Can the assets of a Discretionary Trust be included in the asset pool in a family law property settlement?
Discretionary Trusts have primarily been used with the aim of protecting intergenerational family wealth or business assets from future property disputes and other financial risks. Despite their benefits in a commercial context, discretionary trusts do not often provide the same level of asset protection from claims made by ex-spouses in family law disputes when a marriage or a relationship breaks down.
When the parties to a marriage or a de facto relationship cannot agree how to divide their assets after separation, the Court has to determine what division of assets would be “just and equitable” in their particular circumstances. The Court has to take into account various considerations in arriving at a just and equitable outcome but first and foremost the Court has to identify all of the assets (property) and liabilities of the parties.
Therefore in answer to the question whether assets of Trust can be included in the property settlement, the Court will first need to be satisfied that the Trust assets form part of the “property” of the parties to a marriage (or de facto relationship). If they do, then the Court has the power to deal with such Trust assets as part of the parties’ overall assets when determining how they should be distributed.
What is Property?
Under s 4 the Family Law Act (Cth) 1975 property of the parties to the relationship is defined as follows: “property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion”. In simple terms, the definition of property has a very broad meaning and in appropriate circumstances assets held in a discretionary trust can be treated as being property even though the legal owner of such assets can often be a Corporate Trustee (ie a Company). Therefore if the Court determines that the assets of the Trust should be regarded as being property of the parties to the relationship, they will be available for distribution between them in the same way as the rest of their assets.
In circumstances where the Trust assets are held by a Corporate Trustee and when it is appropriate and necessary, the Court can direct the Corporate Trustee to undertake various actions such as making distributions of income or capital to a beneficiary in a particular way as well as fixing the vesting date so the assets of the Trust can be distributed between the parties.
In other cases where the Trust assets do not fall within the definition of property, the Court can still examine whether the parties have historically received financial benefits from the Trust and whether they are likely to receive further such benefits in the future. If the latter scenario applies, the Court will not include the Trust Assets in the asset pool but it can still consider them as a financial resource of one of the parties to the relationship.
Who is in control of the Trust?
In determining whether the assets of the Trust will be treated as being property of the parties to the relationship, an essential factor is determining whether a party to the relationship has sufficient control over the Trust to distribute income or assets to themselves or to the other spouse. In establishing whether a party has control over the Trust, the Court takes into account a number of considerations such as the following:
- Who is the Trustee of the Trust or if there is a Corporate Trustee who are the Directors and the Shareholders?
- Who are the Beneficiaries?
- The terms of the Trust Deed as well as the timing of any variations made to the terms of the Trust Deed.
- Whether the variations to the Trust Deed were made for a proper purpose or whether they were made with the intent of defeating a party’s potential claim to a property settlement.
- Who is the Appointor of the Trust and particularly having a close look at the Appointor’s powers (for example whether they have the power to remove or appoint Trustees).
- The relationship between the key individuals in the Trust structure such as the Appointor, the Directors and Shareholders of the Corporate Trustee as well as the Beneficiaries.
- Whether there have been any changes to the Appointors and Trustees ( including Directors or Shareholders of Corporate Trustees) during the marriage or after separation.
- Whether the Trustee (if it is a third party or a Corporate Trustee) or the Appointor is controlled by a party to the relationship. This can include situations where a Trustee is a “puppet” or the “alter ego” of the party to the marriage.
- Whether the assets of the Trust were generated by the efforts of at least one party to the relationship or whether the source of the assets in the Trust were established by the efforts of third parties prior to the commencement of the parties’ relationship.
- The historical pattern of benefits derived from the Trust by one or both of the parties to the relationship such as distributions of income, loans, payment of expenses as well as the ability to use assets of the Trust for the benefit of the parties.
- Whether by reason of the position held by a party to the relationship in the Trust structure and the relevant powers which are bestowed upon such position, such party can distribute the majority of the Trust assets to himself or herself.
The above list of numerous considerations demonstrates that there is no set formula when answering the question whether the assets of a Trust will be regarded as being property. Each case will turn on its own facts.
Below is a list of some recent cases which demonstrate that the treatment of Trusts in property settlements can vary significantly from case to case.
Recent Cases involving Trust assets
The High Court of Australia determined that the assets of the Discretionary Trust were property of the parties to the marriage.
- The Husband established a Discretionary Trust two (2) years after his marriage to the Wife.
- The Husband was the Trustee. The Husband and the Wife were included in the class of potential beneficiaries.
- The greater part of the assets of the Trust were acquired during the period of the marriage.
- During the marriage the Husband varied the Trust and removed himself as an income beneficiary.
- At a time when the marriage was experiencing difficulties, the Husband varied the Trust again by removing both himself and the Wife as capital beneficiaries.
- After separation, the Husband divided the Trust into 4 Trusts for their 4 children. The Husband appointed himself as one of the Trustees of each of the 4 Trusts. The Husband transferred to each of the children’s Trusts one quarter of the income and capital of the original Trust. The Husband also transferred to his children shares held by him.
The High Court held that the assets of the Trust were property of the parties to the marriage because:
- The Husband, as Trustee, was the legal owner of the Trust assets.
- Prior to removing the Wife as a beneficiary, under the terms of the Trust Deed the Husband had the power to appoint all of the assets of the Trust to the Wife as one of the beneficiaries of the Trust.
- The majority of the assets of the Trust were acquired by the efforts of the parties during the marriage and no other third party had any equitable interest in those assets.
The Full Court of the Family Court found that the assets of the Discretionary Trust were a financial resource of the Husband.
- The Husband’s Father established the Trust prior to the parties’ relationship. The Husband’s Father was the Appointor. During the parties’ relationship the Husband’s Father died and upon his death the Husband’s Mother became the Appointor.
- The Husband’s parents were the shareholders of the original Corporate Trustee. The Husband’s parents were also Directors. During the marriage the Husband, the Wife and the Husband’s sister also became Directors.
- Following the Husband’s Father’s death, the Husband’s Mother arranged a share restructure of the original Trustee and as a result the Husband’s Mother subsequently held 98 shares and the Husband and his sister each held one share.
- The beneficiaries of the Trust were the Husband, the Husband’s Father (now deceased) and the Husband’s sister and other beneficiaries (but not including the Wife).
- During the marriage, the Husband, the Wife and a Company controlled by the Husband (despite the Wife and the Company not being beneficiaries of the Trust) received income distributions from the Trust.
- The Husband operated the business of the Trust for a considerable number of years.
- After separation, the Husband’s Mother, as Appointor, appointed a new Trustee of the Trust. The Directors and the Shareholders of the New Trustee were as follows: The Husband’s Mother who held 2 shares, the Husband’s son from his previous marriage who held 1 share and a long standing friend of the Husband who held the remaining 1 share.
- The Wife argued that the business of the Trust was the “alter ego” of the Husband and that his Mother was “nothing else but a figurehead” and the assets of the Trust should be regarded as being property of the Husband.
- In the present case the Husband was a beneficiary. He was neither a Director or a Shareholder of the new Trustee. The Husband’s Mother remained a Director and the majority shareholder of the new Trustee as well as the Appointor.
- The Full Court of the Family Court held that the Wife did not point to any evidence that the Husband as a beneficiary had “indirect control” or that his Mother was his “puppet” and that through her he exercised de facto control of the Trustee.
- On the basis of the available evidence, the Court determined that the Trust was a very significant financial resource for the Husband.
The Full Court of the Family Court determined that the assets of the Unit Trust were a financial resource of the Husband. Although this recent case concerns a Unit Trust as opposed to as Discretionary Trust, it still provides a useful discussion of whether “control” of its own is sufficient to establish that the assets of a Unit Trust should be classified as property in a family law context.
- The Unit Trust was established 5 years prior to the parties’ marriage. It held assets worth about $5million.
- At the time of the hearing the Husband’s Father was the sole Unit Holder. He was 99 years old. The Husband was never a Unit Holder and thus he did not have any interest in the Trust assets.
- The Husband held 2 shares and the Father held 4 shares in the Corporate Trustee. In 2016, a solicitor replaced the Father as the Sole Director of the Corporate Trustee.
- The Husband exercised control over the Trust even though he was not a Director nor a Unit Holder. It was clear on the evidence that the Husband engaged in various dealings on behalf of the Trust and has had the benefit of the use of assets owned by the Trust as security for his own personal borrowings. The Husband also conceded that there was an intermingling of his funds with the funds of the Trust.
- The Wife argued that the Unit Trust was the Husband’s “puppet” or “creature”.
- Although the Husband conceded that he had control over the Trust, the Court was not satisfied that control was sufficient of its own to classify the Trust as property of the Husband.
- The Court held that apart from control the Wife also needed to establish that the powers contained in the Trust Deed permitted the Husband to having a “lawful right” to benefit from the asset of the Trust. The only person in this case who continued, by reason of the powers in the Trust Deed, to be able to obtain a beneficial interest in the assets of the Trust was the Husband’s Father as he was the Sole Unit Holder.
- Due to the Husband’s past dealings with the assets of the Trust, the Court considered that the Trust represented a significant financial resource for the Husband as a result of the “freedom” the Husband’s Father had given to the Husband to deal with the Trust assets as he saw fit and in many instances he treated the Trust assets as if they were his own.
If you are separating from your spouse and either you or your spouse have an interest in a Trust even as a beneficiary, it is important that you speak to an experienced Family Law Solicitor and that you provide them with all relevant information in relation to the Trust including the Trust Deed, the Trust’s Financial Statements, Deeds of Variations( if any) as well as all surrounding information which addresses the above issues in order to be advised properly regarding the treatment of the Trust assets in your property settlement.
Should you require advice in with regards to your property settlement, please contact Anthi Balafas of Rockliffs Lawyers on (02) 9299 4912.
This information is not intended to constitute legal advice. It is general information only and should not be relied upon as specialist family law advice.