust or its beneficiaries may be liable to compensate them for this loss. 

This case involved a Mr and Mrs C who were married for 34 years before separating in 2010.  During their marriage, Mr C’s parents set up a family trust of which he was a beneficiary.  This family trust contained a 56-hectare property that Mr and Mrs C took over in the early stages of their marriage.

The couple ran this property as a beef farm and then a chicken farm for a combined 19 years during their relationship before shutting down.  Shortly after shutting down operations, Mr C’s parents died, and the trustees endeavoured to wind up the family trust.  Court proceedings followed and a deed of settlement was signed, which transferred ownership of the property solely to Mr C.

The trust did not expressly transfer ownership in the property to Mr C, as the property was owned by the trust itself.  Mrs C brought a claim to the

Family Court that the property was part of a ‘constructive trust’ to which Mr C was the sole beneficiary.  A constructive trust is an arrangement where a trust is deemed to exist without any trust deed being in place.

Mrs C had to show that Mr C had contributed to the property, had a reasonable expectation of an interest in the property, and the trustees should have reasonably expected to give its interest in the property to Mr C. 

The Court decided that the farm property was held in a constructive trust for the benefit of Mr C as he had contributed over $165,000 on improvements to the farm and had an expectation that the property would become his.  This made Mr C the beneficial owner despite the registered owners being the trustees.

Mrs C applied to the Family Court for an order granting her compensation due to her contribution to the family home during the relationship.  Mrs C had brought in revenue through her work on both the cow and chicken farms, a considerable portion of which was used to pay for improvements to the farm. 

Whilst it was agreed upon that the farm initially constituted separate property, the contributions that the couple made to the property over the course of their relationship were made with relationship property.  The court held that any increase in value seen by the farm property from the year the court determined Mr C had become beneficial owner was relationship property.

The Court awarded Mrs C a half share in the increase of the value of the whole farm property, that half share being $900,000, as well as a half share of the homestead portion of the property used by Mr and Mrs C as their family home, being $300,000.

Contribution to trust property – Johnstone v Easterbrook

Ms Johnstone and Mr Easterbrook married in December 2006 and separated in December 2013.  When they separated, all the assets that would regularly be seen as relationship property were being held in a family trust, of which Ms Johnstone was not a beneficiary.  This trust property included the family home, which had been built by Ms Johnstone and Mr Easterbrook in the final years of their marriage.

Early into the relationship the trust was in large amounts of debt to both the bank and Mr Easterbrook.  Mr Easterbrook managed to convince Ms Johnstone to sell her house and move in with him.  

From the proceeds of sale from her house, Ms Johnstone paid over $43,000 to the trust’s bank account to help pay off this debt.  Mr Easterbrook stated that he would ensure that Ms Johnstone was taken care of when it came time to repay her.

The trust then sold the house, purchasing a lifestyle block on which to build a new family home.  Over the course of the building of the house, Ms Johnstone regularly contributed to the trust, either paying the trust’s debts, or contributing to the development of the property.

Upon separation, Ms Johnstone brought a claim to the High Court to be paid back for the contributions she had made to both the trust account and to the development of the new family home.  Over the course of its development, Ms Johnstone contributed over $51,000. This contribution directly benefited the trust, as it was used to improve a trust asset. 

The Court stated that Mr Easterbrook and the other trustees were aware of Ms Johnstone’s contributions and expectations to be paid back for the contributions she made, as Mr Easterbrook admitted this both prior to, and during, the trial.  Ms Johnstone’s contribution was made with the knowledge and approval of all the trustees, leading the Court to decide that she was entitled to receive compensation for the contributions she made.

The Court assessed Ms Johnstone’s contributions to the trust and decided that her share in the family home should be 35%.  Accordingly, the Court awarded $275,000 to be paid to Ms Johnstone, representing 35% of the property’s value.

Conclusion

Determining your share in property after a separation can be difficult, especially if there is a trust involved.  Seeking advice from a professional with experience in this area can shed light on these situations and help people come up with an informed path forward.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.