Understanding the Limitations of Family Trusts
Family trusts are often considered a robust tool for protecting assets, especially in the event of relationship breakdowns. However, a recent case in New Zealand serves as a cautionary tale about their limitations and highlights the importance of taking additional measures, such as prenuptial agreements, to safeguard your financial interests.
In this case, Roy Webster*, a man who referred to his home as his “life’s work,” placed his property in a family trust following the end of his 26-year marriage. He believed this would protect his home from any claims by future partners. However, after a decade-long de facto relationship with Joanna Pocock*, Webster’s assumption was tested in court.
The Court’s Findings
When Webster transferred his property to a trust in 2010, he was advised by his accountant that it could protect his assets from potential claims. At the time, Webster had just finalized the division of relationship property from his first marriage. While his initial intentions were valid, the court found that his actions also aimed to prevent Pocock from making a claim under the Property Relationships Act.
The Family Court determined that when the property was placed into the trust, Webster and Pocock’s relationship was already showing signs of permanence. As a result, the court ruled that the transfer was intended to defeat Pocock’s potential future claims.
Key Lessons for Families and Individuals
This case highlights several critical points for those relying solely on family trusts to protect assets:
Trusts Alone May Not Be Enough: While trusts can provide a layer of protection, they are not infallible. Courts now have greater powers under the Trusts Act 2019 to scrutinize trusts and ensure fairness in disputes.
Prenuptial Agreements Are Essential: A well-drafted prenuptial agreement, tailored to the couple’s unique circumstances, can provide additional security. However, it’s equally important to update these agreements over time to reflect changes in circumstances.
Contributions Matter: Contributions made by a partner, whether direct (e.g., renovations) or indirect (e.g., childcare), can influence court decisions, even if the property is held in a trust.
Communication Is Key: Open and honest discussions about assets, liabilities, and expectations at the start of a relationship can prevent misunderstandings and legal disputes later.
Protecting Your Assets
If you are considering placing assets in a family trust, it’s vital to consult experienced professionals who can guide you through the legal intricacies. A trust, combined with a prenuptial agreement and regular reviews of your legal documents, can offer a more comprehensive strategy for asset protection.
At Tax Professionals, we can help you navigate the complexities of trust structures and asset protection. Contact us to discuss your specific circumstances and secure your financial future with confidence.