Unequal debts owed by a family trust can become relationship property

March 18, 2015

in Family & Relationship Property

iStock_000017754761SmallMany people will be familiar with the concept of transferring assets to a trust.  The value of those assets or any part that hasn’t been paid being left as a debt owed by the trust to the person transferring the assets.

Often couples transfer assets to trusts either before or after a relationship starts and in many cases this may involve a situation where one or other of the parties is transferring more in value to the trust than the other.

The normal process provides for a gifting programme to be entered into which over time has the expectation that all of the debt will be forgiven and become trust property.  This, of course, may take longer for one party than the other if the size of the other parties debt is larger.

The abolition of gift duty has refocused peoples attention on this issue and in particular the question of whether or not to maintain a gifting programme which requires the debt to be reduced over time or to forgive the total balance of the remaining debt in one lump sum.  There are a number of considerations that need to be taken into account in respect to such a decision and you should always take legal advice on such an issue.

One further issue that may now need to be taken into account as a result of a recent High Court decision is the question of the status of debts on separation.  The High Court has decided that in a situation where there was significantly larger debts owed by the trust to one partner than the other that upon separation the total amount of both debts was to be combined and treated as relationship property and shared equally.  This was due to the fact that the parties had not entered into a Relationship Property Agreement at the time of transfer of assets to the trust (and the creation of the relevant debts) setting out whether those debts were to be treated as separate property or relationship property on separation.

It was clear that the intention when setting up the trust when transferring the property was that over time the debts would be forgiven and ultimately become the property of the trust.  The parties however separated before that was completed and therefore the issue of ownership of the debts was very relevant.

As no Relationship Property Agreement or independent advice was provided there could be no finding that there had been an agreement to treat the debts as separate property on separation.  The Court also found that there was no extraordinary circumstances to make equal sharing repugnant to justice within the provisions of the Act.

The decision provides an important reminder that when making decisions as to restructuring assets or transferring assets to a trust all issues should be considered and indeed while it is not pleasant forecasting the possibility of what should happen if the parties separate.

Farry and Co. are experts in this area of law and can provide advice on all aspects that may be relevant to these decisions and also can review any trust structures that have been established by you already.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:

Paul Farry
09 379 0055 or 03 477 8870


The information contained in this publication is intended as a guide only.  It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.

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