March 16 2009
Courts can overturn property transfers to trusts
There is considerable power held by the courts to make orders under the Property (Relationships) Act 1976 (PRA) if relationship property has been transferred to trustees. Court orders can sometimes be made to set aside the transfer of property to the trustees (effectively reversing it), and/or compensation may be awarded to the ‘other spouse’ for loss of the property; or the terms of the trust itself may be altered. These powers are commonly referred to as ‘trust busting’.
Where a property owner both intends, and achieves, the transfer of relationship property to a trust in a way that defeats the claims of the other spouse the court can set that transfer aside. Let’s look at a scenario with Sue and John who have recently separated.
Relationship property rights
The family home is in Sue’s sole name, although her partner John has lived in it with Sue for a number of years. Sue has transferred the family home into a trust which excludes John as a beneficiary. John is livid and wants to get the transfer reversed, or at least equivalent compensation paid. John has to prove that he has relationship property rights over the home, which have been lost because of the transfer, and also that Sue intended him to lose those rights.
If compensation is ordered Sue may have to pay it from her own, otherwise separate, property. This separate property maybe money she inherited or had before the relationship began. Alternatively the court may order compensation to be paid from other relationship property, or for the trustees to pay income from the trust to John for a specific period or until he had been paid up to a specific threshold.
If the trustees had bought the family home from a third party, rather than acquiring it by transfer from Sue, they may have escaped these court powers because no actual transfer of property would have taken place and the court only has these powers where a transfer occurs.
If the purchase was of a property not used as the family home (eg: a rental investment) and if it was self-funding then no relationship property would have been put towards it. In that case the trustees would almost certainly succeed in avoiding John making a claim against it.
The courts have the power to insist that both spouses disclose all information about transfers to trusts, so any records showing Sue’s intentions at the time of planning the transfer can put into evidence in court. These records might include her lawyer or accountant’s file notes, or the bank manager’s records relating to her mortgage application.
As far as the PRA is concerned, it has retrospective effect and no end date. Therefore transfers made before the PRA was enacted are caught, as are transfers made after the end of a relationship.
Compensation is available to a ‘spurned spouse’ even if the family home had been in joint names and John co-operated in putting the house into the trust as long as Sue had the necessary intention and was successful in defeating his relationship property rights by way of the transfer. It seems odd, but couples do sometimes transfer their family homes to a trust that is effectively controlled by just one of them, and that can be enough to meet this criteria.
If John can’t prove that Sue had the necessary intention to exclude him, he may still be able to bring a claim as long as only his rights were defeated by the transfer. If Sue’s relationship property rights were also defeated he would have a much harder job bringing any claim for compensation. Technically Sue’s relationship property rights would have been defeated if the family home was transferred to a trust effectively controlled by her as her rights have been converted from relationship property rights to beneficiary rights.
Unless the trust was established under a Will the courts have the power to vary the trust to give better effect to any order it has made under the PRA. So if the trust has no income to pay out to John the court may order the trustees to sell the house and repay any debt owed to the couple, so that a lump sum can be paid, or it may order the trustees to invest the trust fund in a way that produced income.
Trust busting techniques and provisions also exist outside of the PRA. It is a complex area of the law, so if you are unsure about any aspect of transferring assets into a trust, please give us a call.