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February 2024

Why Trust Structures Alone Aren't Enough to Protect Your Assets: Our Top 3 Tips for Secure Wealth Management in Relationships

In recent years, there has been a discernible shift in the Court’s approach to the division of relationship property at the end of a relationship.

In the past, it’s been possible to preserve individual interests and protect assets acquired prior to and during the course of a relationship through the creation of a family trust. However, there is now a prevailing trend towards the Court prioritising a “just division”, where they place more importance on the actual fairness of the division rather than strictly adhering to formal legal procedures or technicalities. In simple turns, the Court is leaning towards dividing assets equally between parties to achieve a fair outcome, even where assets are held in trust.

This shift can be problematic in today’s context, especially since trusts are commonly used for effective succession planning in blended families and for managing commercial risks in a traditional setting. The concern is that this new preference might impact the benefits trusts offer in these modern scenarios.

Recent court cases highlight the need for formal agreements to safeguard your individual property rights, even if you have trust structures in place. The controversial Supreme Court ruling in Sutton v Bell decided that property put into a trust before a relationship is officially recognised (“de facto”) could potentially be reclaimed in a legal claim over relationship property. Essentially, from the moment you meet your future partner, there’s a risk that property could be subject to future claims.

Additionally, the Supreme Court decided in Clayton v Clayton that the powers of trustee/settlor of a trust can be considered “property”. In this situation, the trust property can be divided when the relationship ends.

Now, the Supreme Court is also considering the case of Cooper v Pinney to decide whether this principle should be extended. The Supreme Court’s decision will have a significant impact on the future effectiveness of trusts against relationship property claims.

So, what can you do to protect your assets? As experts in trust law, here are our top three tips:

  1. Don’t believe the myth that contracting out agreements are just for the rich. They are a common and practical tool that can give you certainty and peace of mind.
  2. Once a dispute starts it’s already too late. Many people don’t engage in this process out of fear that conversations about money and separating may damage the relationship. This is a mistake. Be proactive in your structuring arrangements at the outset of relationships to provide certainty.
  3. Don’t just rely on your family trust. It is likely that a contracting out agreement is needed to support your trust arrangements in light of new case law developments.

While these new legal developments provide challenges, thankfully with the right planning, there are legal mechanisms that can help to preserve individual interests and protect assets acquired prior to and during your relationship.

In navigating these evolving legal landscapes, it’s crucial to recognise the intricate relationship between property rights and trusts. At Grayson Clements we can assist in implementing appropriate structuring arrangements now to ensure that your future assets are protected not only from commercial risk, but also from relationship risk.

We have successfully assisted many clients in structuring their private wealth and succession planning models together with contracting out arrangements. This provides all of the benefits of traditional trust structuring, while ensuring that relationship property claims do not bring down risk trust structures from the inside.

If you’d like more information, please don’t hesitate to reach out to us to learn more.