Is your trust safe?

Tuesday 20 October, 2020

Do you have a trust? Did your spouse automatically become a beneficiary when you got married? Or have you thought about adding a new spouse as a discretionary beneficiary? Have you acquired property through your trust instead of personally?  If so, your trust property may be at risk of relationship property claims.

Asset protection

One of the main reasons for establishing a trust is asset protection, whether for succession planning or to protect assets from creditors or relationship breakdowns. Many people think that once they’ve established a trust, their assets are safe, even if they enter into a new relationship, or an existing relationship ends. Unfortunately, time and again, asset protection is jeopardised through a lack of understanding of relationship property rules. Sometimes the fight over assets can last nearly as long as the relationship itself.

Dyer v Gardiner

In a recent Court of Appeal case[1], the wife had an existing trust which owned a house. After the relationship began, the trust sold the house and acquired another one which became the family home. The wife also used the trust to acquire shares in her employer. After the parties separated, the husband tried to claim 50% of the family home from the trust and 50% of the increase in value of the shares.

The Court held that using the trust to acquire the family home and the shares made these “post-nuptial settlements”, which meant that the Court could exercise its discretion to award the husband a share of these assets. Ultimately, the Court refused to give the husband a share of the family home, but did award him 50% of the increase in value of the shares on the basis that the wife had acquired them through her trust in order to try and prevent him having a claim to them.

Little v Little

In a recent High Court case[2], the husband transferred his business into a trust before his marriage to protect it in case of separation, after he was unable to agree terms with his wife to contract out of the Property (Relationships) Act 1976. The trust was the exclusive source of the family’s accommodation and income. The wife was not a beneficiary of the trust but had substantial involvement in the business and help to grow its value. After the parties separated, the wife sought a 50% share of the trust assets.

The Court held that the creation of the trust was a “nuptial settlement”, giving it discretion to award the wife a share of the assets. However, the Court considered that equal sharing of trust assets was not appropriate, as the husband had acquired the business well in advance of his marriage, so the Trust contained assets accumulated prior to the marriage. The Court held that the wife was entitled to a share in the increase in value of the assets, starting from an expectation of equal sharing, but with discretion to alter this as appropriate in the circumstances.

How can I protect my trust assets?

Putting assets in a trust is not a fail-safe method of protecting them in the event of a relationship breakdown, particularly if your spouse or partner is, or will be, a beneficiary of the trust. Rather than relying solely on a trust for protection, you may want to consider a contracting out agreement. Seeking legal advice at the start of a relationship can significantly reduce time, money and stress if things go wrong.

If you have any questions relating to this article, or if you'd like some advice about your trust, contact one of our experts below.