November 02 2016
Trusts are used in many ways, but often their purpose is to protect assets, including claims by former spouses and partners. However, trust lawyers and the courts are continuing to find ways around trusts in order to achieve what they see as justice. Your trust may not be as safe as you think. If you’re in any doubt, talk to a trust lawyer as soon as possible.
Is your trust vulnerable to attack?
A trust is sometimes called a ‘coward’s pre-nup.’ People sometimes put their assets into a trust rather than asking their partner to sign a relationship property agreement. It’s often easier to put your assets into a trust in the hope this will protect them if a relationship breakdown occurs.
Be aware that trusts are vulnerable to other forms of claim. There have been a few cases where the court has ruled in favour of former partners. So far these have all been women. In these cases, former partners have claimed a share in trust property because they contributed to the property on an understanding they would benefit.
The case setting a precedent was Murrell v Hamilton. The Court of Appeal upheld a High Court decision giving $37,500 to a former de facto partner who had assisted with work on a new house. The house was owned by her partner’s trust. She said he had led her to believe they were working together on the property for their mutual benefit.
New decisions indicate trustees need to be cautious...
In Vervoort v Forrest, the arguments were made as follows. The claimant said she did a great deal of work redecorating and refurbishing a property and establishing a garden. He said any promise to her would have to have come from both trustees because the law requires trustees to act unanimously. She replied he had been given authority by his other trustees to speak on behalf of the trust. At times he used his name and the trust’s name as if they were the same thing. He even had an irrevocable power of attorney from his other trustees so he could sign on behalf of the trust whenever he wanted to. However, the claimant received nothing in this case because there was not enough detailed evidence of actual contribution to the property.
A second case involved a married couple, both of whom had been married previously. The wife had put money into renovating the trust property using funds from the sale of her previous home. The husband could point to payments he made to his wife equal to the amount she had contributed. Nevertheless the wife’s payment was treated as a contribution to the property.
The court found that the other trustee had given the husband ‘carte blanche’ to do as he wished with the trust assets. It was credible the wife believed the assurances of her husband. The court also mentioned that the husband could have asked his wife to sign a relationship property agreement and this could have made it clear she was to have no expectation of an entitlement to the property that was held in the trust. In the absence of such an agreement, the wife had a natural expectation that she would benefit in this way. She was awarded $65,000.
Where does this leave the integrity of trusts?
In the past, anyone trying to make a claim against a trust has thrown in the word ‘sham’ to discredit it as an entity. In each of the cases above, claimants also asserted the trusts in question were shams. The court rejected these claims every time. Court will not disregard a trust or call it a sham unless there is real evidence there was a deliberate intention to deceive from the start.
What’s the best way to avoid a trust attack?
Despite the precedents these cases have set, it’s still possible to use a trust to protect assets against a future relationship property claim, but there’s no guarantee this will work. While we don’t know what, or indeed whom, is around the corner, assets should be transferred to the trust before a relationship starts. It’s important that one partner is not given sole authority to speak on behalf of all the trustees. You should also manage the expectations of any new spouse or partner by making it clear that what is in the trust stays in the trust, i.e. contributions to the trust property will not lead to any entitlement to a share in the property. Talk to your trust lawyer about a written agreement. Setting the right expectations from the start is a healthy way to start any relationship.