Does a family trust protect my home against relationship property claims? 20 May 2013

You may have heard that trusts are a good protector of homes against relationship property claims. Indeed they may be – but they are not watertight protection. There are various ways that a trust can be attacked. It is therefore important to be aware of these situations so that you are less likely to fall victim to one of them.

Transfers of relationship property to a trust

If you have:

1. Transferred “relationship property” to a trust since the beginning of your marriage or de facto relationship; and
2. That transfer has defeated the claim of your partner i.e. they cannot claim an interest in it because it is now owned by a trust rather than their partner

then the Court can require you to compensate your partner or order the trust to pay income to him/her.

One of the key pitfalls to be aware of is that a family home is always classified as relationship property. So, if you decide to protect your home and transfer it to a trust after you are already living together with your partner in the property, this may be too late. The home has already become the family home and your partner may have an entitlement under this scenario.

Transferring property in order to defeat your partner’s claim

This is a broader test than the previous one. If there has been a transfer of property made (it is not restricted to trusts) in order to defeat any person’s relationship property claim, then the Court can overturn this transfer.

The property need not be relationship property at the time it is transferred to the trust. What is needed is:

• That the home would have been relationship property on separation if it had not been transferred into a trust. Therefore, a transfer shortly prior to the beginning of a de facto relationship or marriage may even satisfy the test, as long as the intention requirement (below) is met; and
• When you transferred your home to a trust, you must have had knowledge of the consequences of that transfer i.e. that you might be depriving your partner (or soon to be partner) of a share of an asset which they may have an entitlement to. You do not need to have a conscious desire to remove that asset from the Court or your partner.

Your trust is declared a “sham”

The Court can declare a trust to be a sham if there is evidence that the settlor (the person who effectively set up the trust) never really intended the trust to take effect.

This is a hard test to prove as most people do not set out with this intention. However, the following factors could assist with a sham trust argument:

• The home has been transferred to the trust at less than full market value;
• The settlor continues to treat the trust property as his own;
• There are no trustee meetings;
• The other trustees are rarely consulted;
• No occupational rent is paid to the trust if the home is used by the settlor (though the trust might receive occupational rent by way of the settlor meeting trust debts, such as a mortgage);
• The trust bank account is rarely used; or
• The settlor does not ever turn his/her mind to the interests of other beneficiaries.

If the Court declares the trust to be a sham, it does not exist. The property in the trust will be treated as the settlor’s own property, which in turn can potentially be categorised as relationship property.

Illusory trust

An illusory trust is when a trust is declared to not exist because the settlor is able to control the trust entirely for his/her benefit. In particular, there is no way for the beneficiaries to hold the trustees accountable. Under the trust deed, the trustee (who in this case will also be a settlor and beneficiary) may have unrestricted powers, even though this may be contrary to the interests of other beneficiaries.

If the Court declares that the trust is illusory, it will have the same effect as a sham trust. The property will return to the ownership of the person who settled the trust.
The way to ensure that this argument is never raised is to consult with your lawyer about trustee powers at the time when the trust is being formed to ensure that they are balanced and reasonable.

Constructive trust

Finally, a Court can declare a “constructive trust” over a trust asset if:

1. Your partner has made a contribution (in more than a minor way) to maintaining and enhancing the property;
2.  At the time, you both expected that your partner would share in the property and this expectation is reasonable; and
3. The contribution must greatly outweigh the benefits received. i.e. the contributions your partner made (money, time, labour etc) need to exceed the benefit of occupying the property.

This argument is more likely to be raised where the parties have lived in the trust property on a long term basis and the partner has made significant contributions during this period.
If a constructive trust is declared, the Court may grant the applicant an ownership interest by declaring that the trust holds the property on trust for the applicant in such shares as it determines. When assessing what share of the property your partner may be entitled to, the nature and value of the contributions will need to be considered.

What can you do to prevent the likelihood of any of these grounds of attack being successful?

The best protection that you can have against attack is to enter into a property agreement within the first 3 years of your relationship, declaring that your interest in the trust and its assets are your separate property.

Other measures include:

• Consulting with your lawyer about the desired purposes of the trust, trustees, beneficiaries and terms of the trust prior to formation;
• Ensuring that your home is transferred to a trust prior to commencing a relationship (if at all possible);
• Understanding and carrying out your trustee duties with diligence – e.g. ensure that meetings are had and minutes taken, use the trust bank account for the payment of outgoings, have financial accounts prepared;
• Consider whether you and your partner should be paying occupational rent to the trust when occupying trust property;
• Do not allow your partner to make any major contributions to the property e.g. provide finance or labour for extensive renovations, unless there is legal documentation in place to record the arrangement;
• Consider renting out the property to someone else rather than living in it together.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Lois Flanagan at Parry Field Lawyers (348-8480) loisflanagan@parryfield.com