Robust asset protection
24 Oct 2016
By Gillian Stuart, Solicitor, Aspiring Law
As they say, prevention tends to be better than the cure, so let’s take a look at one of the most pragmatic preventative legal measures you can take to safeguard your future – robust asset protection.
Trusts, in particular, can be key to protecting your hard-earned wealth for both you and your loved ones, now and into the future. A robust asset protection plan in New Zealand usually hinges on a three-pronged approach, encompassing a Will, Trust, and Relationship Property Agreement (or, more commonly known as a “Pre-Nup”.) Yet, a frightening number of Kiwis – around half, according to one survey – don’t even have a basic Will, let alone the trifecta.
A Trust you can trust
A well thought-out and structured Trust can prove a strong, reliable pillar in an asset protection plan. Different types of Trusts, with different combinations of trustees and beneficiaries, can be established to achieve several purposes, covering asset protection, as well as estate and tax planning.
When we look at establishing a Trust to protect assets, our main aims are to guard against unknown or unexpected creditors, relationship property claims, challenges to Wills, andthe possible re-introduction of estate duty or capital tax. There is no one-size-fits-all Trust; each must be established taking into account the unique circumstances and needs of the settlors’ (those who set it up) and the beneficiaries.
In terms of potential relationship property disputes, it’s imperative you know exactly how the Trust operates and take advice to ensure your interests are adequately protected. In some cases, depending on how things are handled, assets held in a Trust may be considered relationship property, and in others, they won’t. People often assume that if an asset is held in a Trust then it is totally ring-fenced and completely safe. That might just not be the case if parties aren’t clear about what they’re doing or how the Trust operates. If you have a Trust, it is vital that you clearly understand from the outset any limitations or special requirements your particular Trust structure might have. If you are not clear, ask your lawyer.
Transferring assets to a Trust does not necessarily shut out all claims under the Property (Relationships) Act. If a Court finds the transfer “has the effect of defeating the claim or rights” of the other spouse or partner, it can order the offending party to pay out compensation and/or transfer property to the disadvantaged party.
And, the little footnote with the big kick is the recent Supreme Court decision on Clayton v Clayton, regarding Section 182 of the Family Proceedings Act 1980, which has blown a rather large hole in what was previously thought to be the bullet-proof vest of Trust law. It affects only parties who were married, but whose marriage has since been dissolved. The Court has now said: “Where… a trust is settled during marriage and contains…assets accumulated by one or both of the spouses only during the marriage, it may well be that the discretion (to modify the Trust) will result in equal sharing…” That means that a Trust created during a marriage with assets that were originally relationship property can be re-written by the Courts and, then, potentially divided 50-50, regardless of who’s named as the Trust’s beneficiaries. In other words, the Trust can be busted.
A Trust should still be a highly-effective method to avoid a relationship property claim, but its effectiveness depends on, among other things, when the Trust was established, when and which assets were transferred, how the Trust has been administered and whether you have a Relationship Property Agreement to back it up.
Ask the question
Time, often, is of the essence, so if you’ve been wondering whether you need, or would benefit from, a Trust, it’s never too soon to ask your legal adviser the question – but it can definitely prove to be too late. For anyone who has assets and is in, or is considering entering into, a relationship, it’s always worth, at least, discussing it with your lawyer. From there, it’s about ensuring you proceed in line with best practice and with the most up-to-date legal information. Already have a trust? A lot has changed over recent years in the law, so if you haven’t done a health check recently, do it now. It’s also really important you have your Trust checked if your circumstances or objectives have changed.
Poorly established and run, a Trust might not prove to be worth the paper it’s written on; one that’s been well set up and is robustly administered and maintained, however, can be worth its weight in gold.
Updated 24 October 2016