When Trusts Meet De Facto Relationships: A Deep Dive into the Recent Supreme Court Decision in Sutton v Bell [2023] NZSC 65

With the changing landscape of family law, one of the most debated issues in recent times has been the intersection of trust law and de facto relationships. Central to this discussion is the landmark Supreme Court decision in Sutton v Bell [2023] NZSC 65. This article aims to provide an analysis of the decision and its implications.

Background: Trusts Before Entering a New Relationship

Traditionally, if a person from a previous relationship (referred to as "relationship one") intended to safeguard their assets before entering another relationship ("relationship two"), they would establish a trust. A common understanding was that if assets were moved into a trust before the commencement of the second relationship, they would be insulated from claims by the incoming partner. This was especially if the new partner played no part in the acquisition of the earlier assets.

Enter Sutton v Bell

The ground shifted with the Supreme Court's decision in Sutton v Bell. The court ruled that if assets from the first relationship are placed into a trust when there's a "clear and present intention" to enter a de facto relationship with another partner, such trusts can be overturned. The assets can then be claimed by the second partner, insofar as a court deems it appropriate.

In the cited case, the Family Court initially found an eight or nine-month de facto relationship existed before trust establishment. However, the High Court, after reviewing more details, held that the trust was formed just days before the inception of the second relationship.

Key Takeaways from the Decision

1.    "Clear and Present Intention" Test: The court has now provided a more definitive test: if a property is disposed of when parties are in a romantic relationship or living together, but without an intention to become de facto partners, the trust remains valid. The crux is whether there was a "clear and present intention" to enter a de facto relationship at the time of trust establishment.

2.    The Gray Area of "De Facto": Under s 2D of the Property (Relationships) Act 1976 (PRA), a de facto relationship commences when persons who are at least 18 (and are not married or in a civil union with one another) “live together as a couple”. There are a range of factors in s 2D(2) of the PRA that are relevant to determining whether a de facto relationship exists. The definition of "de facto" remains ambiguous, making it challenging for legal practitioners to conclusively categorize certain relationships. This uncertainty can lead individuals to take drastic steps, like prematurely ending potential relationships, to avoid legal implications.

3.    Impact on Social Behaviour: The verdict may reshape societal behaviours. Just as New Zealanders have adjusted to pre-nuptial agreements before marriages, a similar practice may emerge for couples entering de facto relationships, necessitating a kind of "pre-de facto" agreement.

The Journey to the Supreme Court: Previous Decisions

The Court of Appeal, in its preceding decision (Sutton v Bell [2021] NZCA 645), determined that contemplating a de facto relationship could serve as grounds to set aside property dispositions, such as trust formations. The Supreme Court upheld this ruling.

What Does This Mean for Trusts and Asset Protection?

The verdict in Sutton v Bell serves as a stark reminder. Trusts might not be the ultimate bulwark against claims on assets brought into relationships. Instead, a Contracting Out Agreement or "pre-nup" emerges as a more robust mechanism to shield such assets.

The implications of the decision are vast:

·         Trusts established in contemplation of de facto relationships are now under scrutiny, especially if made without the benefit of a Contracting Out Agreement.

·         The definition of when a de facto relationship begins might now encompass periods where couples are only contemplating cohabitation.

·         For those with assets, it's paramount to seek expert advice early in relationships. This ensures informed decisions concerning asset protection and minimizes risks.

In Conclusion

The Sutton v Bell decision is a watershed moment in the realms of trust and family law. The decision underscores the importance of clear legal guidance, especially when love and assets mix. As the landscape evolves, ensuring that your assets are well-protected by a relationship property agreement before entering a relationship becomes more crucial than ever.