Relationship Property and Trusts: A 'trust-busting' case

The recent Supreme Court decision of Sutton v Bell is the latest “trust-busting” case to be released.

It is an important reminder for people in, or contemplating a relationship, that a trust is not the most useful mechanism to protect assets that you have brought into the relationship. This case is yet another demonstration how a Contracting Out Agreement (or “pre-nup”) is the best way to protect your assets going into a relationship.

Sutton v Bell

The facts of the case are quite simple. Mr Sutton met Ms Bell. They decided that they would live together and enter into a “de facto relationship”, which is a relationship in the nature of a marriage. Mr Sutton owned a home in Point Chevalier in Auckland and wanted to protect this asset from any claim from Ms Bell. Ms Bell even encouraged him to do this. Mr Sutton sought legal advice and was told to transfer the Point Chevalier property into a trust, which he did shortly before the move-in date.

The relationship ended about eight years later and after the couple had had two children. Under the Property (Relationships) Act 1976 (“the Act”), trust property is not considered to be relationship property. Nevertheless, Ms Bell utilised one of the “trust-busting” mechanisms to claim a half-share in the Point Chevalier home. Ms Bell made a claim under Section 44 of the Act, claiming that Mr Sutton disposed of the future family home into a trust in order to defeat any claim or rights that she may have against it.

The case worked its way through the Family Court, High Court and Court of Appeal before reaching our highest Court, the Supreme Court. The key question was whether a disposition of the Point Chevalier into a trust prior to the relationship allowed for Ms Bell to make a claim under Section 44.

Mr Sutton argued that he could not have intended to defeat Ms Bell’s rights as Ms Bell had no rights with respect to the Point Chevalier home at the time it was transferred to the trust. The family home is normally equally shared between a couple, no matter how it is acquired, provided they have been in a de facto relationship for three years (though exceptions do exist to this “rule of thumb”). Mr Sutton and Ms Bell were not yet living together when the transfer was made.    

Ms Bell said no, that the transfer of the Point Chevalier was made in anticipation of the relationship and therefore it should be covered by Section 44.

The Supreme Court found that because the transfer of the Point Chevalier was made in contemplation of the de facto relationship, that it fell within the scope of Section 44. The Court was persuaded by the fact that there was the ability to enter into a Contracting Out Agreement (aka “pre-nup”) with the mandatory benefit of legal advice. Mr Sutton did not take this step. If people were to be able to simply transfer property into a trust in contemplation of a relationship, it would defeat the purpose of Contracting Out Agreements and the need for both parties to obtain independent legal advice. It is important that parties to a relationship know what their legal rights and obligations are with respect to relationship property.

The Supreme Court ordered the trustees of Mr Sutton’s trust to transfer the property in half shares to Mr Sutton and Ms Bell. It would then be subject to the ordinary equal-sharing principles.  

An interesting comment made by the Supreme Court was that, once a couple mutually contemplates living together, a de facto relationship may have already come into existence. While the ramifications of this comment are not yet known, it is important that people seek legal advice at an early juncture from a relationship property expert. This is so that they can make an informed decision around asset protection.

Had Ms Bell’s claim under Section 44 not been successful, she may have had other remedies such as claiming a constructive trust over the Point Chevalier property.

Protecting assets in a Trust vs a Contracting Out Agreement

It is becoming easier and easier to “trust bust” and people should not take the fact that their assets are in trust as meaning that they are completely protected against claims from their spouse or partner. The key reminder in Sutton v Bell is that your best protection is a Contracting Out Agreement.