When separation beats trust protection
In this article we explain why placing your assets in a trust may not protect them upon separation and what you can do to fix this and ensure your assets are protected.
Most people now understand that after a “qualifying” period, if you separate from your partner (or if one of you die) your relationship assets will be shared 50:50.
The qualifying period is usually three years but it can be much less depending on certain circumstances.
Many people also believe that having their assets in a trust before or during the relationship will protect those assets and they will not be included in the division. This is wrong.
Whilst having your assets in a trust is usually a good idea, in many situations those assets are able to be dragged into the pot and fought over if you separate.
The intention of this article is to educate our clients on what they should do to ensure a fair division of assets if they separate.
Equal sharing on separation
Firstly, lets be clear. For many couples the proposal to share all relationship assets equally is completely fair. In that instance no further advice may be required.
But for many others, particularly those who have been through previous separations, or those who have substantial assets compared to their new partner, it can seem unfair that their new partner might automatically share half of those assets if they separate at some future date.
The Property (Relationships) Act 1976 cannot take into account individual peoples circumstances and so it provides a default position of a 50:50 split. If you wish a more fair arrangement to govern your relationship then you need to prepare and sign a “Property Agreement” to record these more appropriate terms. The Act sets out exactly how this is to be done.
We encourage all parties in a relationship to talk about this issue themselves. Just as we advise co-business owners to enter a Shareholders Agreement setting out what will happen if one of them dies or they 'fall out', we believe it is essential that couples talk to each other about their expectations should they separate (or die). If their expectations are different from a 50:50 split then they need to sign a Property Agreement.
Where trusts lose their protection
Returning to the protection afforded by trusts, often one partner will already have a house in a family trust when starting a new relationship. Their big mistake is in assuming that this house is therefore protected from a claim upon separation.
The Property (Relationships) Act and the way that the courts have interpreted the law expressly allows for the trust owned house to be included in some situations. Examples include:
If the house was transferred to the trust when the couple were already in a relationship the court may order that either the transfer to the family trust is reversed or a payment needs to be made to the non-owning partner for what they would have been entitled to had the transfer not taken place.
Even if the property was already in a family trust before the relationship commenced, if there is a loan secured over the property and either party makes loan payments, then it could be argued that those payments were made from relationship moneys and hence a claim can be made against the trust assets.
If one party contributed to the “improvement” of the home (and improvement can be defined quite widely) then they may have an ability to claim against the trust.
Even the terms of the trust can have an effect. If, during the relationship a trust provided for both parties in some manner but after the divorce one party ceases to be supported, then it is possible that a claim can be made against the trust to recompense for the lack of support that is now available to the divorced party. This can be true even if the trust was set up by someone other than the party to the relationship (for example, family money set up by a grandparent).
Please note that these are only a few examples of where a claim could be made against a trust. Our expert relationships law team are involved in both making and receiving these types of claims in relation to trust assets on behalf of our clients on a daily basis.
What is totally clear is that the mere ownership of assets in a family trust is by no means a complete protection from claims by your future ex partner.
There is a solution!
Fortunately all of the above claims and others can be prevented by entering into a Property Agreement under section 21 of the Property (Relationships) Act.
Such an agreement allows the parties to discuss and agree what is a fair outcome in the event of separation or the death of either party.
A binding agreement
A properly completed Property Agreement is completely binding on all parties. It might include provisions which confirm that one party will not have any claims against the other party’s family trust or it might specifically provide for some form of partial claim against the trusts assets. Its beauty is that it can provide for whatever the parties agree upon!
You must have the discussion
Discussing these matters can be uncomfortable (just as discussing the provisions of your Will is uncomfortable) however both are very wise. We can assure you that not having this discussion will often result in a far more expensive outcome for both parties in the event that you do separate.
At the end of the day, discussing what is fair should you separate or die is an important discussion for two mature people in a relationship to properly provide for one another in the event of future eventualities.
Further related points
If you do have the family home in your trust and your partner is not a beneficiary of that trust then you should be making provision with the trustees as to what will happen if you are incapacitated or die. You would not want your loving partner effectively evicted from the property simply because they are not a beneficiary of the trust and you have not properly provided for them. This can easily be done via a Deed of Ownership with the trustees and with careful drafting of your wills.
Trusts still have a valuable place as a protective tool - from creditors if you are in business, from estate claims, as an estate planning exercise to keep assets safe from your children’s partners as well as in certain other circumstances enabling you to reduce your liability from other claims.
They are an essential part of a complete arsenal of tools to manage your assets properly, including wills, powers of attorneys, trusts and a property sharing agreement.
The provisions of the Property (Relationships) Act provide a default setting of equal sharing in an attempt to achieve fairness when a relationship ends. Whether you have a family trust or not, it is actually very unlikely that either party will be satisfied with the default provisions following separation.
If you have entered your current relationship with unequal mixes of assets, children, earning capabilities or past separation experiences it is even less likely that the default provisions will work for you.
The approach which works best, is for you to discuss as a couple what you think would be fair, and for a Property Agreement to be prepared and signed. This is not inexpensive but the comfort and value to your relationship is immense.
You do not need to solve this issue yourself and then present it to a lawyer. Our team are experts at helping our clients work through the issues and reach a fair agreement. All you need to do is agree that you would like to remove the uncertainty of the default provisions and make an appointment to see our relationship experts.
They will do the rest.