Mackenzie Elvin

Protecting your wealth - Recent trends may change the way in which we structure asset planning.

Introduction

During the 1990’s it was standard practice for people to dispose of assets into trusts for the purposes of succession planning, to protect those assets from relationship property claims (including generationally), to provide protection from creditors, and to be divested of personal assets to qualify for a rest home subsidy. It was also common for more than one of these motivations to be present.

Amendments to the Property (Relationships) Act 1976 (PRA) to extend the regime of equal sharing between a married couple of matrimonial property to people in de facto relationships of three years or more came into force on 1 February 2002, after several years of public debate and controversy. This contributed to a significant rise in the numbers of people establishing family trusts and transferring their assets into them. This was at the time seen as the most effective and protective measure available against the impending law change, and as a protection of those assets against future de facto relationships.

However, a recent decision by the Supreme Court appears to cast doubt on the security of property held by trusts. This may be regardless of whether the creditor relationship existed at the time the trust was established and property transferred into it in the debtor/creditor context. With respect to relationship property, this may be regardless of whether the transfer to the trust took place prior to the amendment to the PRA and perhaps even to any de facto relationship having commenced. What matters now is the interpretation of the intention that existed then with respect to the risk of future claims, including ones that may not have then existed.

The PRA and its effect today

The amendments to the PRA which came into effect on 1 February 2002 had the effect of extending the property sharing regime that applies to married couples to people who have been in a relationship for 3 years or more.

As a result, the PRA applies to all de facto relationships that come into existence after the introduction of the Act and it also has the unusual ability to apply retrospectively, meaning that the PRA applies to de facto relationships that came into existence prior to 1 February 2002 and continued to exist beyond that date.

Prior to the legislation being introduced and passed, many people who were in de facto relationships endeavoured to get their affairs in order to protect their assets. This usually meant establishing a trust and moving assets into the trust.

Even though a trust may have been established and the assets moved into the trust, the PRA gives certain remedial powers to the court to set aside a transfer to a trust in a relationship property context if the court believes that the intention behind transferring property into the trust was to defeat the rights of any person under the Act.

The courts could now be required to give an increasingly broad interpretation to the extent and application of these powers. This is contrary to the expectation that if property was disposed of to a trust at the time when a de facto partner had no statutory legal right to the property, the property would be protected from any break down of the relationship after the law was extended to de facto relationships.

This is as a result of the potential consequences of the 2009 Supreme Court decision of Regal Castings v Lightbody. In that case, Mr Lightbody was personally liable to Regal Castings for the debts of his company through the terms of a supply arrangement entered into in 1995. In 1998, Mr and Mrs Lightbody transferred their home into a family trust and by 2002 had forgiven the debt back from the trust. In 2003, the company went into liquidation owing a considerable sum to Regal Castings, who then sought to enforce Mr Lightbody’s personal guarantee and to set aside the transfer of the family home into the trust. Both the High Court and the Court of Appeal dismissed the application through a lack of intent on Mr Lightbody’s part. The company was not in finanacial difficulties at the time the property was transferred into the trust, Mr Lightbody’s personal guarantee was not about to be enforced and there was no inevitability of loss at the time of the transfer. However, the Supreme Court disagreed, saying that intent to defeat did not depend on inevitability of loss. What was important was the notion of detrimentally affecting or risking the property of others. Therefore, because Mr Lightbody must have known at the time of the disposing of his only real asset that he was significantly enhancing the risk of his creditors not recovering amounts owing to them, he had the necessary intent.

And there is now a potential application of this test to the relationship property context. The question could now become whether the person disposing of assets to a trust knew at the time that there was a future risk that a de facto partner would not share in those assets.

How do the recent trends affect me?

This recent trend has the potential to affect any person who has assets held in a trust. In the event of a relationship breakdown, the assets previously thought protected by the trust structure may be exposed.

It is possible to contract out of certain provisions of the PRA through a s 21 agreement, which may help to protect these assets. However, as many existing trusts were set up prior to the PRA being amended to include de facto relationships, a s21 agreement may not have been entered into. At that time, there was nothing for the parties to a de facto relationship to contract out of, as the PRA did not then apply to them. Given the broad, retrospective application of the provisions of the PRA, and this subsequent Supreme Court authority that as a matter of general principle an intention to defeat future claims is capable of constituting the requisite intent to defeat, any person with assets in a trust should seek advice to review and strengthen their asset protection.

Fiona Mackenzie

October 2009