How Interests in Trusts Are Treated In Relationship Property Claims…

If you are married, in a civil union, or in a de facto relationship then relationship property law may affect any interest you or your partner have in a trust and how any distributions made to you or your partner from the trust will be treated in terms of who is entitled to what.

You have no interest in a trust unless you are a beneficiary of the trust or the trustees have given you a legal interest in the trust.

Examples of various possible interests in trusts are:

• A vested interest, which is an interest which is guaranteed to be received on the date the trust winds up and the trust fund automatically vests in the beneficiaries nominated in the trust deed.
• A contingent interest,which is an interest that is dependent on a certain event happening, eg. the trustees deciding to distribute to a certain beneficiary or a certain person passing away.
• A discretionary interest, which is where the beneficiary interest is dependent upon the trustees deciding to distribute to that beneficiary, so there is no guarantee that that particular beneficiary will ever receive anything under the trust deed.

Relationship property laws will apply only to certain interests in trust assets.  The trust deeds will dictate whether you or your partner are a beneficiary and, if so, what the nature of your interest is.    

Property that falls to be divided under relationship property laws will be classified as either relationship property, which is subject to a 50/50 division on separation, or separate property, which will be the separate property of the party who owns it on separation.   

Under relationship property laws distributions from trusts are normally separate property where the trust was established by a third party. 

Where you and or your partner established the trust or where a third party established the trust but you or your partner contributed to the bulk of the assets in the trust, distributions will not necessarily be separate property and will not be afforded the same protections as they would have had the trust been established by a third party. 

In such a situation distributions will fall to be determined as relationship property or separate property using the standard test that applies to other property being considered under relationship property laws. 

Possible claims in relation to distributions from a Trust

If you or your partner are a discretionary beneficiary of a trust (or have a “discretionary interest” as above), unless and until the trustees of the trust exercise their discretion in you or your partner’s favour, you or your partner will have no interest in trust assets that will be subject to relationship property laws.    

However, if you and or your partner have a vested or contingent interest in a trust, that interest will be sufficient to qualify as property under relationship property laws. 

While these types of interests in trust assets are considered property under relationship property laws, they will be separate property unless the resulting distribution, being separate property, is joined with relationship property.   

Relationship property laws make provision for some possible claims by the non owning partner against these interests.   So even if a distribution is classified as being one partners separate property, it is not necessarily safeguarded from claims by the non owning partner under relationship property law. 

For example:

If there is an increase in value of separate property, or any income or gains received from that separate property (in this case a distribution); and that increase is because of the use of relationship property (or the actions of the other partner), then that increase will be relationship property. Where there has been an increase that is because of the actions of the other partner then the share of each partner in that distribution is determined in accordance with their respective contributions to the increase.

Here’s a good example.  The wife’s father established a trust, and the wife’s interest in that trust was such that when a distribution of farm property was received by her it would have normally been her separate property. 

However, the husband had made major financial and non financial contributions to the trust property by building the home and developing the farm land.  The value of the trust assets had increased substantially at the end of the couples 22 year marriage. 

The Court found that the husband’s actions and the application of relationship property had contributed to the increase in the value of the land.  As a result, the entire increase in the value of the wife’s interest in the trust became relationship property and the husband was awarded a half share.

If the separate property of one partner (in this case a distribution from a trust) has been sustained by the application of relationship property, or the actions of the other partner, then the court may increase the share to which the non owning partner would otherwise be entitled, or order the owning partner to pay a sum of money to the non owning partner as compensation.

If you are entering into a relationship and have interests in trust assets then it is important to seek early legal advice to ensure that such interests are protected from possible future relationship property claims.  If you are ending a relationship it is equally important to seek legal advice so that you are aware of any possible claims that could be made against interests you have in trust assets.