Have You Set Up a Trust During Your Marriage/Civil Union?
Trusts in New Zealand are incredibly common, particularly family trusts. When relationships breakdown the Property (Relationships) Act 1976 has some limited provisions to address dispositions to trusts.
However, if you have been married or in a civil union, there is a much more powerful tool that may apply – Section 182 of the Family Proceedings Act 1980 (“Section 182”).
Section 182 has a wide application, which includes to family trusts. This article focuses on this aspect of Section 182.
The purpose of Section 182 is to remedy the consequences of the failure of a trust’s premise of a continuing marriage/civil union.
This essentially means that when the trust was set up it was based on the relationship not ending. If the relationship has ended then injustices may arise, such as one person benefiting over the other due to the change in circumstances, therefore Section 182 empowers the Court to look into the trust and make orders to ensure justice between the parties is achieved.
For Section 182 to apply:
- Firstly, there must have been a marriage or civil union. This explicitly excludes defacto couples, which differs from the position under the Property (Relationships) Act 1976. There does not need to be children of the marriage/civil union however the interests of children, particularly dependent children, are especially important.
- Secondly, the Court must have made an order dissolving the marriage or civil union, which first requires the couple to have been living apart for two years.
- Thirdly, the order must have just been made or made within a “reasonable time”. What constitutes a reasonable time will be highly fact specific, but it is important not to delay.
- Lastly, there must be the existence of “any agreement between the parties to the marriage or civil union for the payment of maintenance or relating to the property of the parties or either of them, or any ante-nuptial or post-nuptial settlement made on the parties,”. This last element being the most complicated.
The most common use of Section 182 is to nuptial settlements, with family trusts being the most common nuptial settlement. To be considered a nuptial settlement requires a trust to make continuing provision for one or both of the parties, such as through their status as beneficiaries, and there must be a connection between the trust and the marriage/civil union.
Where a trust has been settled during a marriage/civil union, with one or both parties as beneficiaries, it will almost inevitably be considered a nuptial settlement.
Whether a trust settled prior to the marriage/civil union will be a nuptial settlement is more difficult to determine. Where such a trust is not a nuptial settlement when it is settled, then dispositions to that trust of property during the marriage/civil union may make that trust a nuptial settlement in respect of that specific property.
What is clear however is that the Court is giving a generous approach to the meaning of nuptial settlement.
If all the four above elements are present an application can be made to the Family Court. The Court then has a wide discretion to make orders under Section 182.
Exercising the Discretion
The Test - Whether the Court Should Exercise its Discretion
The Supreme Court has set out a test to apply (refer to Clayton v Clayton  NZSC 30). The Court will compare the position of the parties under the trust assuming a continuing marriage/civil union, with the position of the parties under a dissolved marriage/civil union.
Factors that are relevant to the exercise of the discretion are not exhaustive but can include the terms of the trust and how the trustees are exercising, or are likely to exercise, their powers in the changed circumstances. The manner in which the trustees would have exercised their discretion assuming a continuing marriage/civil union is relevant. It is significant who established the trust and the source and character of the trust’s assets. Particular attention must be paid to dependent children. While need is not a prerequisite it may also be taken into account, as well as the parties’ expectations. The length of the marriage/civil union can also be relevant, as is the existence of any other beneficiaries.
One matter to note is that Section 182 cannot be used to defeat or vary any agreement entered into under Part 6 of the Property (Relationships) Act 1976 – the contracting out provisions – unless the interests of the children of the relationship require it. However, the mere existence of a contracting out agreement is not determinative as there must be a sufficient connection between the trust and the agreement.
The Remedy – How the Court Should Exercise its Discretion
Unlike the Property (Relationships) Act 1976, the starting point is not a 50/50 split.
In line with the purpose of Section 182 and the above test, an assessment of the likely position under the trust assuming the marriage/civil union had continued is undertaken and then compared with the likely position following the dissolution of the marriage/civil union. A remedy that can best minimise the negative impact of the failure of the trust’s premise of a continuing marriage/civil union is then implemented.
Remedies can include the trust being split into two separate trusts, payment of a sum to one party, the trust purchasing property for the use of one party, the trust deed being varied, removal and appointment of trustees or a combination. The Court has a wide discretion so the remedy can be appropriate to the specific circumstances.
Section 182 is a powerful tool, particularly in respect of family trusts settled during a marriage or civil union.
The experienced team at McCaw Lewis can help you navigate any aspect of your relationship property matters, including the application of Section 182, or answer any questions you may have.
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