Can Your Partner Challenge Property You Put into a Family Trust?

What section 44 of the Property (Relationships) Act means for your home and family trust

You own your home. You've worked hard to pay off the mortgage, perhaps long before meeting your current partner. You want to protect what you've built, so you transfer the property into a family trust.

But what happens if the relationship ends? Can your former partner challenge the transfer, even if the property went into the trust before your relationship officially began?

The Supreme Court's decision in Sutton v Bell [2023] NZSC 65 provides an important reminder that putting property into a family trust does not necessarily protect it from a relationship property claim.

What does section 44 of the Property (Relationships) Act say?

Section 44 of the Property (Relationships) Act 1976 (PRA) allows the Court to make orders where property has been disposed of with the intention of defeating another person's rights or claims under the Act.

A disposition might involve selling, gifting or transferring property to another person or entity, including the trustees of a family trust.

Where the statutory requirements are met, the Court has powers that include ordering property to be transferred or requiring payment of compensation, subject to the protections and limitations in section 44.

Importantly, the Court does not necessarily have to find that someone acted dishonestly or deliberately set out to harm their partner.

Knowledge that a transfer would defeat a partner's relationship property rights can be sufficient.

What happened in Sutton v Bell?

Mr Sutton owned an Auckland property before his relationship with Ms Bell became a de facto relationship for the purposes of the PRA.

In November 2004, he transferred that property to the trustees of his family trust.

The couple's de facto relationship was subsequently found to have commenced sometime between December 2004 and January 2005. They went on to have two children together before separating in 2012.

Following their separation, Ms Bell challenged the transfer of the property into the trust.

Mr Sutton argued that section 44 could not apply because the transfer had taken place before their de facto relationship began. At that point, he argued, Ms Bell had no relationship property rights for him to defeat.

The dispute eventually reached the Supreme Court.

Can section 44 apply before a relationship begins?

Yes, in certain circumstances.

The Supreme Court unanimously dismissed Mr Sutton's appeal and confirmed that section 44 is not restricted to property transfers made after a marriage, civil union or de facto relationship has formally commenced.

However, the Court did not suggest that every transfer made before a relationship begins can be challenged.

For a transfer made in anticipation of a de facto relationship, the Court considered it appropriate to require a clear and present intention by the parties to become de facto partners.

In Sutton v Bell, the Court found that the couple were on the cusp of a de facto relationship when the property was transferred. Their relationship already showed signs of permanence.

The timing of the transfer therefore did not prevent Ms Bell from pursuing her claim.

What if protecting the property was the reason for establishing the trust?

This was another important aspect of the decision.

Mr Sutton argued that he had legitimate reasons for establishing his trust and had not transferred the property for the conscious purpose of defeating Ms Bell's rights.

The Supreme Court confirmed that section 44 does not require proof of a deliberate desire to deprive someone of their rights.

It can be enough that the person transferring the property knew the transfer would have that effect.

The Court found that Mr Sutton knew the transfer would defeat Ms Bell's future relationship property claim.

Interestingly, Ms Bell had been aware of the proposed trust arrangement and had initially supported it. However, that did not amount to a legally valid agreement to contract out of the PRA.

The Court upheld the order requiring the property to be transferred from the trustees to Mr Sutton and Ms Bell as tenants in common in equal shares.

Does this mean family trusts no longer protect property?

No. Family trusts remain useful for estate planning, succession planning and managing family assets.

However, trusts should not be treated as a substitute for proper relationship property planning.

The outcome of any challenge depends on the circumstances, including when the property was transferred, the nature of the relationship at that time, the transferor's knowledge and the effect on the other person's rights.

An established trust is not automatically vulnerable simply because a beneficiary or trustee enters a new relationship. Equally, the fact that a trust was established before a relationship began does not automatically prevent a challenge.

The trust's history, the way its assets were acquired and the arrangements between the parties all need to be considered.

What is the difference between sections 44 and 44C?

These provisions are sometimes confused, but they operate differently.

Section 44 addresses dispositions made with the requisite intention to defeat rights under the PRA. It can allow the Court to set aside a transfer and make other orders.

Section 44C provides a compensation mechanism where relationship property has been transferred to a trust during a marriage, civil union or de facto relationship, the transfer has the effect of defeating one party's rights, and section 44 does not apply.

Unlike section 44, section 44C does not require proof of an intention to defeat rights. Its available remedies are also more limited.

Neither provision means that every asset held in a family trust automatically becomes relationship property.

Would a contracting-out agreement provide better protection?

For many couples, a contracting-out agreement under section 21 of the PRA is a more appropriate way to address ownership and division of property.

These agreements can be entered into before or during a relationship. They can identify property that the parties intend to keep separate, including interests associated with family trusts.

To be legally effective, the agreement must meet the statutory requirements, including being in writing, signed by both parties and supported by independent legal advice for each party, with the required lawyer certifications.

Even a properly executed agreement can be set aside if giving effect to it would cause serious injustice.

The advantage is that both parties have an opportunity to understand and agree on their respective rights, rather than relying solely on a transfer into a trust.

What should you do if you already have a family trust?

If you are entering a new relationship, moving in with a partner or reviewing an existing trust, it is sensible to consider how your trust arrangements interact with the PRA.

In particular, consider:

• Whether your home is personally owned or held by trustees.

• When and why property was transferred into the trust.

• Whether you or your partner have made financial contributions to trust property.

• Whether there are outstanding loans between you and the trust.

• Whether a contracting-out agreement is appropriate.

• Whether your trust deed, Wills and estate planning arrangements still reflect your circumstances.

These questions are especially relevant for people entering second relationships, blended families and those who have accumulated significant assets before meeting a new partner.

Planning ahead

The lesson from Sutton v Bell is that the legal effectiveness of a trust arrangement depends on more than the date on the trust deed or the name appearing on the property title.

A family trust may still be an appropriate part of your estate and asset planning, but it needs to be considered alongside your relationship property arrangements.

We help clients review family trusts, understand their relationship property obligations and put appropriate legal arrangements in place.

If you are considering transferring property into a trust, entering a new relationship or reviewing arrangements established many years ago, obtaining advice early can help avoid expensive disputes later.

Plan. Protect. Pass on.

This article provides general information about New Zealand law and is not a substitute for legal advice tailored to your circumstances.

Further reading: Sutton v Bell [2023] NZSC 65, Supreme Court of New Zealand; Property (Relationships) Act 1976, sections 21, 21F, 21J, 44 and 44C.