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Property owned by trust not immune from claims by former spouses/de facto partners (Part 2)

March 2017

Click here for Part 1

In our Summer 2014/15 article, we addressed the issue of claims by former spouses/de facto partners against property owned by a Trust. This situation generally arises when there are assets that existed before the start of the relationship, and the property was settled on a Trust. In our 2014 article we raised the issue that the Courts were becoming more receptive to claims by former spouses/de facto partners against the assets of such Trusts.

The Property (Relationships) Act 1976 (“PRA”) was intended to provide a comprehensive set of rules for the division of relationship property when spouse/de facto partners separate. However, there are limitations in the PRA, and not all Trusts are susceptible to the PRA. As a result, there has been a recent number of cases where the Courts have found that a former spouse/de facto partner could bring a claim for work, services and contributions they have undertaken to a property even though that property was owned by a Trust. These claims are separate from any rights a former spouse/de facto partner may have in terms of the PRA.

The way in which the Courts are recognising such claims in the recent cases are through the imposition of a “Constructive Trust” on the Trust’s assets. These “Trust on a Trust” cases are becoming more common, and in the second half of 2016 there were decisions from the Court of Appeal confirming that a Constructive Trust can, and should be, imposed over the assets of an Express Trust in the appropriate circumstances. The overriding principle seems to be to achieve “fairness” and “equity” between the parties.

Further, there are cases where the other Trustees (such as a professional Trustee) may not even know of the contributions of the claimant spouse or de facto spouse. The Court in these situations have said that it would not allow an injustice to occur, and that where one Trustee “has de facto control of the Trust” or “absolute control of all Trust activities” then that Trustee will be in effective control of the Trust and the Trust will be bound by the decisions of that one Trustee.

Therefore, a possible scenario may arise:

  • Assets are settled on a Trust in the usual way.
  • The Settlor may be a Trustee, along with a professional or some other person.
  • The Settlor then either marries, re-marries or enters into a de facto relationship.
  • The new spouse or de facto partner then carries out work or services in respect of the Trust property.
  • The Settlor relies on the fact that they are not the owners of the property in the expectation that they will exclude any claim in the future if the parties separate.
  • The relationship ends and the PRA cannot be utilised by the claimant party. The contributing spouse/de facto partner instead brings a claim against the Trust based upon a Constructive Trust for the work, services and contribution they undertook to the property. Courts have found that these services can include housekeeping and domestic services, (the Court has not closed the categories of what will quality as contributions that should be rewarded).
  • The Trust has to pay the claimant party for the value of those contributions.

When setting up or operating an Express Trust, there should be no assumption that this will provide automatic protection against claims by a spouse or de facto partner. It is necessary for parties to turn their minds to a Contracting Out Agreement under the PRA and in respect of any other types of claims such as a Constructive Trust. Any such Agreements should be reviewed on a regular basis to ensure they are up to date.

Further, all Trustees should be involved in decisions. There should be Trustee meetings, minutes made and resolutions regarding the decisions and operation of the Trust. A person settling the Trust should not run the Trust themselves and only consult the independent Trustees on a piecemeal basis, all Trustees should be involved at all times.

It is also very dangerous to only have the Settlor as the sole Trustee, as this will raise issues over whether a Trust is a “sham”, or at least that Trustee is in complete control, so is bound by any actions taken without the input of an independent Trustee.