It is dangerous for a client with a pre-relationship trust who is married or in a civil union, to add their spouse as a beneficiary of the Trust

The recent Supreme Court in Preston v Preston [2021] NZSC 154 (see here https://www.courtsofnz.govt.nz/assets/cases/2021/2021-NZSC-154.pdf) shows how dangerous it is for a client with a pre-relationship trust who is married in a civil union, to add their spouse as a beneficiary of the Trust. Preston v Preston dealt with s. 182 of the Family Proceedings Act 1980, which empowers a court to vary the terms of a settlement made before or during the marriage, where the parties’ marriage comes to an end.

Mr Preston and Mrs Preston were married for just under five years and had children from previous relationships and no children together. Most of the assets at issue were owned by the Grant Preston Family Trust, which Mr Preston formed before meeting Mrs Preston. The High Court, the Court of Appeal and the Supreme Court all held that “an amendment deed executed in February 2010, which had added Mrs Preston as a discretionary beneficiary to the GPF Trust, was a nuptial settlement for s 182”

In Preston v Preston the Supreme Court held that the purpose of s. 182 is to empower the courts to remedy the consequences of the failure of the premise – a continuing of the marriage or civil union – on which the nuptial settlement was made. They decided that a comparison is to be made between the position under the settlement if the marriage or civil union had continued and the position after the dissolution. The Supreme Court observed that as the purpose of s. 182 is to remedy the disparity. Where the Court is faced with a disparity, the usual course is to make orders to provide that remedy. The Supreme Court held that to depart from this logic would require there to be factors telling against such an outcome, such as where the interests of a dependent child are predominant or where both parties brought considerable assets to the marriage and had maintained some separation in the way those assets were utilised.

Applying these principles, the Supreme Court held there was a clear difference between the direct and indirect benefits Mrs Preston would have continued to receive from the Trust if the marriage was ongoing, compared to her position after the dissolution. The Court, therefore, held that the discretion under s. 182 therefore applied, and orders in Mrs Preston’s favour needed to be made. The Supreme Court took into account that Mr Preston’s children were the final beneficiaries of the Trust; that the main assets had been settled on the Trust prior to the relationship between the parties, and that this was not a lengthy marriage. On that basis, the Supreme Court held that a “modest sum” of $243,000 was to be made to Mrs Preston under s. 182 (plus costs). That sum was approximately 15 per cent of the Trust’s equity.

For the earlier Supreme Court in Clayton v Clayton [2015] 3 NZLR 293 see here: https://www.courtsofnz.govt.nz/assets/cases/2016/sc23_2015claytonvclaytonsubst.pdf 

 Do these decisions affect settlor’s who have only transferred property to their Trust before the marriage or civil union?

The recent decision in Preston v Preston shows that a married or civil union settlor who has transferred separate property to a Trust formed before a relationship can be adversely affected.

 It is now clear that a married or civil union settlor who transfers separate property to a trust formed after a relationship can be worse off than a party who retains separate property in his or her own name or in a company the shares in which are owned by him or her if they add their spouse of civil union partner as a beneficiary of the Trust.

It has always been and still is essential to have a relationship property agreement before commencing living together with a new partner

In view of the above passages in the Supreme Court’s judgments it is essential that everyone with a trust, or who may form a trust, enters into a s 21 agreement before commencing living together with a new partner as a couple, providing, inter alia, that the settlors and trustees powers under the trust deed are not relationship property. That is now the only safe way in which to avoid such results.

In the case of a married or civil union settlor who adds their partner as a beneficiary of their Trust, even a relationship property agreement will not be sufficient to avoid a claim under section 182 of the Family Proceedings Act 1980.