Divorce & Trusts

DIVORCE AND THE TROUBLE WITH TRUSTS

 By Tammy McLeod (Partner with Davenports Harbour Lawyers)

I am often surprised at the number of happily married couples who come into my office and ask the question “What would happen to our trust if we separated?”. Perhaps in this day and age I should not be surprised. It is an interesting question and until a couple actually separate, a theoretical answer is the best I can give.

In a jointly settled trust, as most husband and wife trusts in New Zealand are, if the parties do separate and the couple are relatively friendly, it is usual for the parties to treat the trust assets in the same way as their relationship property assets and split the assets 50/50. One of the parties may retain the trust with their “share” of the assets and the other party’s “share” is either paid out to them or resettled on to new trust.

However what happens if the separation is acrimonious? Where trusts are involved there can often be a stalemate and neither party gets what they want. In most trusts in New Zealand, trustee decisions need to be made unanimously. If the Trust Deed is silent on this point, the Trustee Act 1956 states that all trustee decisions have to be unanimous. But even having an independent trustee cannot help the situation where Mr and Mrs are at war.

So what can be done? The simple approach is to treat the trust assets in the same way as the assets belonging to the individuals and to come to some negotiated arrangement. Mediation may be used and if there is an independent trustee involved, he or she should be involved and needs to agree to whatever is proposed. In most cases there will also be other beneficiaries to be considered.

In a stalemate an application to the Court can be made to either seek directions or to have a trustee removed. The High Court can remove a trustee in specified circumstances. But, as recent cases have shown, “be careful of what you wish for”, as the Court has been inclined to rule that neither the applicant nor the respondent are acting in the best interests or without bias and both are removed. In some cases the Court has appointed a completely independent trustee. This may be to the detriment of both parties.

So how can this be prevented? Some lawyers advocate the use of parallel trusts. This is where Mr and Mrs each set up their own trust. They can both be trustees and beneficiaries of each other’s trust but instead of owning the assets within one trust, each trust owns a share of the assets. This works very well when people come together with unequal contributions and a useful mechanism whereby each can walk away cleanly. It also works well where there are children from previous relationships.

There are also trusts where there is a clause spelling out how the trust is to be dealt with if the parties separate. I would be very cautious about using this as when you transfer assets to a trust you are taking them out of your ownership. Such a clause could be looked upon as an intention that you never intended for the assets to be owned by a trust but you still wanted to retain some control over those assets.

In short, there is no easy answer. When marriages or civil unions go wrong the assets of any trust must be dealt with carefully.

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