Trusts and Relationships
It’s common assumption that assets in a trust are “protected” from claims if a relationship comes to an end. Historically courts have been quite willing to accept that assets in a trust were not relationship property and therefore not subject to claims if the relationship ends.
The position, however, is not so clear cut and cases like Clayton v Clayton and a recent decision from the Supreme Court in Preston v Preston are examples of situations where the courts have been willing to make orders in respect of trust assets when a relationship comes to an end.
In the Preston case, Mr Preston had formed a trust, of which his children were the final beneficiaries and had settled most of the assets on the trust before he married Mrs Preston. After they married, Mr Preston made her a discretionary beneficiary of the trust. Unfortunately only five years after they married they separated and she brought a claim for an interest in the trust’s assets.
The court held that making Mrs Preston a discretionary beneficiary of the trust was “nuptial settlement” and gave the court jurisdiction to make orders in respect of the trust under section 182 of the Family Proceedings Act 1980. The court considered the position of the spouses before and after the dissolution of marriage and whether there was a difference. If the court decides that a difference exists, the court has a discretion and can make orders in respect of the trust’s assets. In the Preston case, even though Mr Preston’s children were the final beneficiaries of the trust, the main assets had been settled on the trust prior to the relationship and it was not a lengthy marriage, the court still made orders resulting in a payment of $243,000 (approximately 15% trust’s equity) to Mrs Preston.
What can you do?
Given the courts willingness to “trust bust”, as the term has been coined, the safest approach for someone wishing to protect their assets from a relationship claim is to enter into a contracting out agreement (commonly known as a “pre-nup”) which sets out each person’s “separate property” if the relationship ends.
This can be a “difficult” topic in relationships but, with people often entering into relationships later in life and having more assets, people should consider having that “courageous” conversation. In our experience, entering into a contracting out agreement or “prenup” shouldn’t be seen as a negative thing.
If the discussion and the process is handled well, it can allow two people to move forward in their relationship without the relationship property issues being a concern or a barrier to the relationship.
Jai Stephens LLB BCom (Finance)
Disclaimer: This publication should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.