Discretionary trust assets are not generally characterised as the property of the beneficiary. They have often been used as part of an asset protection strategy in Family Law disputes.
The intention behind this use is to protect family wealth in the situation where the ex-spouse or ex-domestic partner has come from a prior marital or de facto relationship involving children.
However, trusts frequently fail to provide protection against ex-spouses and ex-domestic partners in Family property disputes.
Although a trust is a separate legal entity, it can be regarded in Family Law property proceedings as the asset of one of the parties to the marital or de facto relationship, if a party effectively controls the trust assets.
What follows is an overview of how trusts and trust assets are dealt with in Family Law Property settlement disputes.
The Four Step Approach for Dealing with Property Division
A 4 step process has been broadly adopted by the Family court in property settlement proceedings:
- determine the assets and liabilities (the matrimonial property pool);
- evaluate each of the parties’ financial and non-financial contributions during the marriage and post separation;
- determine if that contribution figure requires adjustment in light of the relevant s75(2) of the Family Law Act 1975 (Cth) (FLA) factors;
- consider whether the proposed result is just and equitable given all of the circumstances and having regard to the actual result in dollar terms.
Property or Financial Resource?
In Family Law property proceedings, The Court has to make a determination as to what assets are considered as matrimonial “property” and what are “financial resources”. A trust can be seen as either being property or a financial resource. Whether it is property or not depends on the type of trust and the party’s control over the trust.
- If the trust assets are classified as property of the parties, they are available for division;
- If the trust assets are classified as a financial resource, they are not available for division, but will be taken into account at step 3.
Under FLA s79 the Court has the power to make orders adjusting the interests of parties in the “property”. The Court does not have the power to make an order adjusting the interests of parties in “financial resources”.
In determination of appropriate sharing of the trust assets in steps 3 and 4 above, investigation is also required into the interests of third parties outside the relationship. The possible impact on other beneficiaries, for example children, the source of the assets, as well as taxation and accounting implications must be considered.
Property
FLA s4 defines “property” as property to which one or both parties to the marriage are entitled, whether
- they actually possess that property; or
- they do not possess that property, but they have the right or the expectation to do so.
For trust assets to be considered property of the parties, one of the parties must have a controlling position (being trustee, guardian or appointor) in the trust.
The type of control a party can exert over a trust depends on whether they are a settlor, or a trustee, or a beneficiary or an object of the trust.
If a party is trustee or appointer of the trust or treats trust property as their own, then the trust property may be treated in property settlement applications as their property.
The Family Court has the power to alter the property interest of the parties in their property pursuant to FLA s79 in respect to married couples and FLA s90M in respect to de facto relationships.
If property is held under a trust for the benefit of one of the parties, but the other party is not able to establish that the trust property is property of the marriage, it may still be possible for the court to find that the trust assets are at least partially a financial resource of one of the parties.
If one of the parties has acted so as to take the assets out of the reach of the Family Court, the other party may seek an order to set aside the disposition. Such an order under FLA s106B will have the effect of returning the assets dealt with by that disposition back into the pool of assets to be made available for division between the parties.
Financial Resources
If trust assets are not considered “property available for division”, then they can still be taken into account at step 3 as a financial resource.
A financial resource is an asset that a party cannot access immediately, but will be able to access in the future. For example, if a party is a beneficiary of a trust then that trust is a financial resource from which they may reasonably expect distributions of trust income and capital.
If assets are found to be a financial resource of one of the parties, the Court will take into consideration the benefit the relevant party will receive from having access to this financial resource when considering adjustments under FLA s75(2).
There are numerous relevant factors that may affect FLA s75(2) adjustment, for example: the age and state of health of the parties, the income, property and financial resources of each of the parties and the physical and mental capacity of each of them for appropriate gainful employment; whether either party has the care or control of a child of the marriage who has not attained the age of 18 years; or the responsibilities of either party to support any other person.
The Court may make an adjustment of the assets so that the party without the ‘financial resource’ may receive a greater portion of the marital pool under the principle that it would be ‘just and equitable’ under FLA s79(2).
If significant matrimonial assets exist outside of the marital property in a trust, and the court finds that this property is or will be used by one party for their benefit, that is the court will consider it a ‘financial resource’ and the other party may receive all or most of the marital property. The resulting property settlement may end up as being similar to that which would be produced had the court found the financial resource to be an asset and included it in the property pool.
Trust Structures Sesigned to Sefeat Family Court Orders
As mentioned previously, if a trust is designed for the specific purpose of defeating Family Court orders, then the court may deem that trust a sham and such trusts may be set aside pursuant to FLA s106B
The Court may also set aside certain transactions, which were aimed at defeating a Family Law claim. Such circumstances may include
- assets have been removed from the marital pool of assets;
- assets have been removed from a trust under the control of a party of the marriage;
- a party to the marriage has been removed as a beneficiary of a trust; or
- a trust deed had been varied to the detriment of a party to the marriage; the trust structure may be disregarded and the benefits may become property available for distribution between the parties.
In the High Court decision of Kennon v Spry [2008] HCA 56, variations to a trust deed which excluded the husband and wife as beneficiaries; and dispositions of trust assets by application of trust income and capital to newly formed trusts in favour of the children by the husband settlor and trustee were set aside after the Court looked behind and dismantled complex discretionary trust structures. The High Court upheld the decisions of the Family Court, finding the trust property came from “fruits of the marriage” and thus found it was appropriate to treat the assets as the property of the parties to the marriage.
It has been suggested that it is practically “impossible to quarantine a trust which would otherwise clearly be susceptible. It is difficult to pull the wool over the eyes of the Court or well advised other party”.
It has been also suggested that having parties enter into binding financial agreements such as prenuptial/post nuptial agreements. Such agreements are binding if approval is obtained via Consent orders put before the Family Court.
Family Lawyers Sydney at Pavuk Legal can assist you with your Family Law property settlement where trust assets are to be divided, provide advice to you regarding other property that may be need to be divided in such a settlement, as well as act for you in your divorce proceedings that may correspond to your Family Law property settlement.
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