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September 2002

Who Can I Trust - Issues For Those In Relationships

Today, more than ever, the question "who can I trust?" is very relevant when considering how best to protect your assets. The coming in to force of the Property (Relationships) Act earlier this year is yet another example of the raft of legislation that is currently in force that can put at risk a person’s ability to protect their hard earned assets.

The Property (Relationships) Act now affects all relationships and not just marriages and put simply means that after a relationship has been in existence for three years or more all property owned by either party to that relationship will be treated as owned equally by those parties, no matter how they were originally owned or acquired.

Property Solutions

There are ways, however, for a person to protect those assets whether it be from a partner or a future partner or from litigation risks such as creditors or third parties. Forming a Family Trust and transferring assets to that Family Trust may well provide the best solution for ensuring that such property will continue to be available for a person’s own use or for the use of others such as that person’s children.

If a Trust is set up and run effectively and appropriate assets transferred to that Trust, then the assets will be protected from a relationship that is yet to be entered into or possibly even from a relationship already in existence.

Trust Issues

Once a person has taken appropriate advice and determined the need for a Family Trust, decisions then need to be made as to the form that that Trust will take and the assets that will be transferred to it. There is no such a thing as a standard form of Trust nor an easy way to determine what assets to transfer to that Trust. Both of these matters require careful consideration and may well require the advice of an Accountant in appropriate circumstances. Family Trusts, however, do have certain standard requirements and issues that need to be decided before proceeding further.

The Role of Trustees

Trustees, who are the administrators of the Trust and also the legal owners of the assets transferred to the Trust, must be appointed and while the person setting up the Trust ("Settlor") can also be a Trustee, it is strongly recommended that a person independent of the Settlor be appointed as a Trustee also. A decision also has to be made as to who will benefit from the assets of the Trust ("Beneficiaries") and apart from the Settlor and the Settlor’s direct family, there may well be other parties or even charities that may need to be considered. It is imperative, when forming a Family Trust, that the structure is appropriate for each individuals personal circumstances.

The Gifting Process

It is also important to be aware that when transferring assets to a Trust, a debt must be taken back by the Settlor, as a person is only allowed to gift a maximum of $27,000.00 per year without being liable for a tax called gift duty. It will therefore take a certain period of time before that debt is gifted to the Trust, which directly relates to the value of the asset transferred. Until such gifting is completed, the debt back to the Settlor is not protected by the Trust structure and it may well be that other protections are therefore required if a person is considering entering in to a relationship. Again however, with the appropriate professional advice, adequate protection can be provided by means of a Contracting Out Agreement which contracts out of the provisions of the Property (Relationships) Act.

Ownership of Property

However once the Trust has been set up and property correctly transferred to it, then that property is deemed to be owned by the Trust and not the person who transferred it to the Trust. Therefore any claim by a partner or spouse that that property is relationship property under the Property (Relationships) Act is very likely to fail, as the property is not "owned" by either party. Thus, the property would be unaffected by any breakdown in a relationship or marriage and any subsequent claim by a party against that property in the Trust.

Conclusions

Not only is the Family Trust an effective tool for protecting property from relationships, there are many people who also wish to ensure that there is a structure in place to ensure the effective distribution of those assets to their children or grandchildren at a later date. Most people are only too well aware of the fact that Wills can be overturned and by transferring assets to a Trust during a person’s lifetime there is no need to allow for the transfer of those assets through a Will.