Use of Capital Reserved Trusts and Lifetime Gifts
Estate Planning Update – Autumn 2013
Wide powers of the Family Court, extending to many opposite and same sex domestic relationships, makes it difficult to thwart a claim by a domestic partner once a breakdown of a domestic relationship has occurred or even once a domestic relationship has been established. (Binding financial agreements, while often a very useful tool, need both full disclosure of assets by, and the informed agreement and consent of, each party to the relationship.)
The same situation does not generally apply to bona fide transactions before a relationship becomes subject to family law, e.g. before the earliest threshold of 2 years cumulative cohabitation is reached, a child is born of the relationship or marriage occurs.
This means that to minimize risks of a family law challenge, bona fide transactions need to occur prior to the relationship being subject to family law, e.g. by the transfer of assets to a trust where the capital is reserved for 3rd parties, e.g. children. Alternatively, outright gifts could be made to those 3rd parties. In both cases, it is imperative that delivery of the transfer of assets occurs, e.g. in the case of cash that assets move from the donor’s bank account to the recipient’s bank account. Where there are loans back to the donor, it is important that the loans remain enforceable, e.g. by the loans being secured against real estate via a 1st of 2nd mortgage.
It is also important to recognize that a Family Court will look at the substance, rather than the formalities of a transaction, in determining when an asset should form part of the pool of assets to be apportioned between the parties or whether the asset should be still viewed as a resource when determining apportionment of other assets.