Relationship property and trusts
Dispositions to trusts and relationship property
It is proposed that section 182 of the Family Proceedings Act 1980 (under which the courts may vary the terms of ante- and post-nuptial settlements, including trusts, when a marriage or civil union is dissolved) be amended to also cover de facto relationships. The following changes should be made to the jurisdictional requirements of section 182:
(a)the terms de facto partner and de facto relationship should have the same meaning as these terms have in sections 2C and 2D of the Property (Relationships) Act 1976;
(b)the triggering event that allows an application to be made to the court, or the court to make an order varying any qualifying settlement, should be changed from when a marriage or civil union is dissolved to when the parties to a relationship separate; and
(c)an application to the court should be able to be made in respect of relationship settlements rather than nuptial settlements. The term relationship settlement may need to be defined.
Options for Comment
Which, if either, of the following options do you favour for the Property Relationship Act 1976, and why?
Amend section 44C(2)(c) of the Property (Relationships) Act 1976 to give the court a broader power to require the trustees of a trust to which relationship assets have been transferred to compensate the spouse or partner whose claim or right has been defeated by the disposition to that trust. Section 44C(2)(c) should be amended as follows:
(c) an order requiring the trustees of the trust to pay to one spouse or partner the whole or part of the income of the trust, either for a specified period or until a specified amount has been paid any specified amount or to transfer any property of the trust.
Section 44C should otherwise remain unchanged. Please give us your views on these proposals and options.
A review of the Property (Relationships) Act 1976 should be undertaken to determine whether there are circumstances (not currently addressed by the provisions of the PRA) where dispositions to trusts should be set aside, to better give effect to the equal sharing regime in that Act.
17.8Sections 44 and 44C of the PRA are the provisions of the PRA that are most relevant to the law of trusts. Section 182 of the FPA is also relevant.
Property (Relationships) Act 1976 – section 44
17.9Under section 44 of the PRA the court can set aside dispositions of property (including those to a trust) that are made “in order to defeat the claim or rights of any person” under the Act. Initially the courts interpreted section 44 narrowly. In Coles v Coles, the Court of Appeal held that the words “in order to defeat” meant that the partner who entered the transaction had to have done so:
because of a conscious desire to remove some item or items of matrimonial property from the reach of the Courts. It must be shown that such was the aim or object of the transaction; the end which the transaction was intended to achieve.
17.10However, the more recent Supreme Court decision in Regal Castings has clarified that a defeating purpose or motive is not required in this type of test. Instead, if the person has knowledge that a consequence of the disposition will be to defeat the other person’s rights, then he or she is considered to have intended that consequence, even if it was not actually his or her wish to cause that loss. The reasoning in Regal Castings was applied to section 44 in Ryan v Unkovich. In that case Justice French said:
I accept the principles enunciated in Regal Castings are sufficiently general to apply to s 44. In particular, I accept that in so far as the Coles formula fails to distinguish between intention and motive, it is contrary to the reasoning of the Supreme Court and should not be followed. Knowledge of a consequence can be equated with an intention to bring it about.
17.11Relief is not available under section 44 where the person from whom relief is sought received the property or interest in good faith and has altered his or her position in reliance on having an indefeasible interest in the property or interest. The court may also determine that it is inequitable to grant relief in other circumstances.
Property (Relationships) Act 1976 – section 44C
17.12Section 44 is supplemented by section 44C, which enables the court to make an order compensating a spouse or partner whose claim or rights have been defeated by a disposition to a trust. Under section 44C there is no need to prove intention to defeat the other party’s rights.
17.13Section 44C only applies where the court is satisfied that section 44 does not apply to the disposition before moving to consider section 44C. Section 44 may not apply because the required intention cannot be proved or because relief cannot be ordered under section 44 because the recipient trustees received the property in good faith and for valuable consideration. In such circumstances a claim under section 44C can be pursued. Orders can be made by the court under section 44C:
- requiring payment of a sum of money or transfer of property, whether out of relationship property or separate property; or
- requiring the trustees of the trust to pay the whole or part of the income (but not the capital) of the trust.
17.14An order diverting income from a trust may only be made if the first source is not sufficient to compensate the spouse or partner. The court may not make an order against the trustees if it would prejudice beneficiaries of the trust who have altered their position in the bona fide belief that they could rely on the ability of the trustees to distribute the income from the trust. The court has no power to distribute capital or to withdraw assets from the trust.
17.15Section 44C was added by the Property (Relationships) Amendment Act 2001, on the recommendation of the Ministerial Working Group on Matrimonial Property and Family Protection, to redress the detrimental effect trusts were having on property rights. The difficulty of proving the required intention under section 44 and the increasing use of trusts had placed large amounts of relationship property beyond the reach of the courts, often to the detriment of one of the spouses or partners. The objective of section 44C was to strengthen the Property (Relationships) Act where dispositions to trusts had the effect of defeating one of the party’s rights, but where intention to defeat a party’s rights could not be shown.
17.16The scope of section 44C is limited and is easily circumvented. In Equity and Trusts in New Zealand, Professor Peart summaries the problems:
…its ability to achieve a just division of assets produced or enhanced by the relationship is limited both by the section’s requirements and by the remedies. … it is easy to avoid being caught by s 44C. The section cannot be invoked if the trustees acquired the assets directly from third parties, rather than from either of the partners to the relationship. Nor does it apply to trusts that affect both parties equally or that were settled by third parties … Even if the disposition does come within s 44C, the constraints on the compensation powers prevent applicants from achieving an equal share of the fruits of their efforts.
Family Proceedings Act 1980 – section 182
17.17Section 182 of the FPA is also relevant to this discussion. Under section 182 the court may vary the terms of ante- and post-nuptial settlements – including trusts – when the marriage or civil union of the parties comes to an end.
17.18Section 182 jurisdiction is separate from the PRA rules and the concept of equal sharing is not directly relevant to a determination under section 182. What is relevant is that, whereas a trust structure might have served the interests of a couple while they were harmoniously together, the tying up of their property in such a structure upon break up is unlikely to be able to serve them both in the way envisaged. The Supreme Court in Ward v Ward made it clear that there is no entitlement to a 50/50 or any other fractional division of the trust property under section 182. What is relevant, however, is that the nuptial settlement was premised on the continuation of the marriage. Under section 182, the court must assess whether an order is necessary and, if so, in what terms, to reflect the fact that that fundamental premise (the continuation of the marriage) no longer applies.
17.19Under section 182, a “post-nuptial settlement” clearly captures a trust established after a marriage if the trust is intended to provide for the couple (and their children). To qualify as an “ante-nuptial settlement”, a trust must: (1) be on one or both of the parties; (2) be with reference to their married state; and (3) possess a “nuptial characteristic”. The inquiry is into whether there is the necessary degree of connection or proximity between the settlement (not the settled property) and the particular marriage.
17.20If, in light of all the circumstances, there is good reason to intervene, then the court is able to remove capital or assets from the trust, vary the terms of the trust, or resettle the trust for the benefit of one or both parties to the marriage or civil union. The court may also make orders in regard to administration and management of the trust.
17.21Section 182 of the FPA does not apply to de facto relationships so currently provides a remedy for some couples, but not for others. This inconsistency in the treatment of de facto and other couples must now be considered an anomaly.
17.22In broad terms the issue is whether the current look-through provisions in the PRA are adequate to produce a just division of the assets produced or enhanced by the relationship. The use made of trusts by one or both partners to a relationship together with the limited scope of sections 44 and 44C may be undermining the broader policy objectives of the relationship property regime. In addition, the perceived unfairness of some divisions produced by the application of the PRA has contributed to unhelpful distortions and developments in the law of trusts as judges have attempted to find other ways to do justice between spouses or partners under the PRA. A second issue is whether section 182 of the FPA should continue to apply to marriages and civil unions but not to de facto relationships.
A summary of the more specific issues and problems that have been identified with the current provisions are as follows:
- section 44 has broad application in the sense that it applies to any disposition of property to a trust, not just dispositions of relationship property, however, the cases indicate that applicants have had difficulty showing that a disposition has been made to defeat their or others rights. This issue may now have been addressed by the decision in Regal Castings.
- the scope of section 44C is limited and is also easily circumvented. It applies only to dispositions of relationship property to a trust by one or other partner. The provision is not available where:
–a disposition to a trust is made before the qualifying relationship begun;
–the property in question was not relationship property at the time of the disposition;
–the trustees acquire the trust assets directly from a third party rather than from one of the parties to the relationship; or
–both parties to the relationship are equally affected by the disposition. This is because the disposition must have the effect of defeating the claim or rights of only one of the spouses or partners.
- the range of remedies available under section 44C is limited. The court may only make an order under section 44C requiring trustees to pay the income (but not capital) of the trust to the defeated partner where there is insufficient relationship or separate property from which to compensate him or her for the disposition. As has already been noted, the court has no power to require trustees to distribute capital or to withdraw assets from the trust.
- section 182 of the FPA provides an alternative, and arguably more flexible, option where the settlement of property on a trust is an ante- or post- nuptial settlement. However, as already noted it does not apply to de facto relationships. Rather unfairly it currently provides a remedy for some couples and not for others.
17.24Two further issues, which are also likely to undermine the effectiveness of section 44C, should be mentioned. First, gift duty was repealed in 2011. It has been suggested that this is likely to make the circumventing of section 44C even easier because the repeal has largely removed the need for dispositions to trusts to be coupled with a debt back to the settlor and a staggered debt forgiveness gifting programme. If there is no debt back, from which compensation might be sourced by the court, it will be far easier for one party to put relationship property beyond the reach of the court under section 44C.
17.25Secondly, the Commission has proposed in chapter 5 of this paper that the distinction between capital and income for the purposes of investment and distribution of trust funds should be removed (see paragraphs [5.13] to [5.23]). Under that proposed reform trustees will determine what is to be treated as capital and income for the purposes of distribution. This approach is also likely to make section 44C, which only permits the court to direct the trustees to pay income, less effective.
Options for reform
17.26When considering possible reform we must also consider the extent to which reform of the PRA can legitimately be proposed by the Commission as part of our review of the law of trusts. Evaluating the effectiveness of the PRA at ensuring a just division of all assets produced or enhanced by a qualifying relationship is beyond the scope of our project. We consider that proposing substantive changes to the PRA is also beyond the scope of the project.
17.27There are a number of options for reform that attempt to address the issues that arise at the point where trust law interacts with the PRA, however most would require substantial change to the PRA so fall outside the bounds of our review. For completeness we briefly outline different options that have been mooted.
Option 1 − Amend section 44C of the PRA
17.28The first option is to amend section 44C and give the court broader powers to require the trustees of a trust, to which relationship assets have been transferred, to compensate the spouse or partner whose claim or rights have been defeated by the disposition of relationship property to that trust.
17.29This option would involve relatively modest drafting changes to the PRA. While it would not alter the range of circumstances to which section 44C could be applied, it would expand the pool of assets from which the court could order compensation. Where the respondent’s share of relationship property or separate property proved insufficient to adequately compensate the spouse or partner whose claim or rights have been defeated by a disposition to a trust, the court could, under this option, order the trustees to pay any specified amount from the trust or transfer any trust property to the defeated partner as compensation. The current restriction that the court should not make an order against the trustees where it would prejudice beneficiaries who had altered their position in reliance on distribution from the trust would be retained.
17.30This option would essentially implement the original recommendation made by the Working Group on Matrimonial Property and Family Protection in their 1988 report. The Working Group recommended that compensation payments be sourced in the first instance from the respondent’s share of the relationship property or separate property. If they were insufficient, the Working Group thought, the court should have the power to not only divert income from the trust, but distribute capital from the trust and, as a last resort, to withdraw assets from the trust.
Option 2 − Amend section 44 of the PRA
17.31The second option is to amend section 44 to remove the requirement for any disposition to be made with the intention of defeating a claim. The court would then be able to set aside any disposition made by party A, whether for value or not, where the effect of the disposition was to defeat the claim or rights of party B. This would significantly broaden the scope of the provision because, as has already been noted, section 44 applies to any disposition of property and not just dispositions of relationship property. This option would allow the court to set aside a disposition of property made by a third party at the direction of party A.
17.32However, the court would still not be able to order the recipient of property under a defeating disposition, or any person who took an interest from that person, to transfer the property (or interest) or to pay market consideration if the recipient had received the property (or his or her interest in it) in good faith and had subsequently altered his or her position in reliance.
17.33Section 44 is a general provision addressing all dispositions of property to third parties, so this option would change the circumstances in which the court could set aside any disposition of property and not just dispositions to trusts.
Option 3 − A new provision empowering the court to vary or resettle a trust
17.34Another option is a new provision that gives the court a power to vary or resettle any trust that holds assets that would otherwise be relationship assets for the benefit of a former spouse or partner. Some commentators have discussed a provision drafted with the same flexibility as section 182 of the FPA.
17.35As with section 182, the court would consider whether the trust arrangements that had been entered into still served the interests of the parties in the way envisaged now their relationship has broken down. The court’s task would be to assess how best in the changed circumstances to now give effect to the reasonable expectations the parties had of those arrangements. Like section 182 of the FPA this type of provision would be premised on the parties’ expectations of the trust. Professor Peart has suggested in a discussion on this type of approach that the power to vary or resettle the terms of the trust might only be exercised as a last resort if there is no other property from which a just division can be ordered.
Option 4 − Impose a requirement for independent advice before settling a trust
17.36Another option that has been mooted would be to recognise the establishment of a trust during a relationship as akin to contracting out of the PRA and impose a requirement to obtain independent advice similar to that applying to section 21 agreements under the Act. When assets are transferred into a trust they cease to be relationship property so are not subject to the equal sharing regime. Independent legal advice could make the parties aware of the effects and implications of having their assets in trust.
17.37A failure to obtain independent advice could, as with section 21 agreements, invalidate the settlement. Similarly, it might also be appropriate, under this option, to give the court the power to set the settlement aside if the trust causes serious injustice on similar grounds to those that apply to section 21 agreements.
17.38However, the analogy with section 21 agreements breaks down at this point. Invalidating a trust adversely affects the interests of its beneficiaries. Unlike a section 21 agreement, which involves the interests of the parties, the settlement of a trust creates a broader set of relationships. Further, such a provision would impose what are arguably unnecessary upfront costs on all parties to all relationships who wish to create trusts. Many trusts are likely to be created during the course of relationships for legitimate reasons and in circumstances where the disposition of assets to a trust will not have the effect of defeating a future claim by one of the spouses or partners. Is it therefore appropriate to impose a blanket requirement across all settlements to address a problem that sometimes occurs and only in some relationships when they break down?
17.39Again, there may be merit in this type of reform, but it involves substantive alteration to the PRA so falls well beyond our scope.
Option 5 − Extend section 182 of the FPA to de facto partners
17.40A final reform option we examined is amending section 182 of the FPA so it applies also to ante- and post-relationship trusts (and other settlements) established to benefit de facto partners as well as married and civil union partners. Under section 182 the court is currently able to vary the terms of or resettle a qualifying trust when the marriage or civil union contract is dissolved. The reform option considered here would allow the court to vary the terms of any relevant ante- and post-relationship settlement – including any trust – when a qualifying relationships between de facto partners as well as married or civil union partners end.
17.41It should be noted that section 182 applies to all ante- and post-nuptial settlements, so this option has implications for all such settlements and not just for trusts. However, the rationale for reform here in addressing the section is addressing an outdated anomaly that treats de facto relationships differently than marriages and civil unions.
17.42Options 2, 3, and 4 all involve considerable change to the PRA, and so fall beyond the scope of our review. If significant changes to the PRA need to be considered, then a separate review of the PRA should be undertaken to determine how that regime should be modified. These are not matters we can address in passing as an adjunct to our review of trust law.
17.43The reforms proposed in options 1 and 5 are, however, more constrained in nature. In our view they do not seek to alter the PRA and FPA in such a significant way.
Option 1 – Amending section 44C of the PRA
17.44There are some difficulties with option 1. A considerable amount of uncertainty would be introduced into the operation of trusts if all of the assets of a trust were potentially available to be clawed back to compensate one partner to the relationship under section 44C. Any disposition of property to a trust and all assets held in any trust to which qualifying dispositions are made would potentially be available as compensation. Compensation could potentially be sourced from any trust asset and not just dispositions of relationship property made by the other partner to the trust. This arguably prioritises the relationship partner’s interests over those of the trust’s beneficiaries and others such as creditors. However, the point should not be overstated because compensation from the trust could not exceed the value of the dispositions of relationship property (valued at the date of hearing) that had been made to the trust. The court would also be required to consider changes to other circumstances and could not make an order where any third party has acted in good faith and altered their position in reliance and it would be unjust to make an order.
17.45In 1988 the legislature rejected this option and confined section 44C to allowing distributions of income. This was done on the grounds that trusts were created for legitimate reasons and should be permitted to fulfil that purpose where there is no intention to defeat a relationship property claim at the time the trust was established. This is still an important point to consider. Trusts take such a variety of forms and affect spouses and partners in a different ways. Many trusts are settled for legitimate reasons with property from a variety of sources for a range of purposes. Amending section 44C so as to require trustees to withdraw assets from the trust to compensate a partner whose rights have been defeated by a disposition to the trust addresses one problem, but does so at the risk of creating others. It is not clear that the claim of a defeated spouse or partner for compensation should be prioritised over others (including the trust’s beneficiaries) who are essentially required to fund that compensation under this option.
17.46Option 1 does not address all of the problematic issues that have arisen at the interface between trusts and the PRA. However, it does arguably address one of the most glaring problems identified; namely, that the court may be satisfied that relationship assets have been disposed of to a trust during the relationship with the result that one partner’s rights to those assets are defeated but the court is unable to do anything to fairly compensate him or her for the loss because there is not enough other relationship and separate property. As we have already discussed, the repeal of gift duty and the Commission’s proposal that trustees determine what should reasonably be treated as capital and income for the purposes of distribution are likely to make it far easier for one party to successfully put relationship property beyond the reach of the court under the current section 44C.
17.47Despite the limitations and concerns, option 1 has merit and we believe it should be considered further. We have therefore included it as an option for feedback and invite comment on the advantages and disadvantages of amending section 44C in the way proposed. The alternative option we have included is that the Commission should recommend that the Government undertake a separate review of the PRA. This option also has merit. It would allow full and careful consideration to be given to other options for reform, including those we briefly outlined earlier. Also, in not attempting to directly address the issues arising over the use of trusts, it accords better with the general focus of our review.
Option 5 – Amending section 182 FPA
17.48The Commission proposes that section 182 of the FPA be extended to cover de facto relationships. This is again a relatively constrained proposal. It does not alter the fundamentals of the provision or the test applied by the courts, but just expands the class of potential applicants. Our primary concern here is that the current differing treatment of de facto relationships from married and civil union couples cannot be justified. It is something of an anomaly that this section of the FPA continues to discriminate against some relationships when other family law legislation does not. It would seem to us a relatively non-controversial change for that Act to be amended so it provides the same remedies for qualifying de facto couples as it does married and civil union couples in the same circumstances. Unlike the options for reform of the PRA, this proposal relates to a jurisdiction that is limited to settlements made for the benefit of the parties to the relationship. Any variation to the settlement would therefore not unduly interfere with the rights of others. Further, the basis on which the jurisdiction is exercised, as carried out in Ward v Ward, seeks to perpetuate the objects of the settlement. This means that there is no departure from core trust principles.
17.49Some consequential changes to the mechanics of section 182 are obviously needed to put de facto relationships, marriages and civil unions on an equal footing. For the reasons discussed we propose that the triggering event should change from dissolution to separation and applications should be allowed to be made in respect of relationship settlements rather than nuptial settlements. These changes are necessary to make the provision work. There is no equivalent to a “dissolution” at the end of a de facto relationship, nor is there the equivalent of a “nuptial” at the commencement. Separation, rather than dissolution, is widely seen as the end of a marriage or civil union, so the amendment would ensure that section 182 applications are not unduly delayed for all relationships. The approach taken in the PRA to defining of a qualifying de facto relationship and to determining when separation occurs should also apply.
17.50We are mindful that this is our first opportunity to publicly consult on this proposal and we welcome feedback on it.