You might not know it, but New Zealanders have a love affair with trusts. NZ practitioners probably won’t be surprised to hear that there may be anywhere between 300,000 to 500,000 trusts in the country, one of the highest per capita rates in the world.
But trusts can lead to unfair outcomes when a relationship ends. As a general rule, trust property isn’t divided equally between the partners. It’s only divisible to the extent that each partner is a beneficiary of the trust, and has a vested or contingent interest in the trust property. That means the Property (Relationships) Act 1976 (PRA) doesn’t apply to a lot of the property used and enjoyed by New Zealand families.
While the law does offer some remedies, there are issues with those too. Sections 44 and 44C of the PRA are limited, and the proliferation of alternative remedies to attack trusts is making it difficult for practitioners to provide advice. Many people argue that the PRA should deal with trusts more effectively, and on a clearer and more principled basis.
Our preliminary view is that the PRA doesn’t strike the right balance between the preservation of trusts and enabling a just division of property at the end of a relationship. Unfortunately there’s no ‘silver bullet’ solution. So we’ve presented four options for reform in our paper, Dividing relationship property – Time for change? Te mātatoha rawa tokorau – Kua eke te wā?
1. Change the PRA’s definition of ‘property’ to include any interest under a trust through which it is both likely and permissible that the partner will receive a distribution of trust property. This may include a partner’s power of appointment if they can exercise it in their own favour. Option 1 would mean that qualifying discretionary beneficial interests could be treated like any other item of property under the PRA.
2. Change the PRA’s definition of ‘relationship property’ to include the value of trust property attributable to the relationship if the court considers it just. The focus of this option is on the character of the underlying trust assets rather than option 1’s focus on the nature of the partner’s beneficial interest in the trust. It seeks to bring trust property into the relationship property pool when that property has the character of relationship property. The court would, however, retain discretion to prevent sharing of the trust property when the partners have genuinely, and with informed consent, alienated the trust property for the benefit of third party beneficiaries.
3. Broaden section 44C to overcome its main limitations. This would include changes to remove the requirements that the disposition be of relationship property and that it must occur after the relationship began. Section 44C(2) would be expanded so that the court may order the trustees to pay to one partner a sum of money from the trust property or transfer to a partner any property from the trust. The matters the court must take into account in exercising its powers under section 44C(2) could also be expanded. These changes would give section 44C a much wider application.
4. A new provision modelled on section 182 of the Family Proceedings Act 1980. Section 182 has proven to be a useful provision that gives effect to the original expectations of people that settle trusts and deals with injustice that could otherwise be caused by changed circumstances. But it needs to be enlarged to apply to de facto relationships as well as marriages and civil unions, and there’s a case for bringing it into the PRA.
There will be varying degrees of support for, and opposition to, the options above. That’s why it’s so important for you as STEP members to have your say. Please visit our consultation website below and tell us how you think the law should be reformed. Part G of our issues paper is dedicated to what should happen to property held on trusts.
Please email your submission to [email protected] by 7 February 2018
Helen McQueen, Commissioner, New Zealand Law Commission