If your assets are in a trust they might not be as safe from creditors or relationship break-ups as you might think. Pitt & Moore Associate Andrea Halloran explains;
The Courts are prepared to set aside or go around trust structures if it is justified. Trust structures can be overturned in a number of different ways. These include if the trust has not been run properly; if it is really the “alter ego” of an individual or if the trust was really never intended to operate as a trust. If the trust structure is overturned then any benefits will be lost. For example, if the trust was established with a view to protecting assets from creditors’ claims, once overturned, those assets would be exposed. If the trust was established to hold and protect your family home from any subsequent relationships, the home will no longer be classified as “trust property” but classified as “relationship property” and therefore subject to Property (Relationships) Act, which generally presumes that both partners should share equally in the family home if their relationship is three years or more.
In the relationship property context, the Court of Appeal has recently ruled that trustees of a trust held the increase in value of a property not for the beneficiaries of the trust but for the benefit of the couple who had worked on the property. That meant it was “relationship property” not trust property and was to be shared equally. This is seen as a somewhat novel way to address efforts by a partner who was not a beneficiary of a trust and who otherwise would be unable to claim against any relationship property. The decision must be viewed against the legislative backdrop of the Property (Relationships) Act whereby all contributions, not just monetary, are considered.
When thinking about ways to protect your assets, consider a contracting out agreement instead of, or possibly as well as, a trust. Contracting out agreements allow partners to say what provisions of the Property (Relationships) Act won’t apply to their property interests in the event they separate or go into bankruptcy. Provided each person gets independent legal advice as to the effects and implications of the agreement they are hard to overturn as a challenger generally has to prove it was void due to a technicality or that it would give rise to serious injustice. For a creditor to overturn a contracting out agreement, they would generally have to prove that the agreement was entered into in order to defeat creditors. These are very high thresholds to meet.
Before you sign up to a trust it’s important to seek professional legal and accounting advice to consider whether it’s the right option or whether a contracting out agreement could better serve your needs. Good advice should also include how the trust should be administered in order to avoid potential court action later.