Family Trusts in Property Settlement
When considering what is a fair property settlement after a relationship breakdown, the first step is to identify the assets, liabilities and financial resources of the parties. A family home registered in the name of one or both of the parties or cash at bank in the name of one or both parties can be easily identified as being property of the parties. However, the task can be more difficult when, for example, wealth is held in a family trust.
Family trusts are a popular mechanism which many families use to arrange their financial affairs. They involve a trustee, who is a legal owner of the trust assets, holding and using those assets for the benefit of beneficiaries. They often involve extended family members who may hold decision making positions or are included as beneficiaries in the trust deed.
The use of discretionary family trusts offer many benefits, including flexibility in tax planning (by allowing income to be divided between many beneficiaries) and estate planning. For some time they were also thought to offer protection against property settlement claims between separated spouses or de facto partners. There are many examples of cases in the Family Court where litigants have attempted to use a family trust to place assets out of the reach of their former spouse or de facto partner by arguing that trust assets are not property of the parties.
Many clients (particularly those who set up structures more than a decade ago) are surprised that the use of a family trust structure may not ‘protect’ an asset from inclusion in the pool of assets available for division between former spouses or de facto partners in a financial settlement. They can often recall advice given at the time the trust was settled when they were told that the assets in the trust would be protected in the event of a relationship breakdown. In farming matters in particular, where trust structures have been used for generational wealth and the transfer of farming land, many are surprised that say, a daughter-in-law, may have an interest in an asset which they had hoped to exclude her from.
As far back as the late 1980s and early 1990s examples can be found where the Family Court included trust assets in the pool of assets available for division between separated spouses or de facto partners. The leading authority in this area is the 2008 High Court decision of Kennon v Spry. This case highlighted the power of the Family Court to include a family trust as property capable of being divided between parties to a marriage or de facto relationship. From this case and those that followed, we know one of the primary factors the Court will consider is the extent to which the parties to the marriage or de facto relationship control the trust and who benefits from it. The decision in Kennon v Spry demonstrated that the Court was interested in the ‘reality’ of who controlled the trust (either directly or indirectly) and who was benefiting from the trust either by way of income or capital distribution.
Of course, the ‘reality’ differs from case to case and there is no hard and fast rule about whether family trusts are property or not in property settlement proceedings. The majority of family trusts seen in practice show the use of a trust by the parties to hold their family business assets and distribute the income from that business to them and their children to reduce overall tax paid. In these cases, the trust assets are usually included in the pool of assets available for division without any argument. However, in the 2011 matter of Harris and Harris , the Full Court refused to include trust assets (the primary asset being a business operated by the husband and wife) as property of the marriage, on the basis of insufficient evidence to establish the husband’s control of the trust.
The wife in this matter argued that the husband’s mother, who was the appointor (meaning she could nominate and remove the trustee of the trust) was a “puppet” of the husband and that in reality, the husband controlled the trust. The Court held that even if that was true, the wife failed to provide any evidence of this. The matter of Harris highlights the need to obtain specialised legal advice and pay close attention to what evidence is presented to the Court.
Trust assets in property settlement
When seeking to include trust assets in a property settlement, a party should ensure they start compiling relevant documents at an early stage. If the provision of documents is resisted, the issuing of a subpoena (or a number of them) should be considered. Beyond the trust deed, variations to the trust deed, tax returns and financial statements, other documents to be sought often include those held by accountants and lawyers who assisted with the establishment or assist with the ongoing operation of a trust. For example, these documents may show who gives instructions and makes decisions with respect to a trust’s assets and income or the purpose that a trust was established.
You cannot, with any certainty, trust a trust to exclude assets from forming part of a property pool in property settlement proceedings. If the trust is established before the relationship and the party in control of the trust seeks to protect the assets the trust holds, they should consider seeking advice from a family lawyer about the preparation of a financial agreement. When you are a parent, and want to protect assets from a future claim by a partner of one of your children, you should take appropriate advice before giving your children any control over the trust and making distributions to them.
For more specific advice on property settlement and trusts assets, contact one of the lawyers at Carr & Co on 9322 8000 or via email at email@example.com