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What are trusts and how can they cause problems at the end of relationships?

What is a trust?

A trust is a way of holding property. Under a trust, the trustee owns and manages the property for the beneficiaries. The document used to create the trust will explain who the beneficiaries are and what property they are entitled to.

The trust document can give the beneficiaries different interests.

Sometimes, the document might say that the beneficiaries may have a fixed share of the trust property. The trustees then must give the property to the beneficiaries when the beneficiaries ask for it, or when a certain event happens, like the beneficiaries turn 21.

Sometimes, the trust document might say the beneficiaries may have the trust property only when the trustees decide. The beneficiaries cannot make the trustees give them the property.

Why do people use trusts?

People use trusts for many reasons. Some people use trusts to keep assets safe from the risks related to their business or occupation. Some people use trusts to pass certain assets, like a family business or farm, to the next generation. Some people use trusts to give to charity, or to provide property for people who cannot manage it on their own like children or intellectually disabled people. Some people use trusts so they need not share property with their partner under the Property (Relationships) Act 1976.

Esther wants to buy a house. Her lawyer suggests using a trust.

Esther agrees and signs a document which sets up a trust. Esther and the lawyer are trustees. When she buys the house, Esther and her lawyer are named as the property’s owners because they are the trustees.

The trust document says that the beneficiaries are Esther and any children she may have. But the trust document says that the trustees can choose whether to distribute property to the beneficiaries.

What happens to property held on trust when a relationship ends?

When a relationship ends, the Property (Relationships) Act 1976 sets out how the partners should to divide their property. But the Act only applies to property that the partners own.

When a partner holds property as a trustee, the Property (Relationships) Act 1976 does not see it as their property.

If a partner is a beneficiary under the trust, their beneficial interest might be property. But the courts have said that if the trustees can decide whether or not to give property to the beneficiary, the beneficiary’s interest is not property.

That often means property held on trust will not come under the Property (Relationships) Act 1976. It does not need to be divided. Instead the trustees will continue to hold the property according to the trust document.

Sometimes a person might have a remedy if the trust has defeated their legal rights. We look at some remedies here.

Esther and Greg
Two years after Esther buys the house using the trust, she gets married to Greg. Esther and Greg live in the house. The couple use Greg’s income to pay the grocery and utility bills. They use Esther’s income to pay the mortgage over the house.

Nine years later Esther and Greg separate. Greg moves out. Esther stays living in the house. Greg goes to see a lawyer to see how he and Esther should divide their property. The lawyer says that the Property (Relationships) Act 1976 does not require him and Esther to share the family home. That is because the home is held on the trust.

What are some problems trusts can cause?

Because the Property (Relationships) Act 1976 may not apply to property held on trust, there can be several problems when people separate.

  1. Sometimes a trust may hold property that would normally be important and valuable items of relationship property. For example, the partners would usually divide the family home. If the home is held on a trust, the trust stops people from sharing the home equally regardless of what rights they would normally have under the Property (Relationships) Act 1976.
  2. Sometimes people create a trust assuming that their family will remain together. For example, both partners may be trustees. Or the trust property may be central to family life, like the family home, a bach or the assets of a family business. If the partners separate, the Property (Relationships) Act 1976 provides no way for the partners to sort out these trusts.
  3. Sometimes a partner will control a trust. A partner may be a trustee. Or the trustees might follow that partner’s instructions. If the partner can control the trust, the partner may get to use and enjoy the trust property. Or in the future the trustees may give the partner the trust property. But, regardless of the practical benefits a partner might get from a trust, the Property (Relationships) Act 1976 will not usually divide the property. This may mean one partner leaves the relationship with little property whereas the other gets access to large amounts of property.

The law is inconsistent. Normally if people do not want the Property (Relationships) Act 1976 to apply they must enter an agreement following the process set out in the Act. The process requires each partner to have independent legal advice so they know exactly how the agreement affects their rights to the property. A trust can have the same effect as a contracting out agreement because it can stop the partners from sharing the property when they separate or if one partner dies. But a partner can move their property so it is held on trust without the informed consent of the other partner.

What do you think?

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