It is estimated that there are between 300,000 and 500,000 trusts in New Zealand. This means a large proportion of real estate in our country is owned by trusts and more often than not by discretionary family trusts.

It is important to know the consequences of this form of ownership and how it may affect your property entitlements if you separate.

  1. What is a trust?

A trust is a property owning mechanism which has the purpose of protecting property and putting it out of reach from creditors, ex-spouses or other third parties.

A trust essentially takes ownership away from the individual and instead gives it to trustees who are people or companies assigned to manage the trust and its assets.

The property in a trust is held for the beneficiaries. These are the people who are entitled to receive a benefit from the trust, some of whom will ultimately receive the trust assets when the trust ceases to exist.

How a beneficiary benefits from the trust depends on what kind of beneficiary they are. The most common form of beneficiary is a discretionary beneficiary. Whether a discretionary beneficiary receives a benefit from the trust is up to the trustees and therefore there is no guarantee that any particular discretionary beneficiary will receive a benefit, they merely have the potential to receive a benefit.

  1. What are the consequences of property being owned by a trust?

In the context of a relationship this will depend on a range of factors including when the trust was made, who the beneficiaries are, and how the trust acquired its assets.

If assets such as the home you and your partner live in are owned by a trust then it may be difficult to ascertain and/or realise your share of the property.

This is because the law governing how property is divided on separation, the Property (Relationships) Act 1976, generally only applies to property owned by either party to the relationship.

There are some exceptions which apply to trust property but these are limited and are of little use if the trust was made prior to your relationship.

  1. What are your options if the Trust was settled prior to your relationship?

Unfortunately the mechanisms provided for in the legislation can be difficult to utilise if the trust was settled long before your relationship commenced. This might be the case with second marriages or relationships later in life, or where the trust is family trust settled by your partner’s parents.

The recent cases of Murrell v Hamilton [2014] NZCA 377 and Vervoort v Forrest & Others [2016] NZCA 375 have tackled this problem and have firmly established the availability of constructive trust claims in these circumstances.

A constructive trust is a trust imposed by the Court.

For there to be a constructive trust it must be shown that:

  • the claimant made contributions, direct or indirect, to the property in question. Contributions need not be money and can be other services such as work performed to improve or maintain the property. There does however need to be a link between the contributions and either the acquisition, improvement, or preservation of the property.
  • the claimant had an expectation to share in the property;
  • the expectation was a reasonable one; and
  • the defendant, being the owner(s) of the property, should reasonably expect to yield an interest.

It is the last requirement which makes it difficult to bring a constructive trust claim against an express trust such as a family trust. This is because normally there is more than one trustee and all trustees need to reasonably expect to yield an interest.

So while your spouse or partner may have led you to believe you were to have an interest in the trust property that expectation may not be able to be attributable to the other, often independent, trustees.

This is due to the trust principles of unanimity and non-delegation which assume that a lone trustee cannot make decisions for the trustees. 

However, Murrell v Hamilton and Vervoort v Forrest & Others have established that these principles cannot be used as a “weapon for inequity” where one trustee has effective control of the trust.

Whether a trustee has effective control of the trust will depend on how the trust is managed. In Murrell v Hamilton and Vervoort v Forrest & Others the other trustees left the management of the respective trusts to the trustee spouses and there was a complete abstention from all decision-making. Essentially the trustee spouses did what they pleased with the trust.

In those circumstances a constructive trust claim may be brought.

However, it is important to keep in mind that even if a constructive trust claim is successful, the remedy will most unlikely be an equal share in the trust property. The interest in the property will depend on the contributions made.

In Murrell v Hamilton the Judge acknowledged that the claimant had made a valuable contribution in assisting with in the construction of the property and preparing it for sale. The claimant was awarded 15% of the profit the trust made from the sale of the property being $37,500.

In Vervoort v Forrest & Others the claimant had made contributions in redecorating the property, choosing colour schemes and furniture, establishing a garden, and maintaining the house and garden. The Court found that the contributions were of a cosmetic nature and there was no evidence that the contributions significantly added value to the property. The Court also considered the benefits the claimant had received from the trust to conclude that any entitlement under the constructive trust would be limited.

Conclusion

So while a constructive trust claim may allow access to trusts settled prior to relationships where a spouse has effective control, any interest is likely to be limited to the contributions made by the claimant to the property.