When families blend, existing trust arrangements need careful consideration to protect everyone's interests. Through a real-life example, we explore how new relationships can impact Trust assets and what steps can be taken to maintain asset protection while being fair to all family members.
Despite recent significant law changes affecting trusts, they remain popular mechanisms in New Zealand for safeguarding a family’s assets. In the situation of a blended family, it is particularly important to ensure that the Trust Deed and related documents are fit for purpose.
Think of your trust as a citadel built to protect your hard-won assets sitting inside the strong citadel walls, safe from marauders. Careful thought needs to be given before adding new points of entry, such as doors and windows.
Part 1 - Existing Trust and new Blended Family
Consider the situation where Jane, with two children from a previous relationship, marries David, who has three children. David’s first wife died when their children were quite young. David subsequently established a family trust, with the beneficiaries being himself, his three children and, in due course, his grandchildren. The trust owns a large investment portfolio and the home where David and his children live.
Although not a citadel, David’s house is big and, following her marriage to David, Jane and her two children move in with him and his children. Jane then begins contributing to the usual operating costs – power/broadband, rates, insurance, Sky TV, grounds upkeep, etc. When they decided to redecorate the kitchen, Jane, who has a flair for colour and design, did most of the work herself.
Perhaps unknowingly, David has built a door into his citadel wall and opened it to Jane.
Neither Jane nor her children are beneficiaries of David’s trust, but now Jane may have a claim on the house under the Property (Relationships) Act 1976.
To ensure that the asset protection afforded by his trust is effective, David needs to enter a Contracting Out Agreement with Jane, the terms of which include that she has no claim on the trust, except to the extent which might be granted to her by David.
Later on, before appointing Jane and/or her children as beneficiaries of his trust or appointing Jane as a trustee (and thus putting a new door into the wall of the citadel), David should seek legal advice about whether changes are needed to the Trust Deed to ensure that his children’s interests remain protected.
In Part 2, we’ll consider an existing blended family where the parents wish to establish a new Trust.