How does the International Relationship Property Trust Act (2021) address the issue of forced sale of family businesses?

The International Relationship Property Trust Act (2021) aims to safeguard family businesses from forced sales often triggered by divorce or separation. The Act establishes a legal framework that allows couples to place their jointly owned assets, including family businesses, into a Relationship Property Trust (RPT).

Here’s how the Act addresses the issue:

• Protecting Assets from Division: The Act explicitly states that assets within an RPT, including interests in family businesses, “must be held intact and remain upon the trusts declared, and must not be divided and distributed in the event the parties separate unless the trust instrument provides otherwise.” This means that even if the couple divorces or separates, the ownership of the family business remains within the trust structure and is not subject to division as part of the separation settlement, preventing a forced sale.
• Recognizing the Unique Nature of Family Businesses: The Act acknowledges that a forced sale of a family business can be “catastrophic to both its value, and the interests of the beneficiaries” and can often lead to the “collapse of the business.” This understanding underscores the Act’s emphasis on preserving such businesses by keeping them within the trust structure.
• Allowing for Continued Management: The Act recognizes that the continued involvement of a spouse in the management of the family business, even after divorce or separation, can be crucial to the ongoing success of the business. The Act states that “it may be in the best interests of the beneficiaries if management of a family business by a spouse, who is a key person, continues after divorce or separation.” This provision ensures that the business can continue to operate smoothly and benefit from the expertise of key individuals, even in the event of relationship breakdown.
• Providing Security for Lenders ad Co-Investors: By preventing the forced sale of a family business or other assets during divorce proceedings, the Act also provides a higher level of security for lenders. In particular, financial institutions lending to family businesses under an RPT can be confident that the business will not be subject to sudden ownership changes or forced sales due to divorce or separation, thus reducing their risk. The same principles apply to co investors with the spouses.

The Act, therefore, introduces a mechanism to separate the fate of a family business from the outcome of a relationship. Instead of being treated as an asset to be divided, the business is seen as an entity meant to be preserved for the benefit of the family, ensuring its continued operation and safeguarding the interests of all stakeholders involved.

Part 4 will be published next week.

If you are considering using a Cook Islands International Relationship Trust contact us by email at info@trusteescookislands.com for our registration package and details.