When entering a second or subsequent relationship, it is common to want to keep assets safe from relationship property claims. An effective way to do this can be by transferring assets to a trust. Care needs to be taken, however, to ensure you do this within the law.

A recent case (1) reminds us that transferring assets to trust will generally be ineffective where:

• You have already met someone, and the relationship is ‘in contemplation’, and

• You don’t sign a contracting out agreement.

Background

Ms K, a Hong Kong resident, met Mr R, a builder from Tauranga, when she was in New Zealand as a tourist in August 2008. They quickly developed a relationship and Ms K relocated to New Zealand to be with Mr R. They began living together on 1 March 2009 and Mr R proposed marriage to Ms K in May 2009, though they never actually married.

Mr R, having seen his assets halved on two occasions as a result of relationship property proceedings, was committed to the relationship but wanted to protect his own assets. He was particularly concerned about a section in Tauranga (purchased shortly after the couple met but before their relationship began), where he intended to build a house in which both he and Ms K would live.

After the couple had lived together for about two and a half years, Mr R sought advice from a law firm about the best way to protect his assets. He told the lawyer that he had tried to talk to Ms K about a contracting out agreement, but she got angry and refused to do this.

The lawyer advised Mr R to set up a trust before the relationship got to the three-year mark and to transfer the section into it. Mr R and Ms K then built a house on the section, using Mr R’s separate property (apart from about $100,000 borrowed from the bank in order to complete the build). Mr R and Ms K lived in the new house as a couple until their relationship came to an end in September 2016.

Legal issues

After they separated, Ms K was left with nothing but her personal effects and $900, and so the matter went to court. The court found that section 44 of the Property (Relationships) Act 1976 (PRA) applied. That section says that if someone transfers property (for example, to a trust) with the intention of putting it out of the reach of their partner, then the court has the power to transfer that property back, and divide it as it sees fit.

Mr R tried to argue that s 44 should not apply, because the relationship hadn’t been in existence for three years when he transferred the property to his trust. The court found, however, that it did not matter whether Ms K had any rights to the property at the point it was transferred. The only issue was Mr R’s intention, and his very clear evidence was that his intention in creating the trust was to protect his property from any claim from Ms K.

Outcome

Mr R was ordered to pay half the value of the home to Ms K. He then sued his lawyers; the court found that the lawyers should have made it clear that transferring assets to a trust once a relationship was already contemplated had a good chance of resulting in successful claims under the PRA. Mr R was awarded damages equal to the half share in the home he had been ordered to pay Ms K, plus the initial legal fees and costs.

Get a contracting out agreement signed

When transferring assets to a trust, for the purpose of putting them beyond the reach of a PRA claim and in circumstances where a relationship is in contemplation, the best course of action is to enter into a contracting out agreement at an early stage. You cannot use a trust to avoid an awkward conversation.

(1) K v R [2020] NZHC 923

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