Trusts under attack by former spouses and partners, trustees need to be cautious
Trusts can sometimes be used to protect assets from future claims by a former spouse or de facto partner. However, lawyers and the courts are continuing to find ways around trusts in order to achieve what they see as justice. Recent decisions indicate why trustees need to be cautious.
A trust is sometimes said to be a ‘coward’s pre-nup’. Rather than asking your partner to sign a relationship property agreement, it’s often easier to put your assets into a trust and hope that this will protect them in the event of a relationship breakdown.
But trusts remain vulnerable to other forms of claim. There have been a few cases where the court has said a former partner (these have all been women) has a claim to a share in the trust property because she contributed to the property on an understanding that she would benefit.
A couple of years ago in 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 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. This case has set a precedent.
Two new Court of Appeal decisions
The first new case is Vervoort v Forrest. Again the claimant says she did a great deal of work redecorating and refurbishing a property and establishing a garden. He says that any promise to her would have to have come from both trustees because the law requires trustees to act unanimously. She replies that 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 woman claimant received nothing in this case because there was not enough detailed evidence of actual contribution to the property.
The 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. However 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. So it was credible that the wife believed the assurances given by her husband. The court also mentioned that the husband could always 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.
Not sham trusts
In each case the claimant tried to claim the trust as a sham. The court rejected this claim every time. In the past anyone trying to make a claim against a trust has thrown in the word ‘sham’ like some sort of bogey man. It is now quite clear the court will not disregard a trust or call it a sham unless there is real evidence that there was a deliberate intention to deceive from the start.
It is still possible to use a trust in order to ring-fence assets against a future relationship property claim but there is no guarantee that this will work. Assets should be transferred to the trust before the relationship starts. It’s important that one partner is not given sole authority to speak on behalf of all the trustees. It’s also important to manage the expectations of any new spouse or partner by making it clear that what is in the trust stays in the trust, ie: contributions to the trust property will not lead to any entitlement to a share in the property. A written agreement drawn up by your lawyers
is a good way to do this.