Discretionary trusts in Family Law
In general trusts have been used historically to protect family or business assets.
It is widely seen as an effective means of ensuring that trust assets aren’t construed as property of a particular beneficiary but in a Family Law property dispute, are they really that effective? In short, they may not be so effective but the news isn’t all bad.
The first use of trusts occurred in the 12th century. Most people in business (and many who are not) would understand that a trustee owes a fiduciary duty to the objects of the trust and that a trustee has the legal title to the trust assets. The orthodox view is that a person isn’t a beneficial owner of trust assets, even if they can control the distribution of assets under the trust.
The Family Law perspective
When a marriage or relationship breaks down, unless the parties can agree on some common ground regarding property and how it is to be distributed, the Family Court or the Federal Circuit Court (the Court) has the power to deal with their property interests under Section 79 of the Family Law Act (the Act). Under this section, the Court can make orders that it considers appropriate to alter the property interests of the parties involved. Section 4 of the Act defines property as "property to which a party is entitled” however, property has a very broad meaning which can include the assets of a trust.
If trust property happens to fall outside the grasp of property as defined in the Act that isn’t the end of the matter. Such assets may be characterised as a financial resource of a party and the Court will look to the benefits that a party has received or is likely to receive when deciding how to make property alterations.
When determining whether trust assets are property of the marriage the Court will look at who controls the assets. The Full Family Court has addressed the concept of control in a number of cases and, in essence, control is dependent on whether trust assets are property of a marriage or relationship, a financial resource or excluded from the matrimonial pool altogether.
The purpose behind creating a trust is to protect family assets from future property disputes. The intent is, among other things, to keep the assets out of the matrimonial pool. Despite the view of the Court, trusts can still be useful but their effectiveness might be limited.
Circumstances vary in each matter so obtaining specific advice in individual cases is necessary as there is no one size fits all.
With appropriate planning to keep trust assets out of the marriage assets pool at an earlier stage, it may be possible to challenge attempts to characterise trust assets as assets of the marriage or relationship.
The Court might still determine that they are part of the matrimonial pool or a financial resource of one of the parties. In that instance, the Court will make adjustments to property according to contributions the parties have made, future needs and what’s fair in the circumstances.
There are, however, some steps that may be taken by someone who wants to attempt to keep trust assets out of the matrimonial pool. Ideally steps should be taken at an early stage of the marriage or relationship and may might involve changes to the trustees, or to vest the trust and distribute the assets, or to remove beneficiaries. The Court will want to investigate whether any changes made were done for an improper purpose and, where it believes that this is the case, it has the power to set aside the disposition.
It’s quite common in discretionary trusts for a party to the marriage to be the only trustee. Having a number of trustees in which there has to be unanimous agreement by all trustees before distribution of any trust assets might assist a party trying to defeat an argument that he/she has effective control of the trust.
Another way is to include a term in the trust deed to the effect that a trustee who is a party to the marriage or domestic relationship will be removed from control of the trust should the marriage or domestic relationship become troubled or the parties separate.
It is prudent to seek specific advice regarding the implications from a family law perspective of alterations to the trust deed before the need arises due to a marriage or relationship breakdown.
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