Rush to Trust - or Maybe Not?


March 25 2011


Careful on relationship property issues

With the abolition of gift duty taking place on 1 October 2011, commentators are already predicting there will be a rush to transfer assets into trust, or to complete any established gifting programme, see our article “Gift Duty Abolition”.

The purpose of this article, however, is to suggest that there may be reason to pause and consider whether that will actually achieve the desired outcomes, at least in the area of protection against relationship property claims. Under s44 of the Property (Relationships) Act 1976 (PRA), the Family Court can set aside any transfer of property to a trust if it was done with the intention of defeating the rights of a relationship partner.

Under the PRA it generally only takes three years for a relationship partner to have an equal claim to certain assets owned by the other, such as the family home. Under the existing gift duty rules, however, it can take several years to transfer the full value of a property to a trust. With that mismatch in timing, it has been difficult for people to prevent an established partner from enforcing PRA rights.

The proceeds of a relationship property sale are itself relationship property. Proceeds of sale include any debt back owed by a trust for the price. Transferring a home that is already relationship property to a trust does not stop a partner making a claim against the debt back or from making an application under s44 to have the transfer reversed and then making a claim against the property itself.

It is frequently suggested that the s44 provisions do not apply where property is transferred into trust before a couple’s three year anniversary; the property is not yet relationship property. This is incorrect as the judgments of the Supreme Court in Regal Castings v Lightbody¹ and in the High Court in Ryan v Unkovich² have made clear.

The courts held that ‘knowledge of a consequence can be equated with an intention to bring it about’. If you know that a transfer could defeat your partner’s PRA rights, even if that was not in fact your primary motive, you are still held to have intended that outcome, and s44 will apply.

Retrospective

The PRA applies in retrospect; it applies to actions that took place before the legislation was passed. This means that any transfer to a trust that was intended to defeat the rights of a de facto partner will be subject to s44, even if the transfer took place before the PRA came into effect (1 February 2002). The PRA also applies to actions of a couple that took place before they have been together for three years. Therefore both existing PRA rights and also potential PRA rights are protected by s44.

John and Mary

To illustrate how this works, let us look at John and Mary who live in John’s house. Mary will have a full PRA claim to half the house once they have been together for three years. At year two she only has a potential PRA claim to a half share. If John transfers his house to a trust at year two, then it appears that in year three he has defeated Mary’s potential PRA claim to a half share.

As the PRA is retrospective, and following Regal Castings and Ryan, it is now clear that John knew that would be the result, and so s44 will apply.

Speeding up John’s gifting programme is not going to fix his problem. Whether John can transfer the house to his trust in one step, or does it over several years at $27,000 pa as currently, does not alter the effect of s44.

In conclusion, any assumption that an immediate transfer of the whole value of a property into trust is sufficient to provide relationship property protection will frequently be wrong. Transferring assets to a trust before the commencement of a relationship is the safest course of action.

¹ Regal Casings v LIghtbody [2008] NZSC 87; [2009] 2 NZLR 433
² Ryan v Unkovich [2010] 1 NZLR 434; [2009] NZFLR 948


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