Rural Roundup

Protect your family farm against a relationship property claims
Rural Roundup

One of the areas of law that has seen the most development in recent years is the law governing the intersection of trusts and relationship property.  It is a fairly common misperception that a family trust is an effective barrier to all relationship property claims by an ex-spouse or ex-partner of a beneficiary of a trust.  

A trust settled during a relationship will be unlikely to protect the assets that have been transferred into that trust during the relationship.

A trust that was settled prior to a relationship commencing will offer some measure of protection from a relationship property claim.  Many farms are owned by a discretionary family trust with the goal being to ensure that the ensure the farm will be retained for future generations.  In some circumstances however, an ex-spouse or partner will be able to successfully make a claim against the farm, even though it has been held in a family trust for a number of years.

Where an ex-spouse or ex-partner has made contributions to a trust asset and those contributions have caused, or in part caused, an increase in the value of those assets, those contributions will give rise to a claim for up to a half share of the increase in value.  Contributions may include foregoing income in order that it be reinvested in the farm and carrying out work to improve the farm, for example.

Another way in which an ex-spouse (not an ex-defacto partner) can make a claim against trust assets is under section 182 of the Family Proceedings Act 1980.  In order to successfully make a claim under section 182, an ex-spouse must show that the trust is a “nuptial settlement”, meaning it is sufficiently connected to the marriage, and that the ex-spouse has a reasonable expectation of an interest in the trust assets.  The Courts have taken a wide approach to what is considered a “nuptial settlement” including trusts settled by third parties, such as parents or grandparents.

For example; we recently acted for Gary.  Gary and his wife Sally had recently separated.  Gary and Sally had lived and worked on the family farm for 15 years.  Sally did some of the bookwork for the farm and helped out with milking when needed.  The farm was owned by a family trust that was settled by Gary’ parents about 25 years ago.  Gary was a trustee and a beneficiary of the trust.  It was always intended that Gary would eventually take over the farm.  Gary and Sally had lived frugally for a number of years, taking minimal amounts from the farm income in order to build up enough capital to purchase the farm from the trust.

After Gary and Sally separated, Gary and his parents were surprised to be served with Court proceedings in which Sally was making a claim against the assets of the family trust.  Sally was claiming a half share of the increase in value of the farm since the relationship began.  Because the farm had undergone a dairy conversion, the value had increased significantly.  Gary and his parents had assumed that the farm was ring fenced from such claims by the family trust.  

Although in Gary’s case the matter settled without going to Court, the situation could have been prevented had Gary’s parents sought advice as to the protection the trust would offer in those circumstances and required Gary and Sally to enter into a Contracting Out Agreement (a “pre-nuptial agreement”).  If you need advice as to whether your trust will sufficiently protect your family farm against a relationship property claim, contact Kirsty McDonald or myself at Gallie Miles.

By
Shelley Greer
Solicitor

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