5 Apr 2016

In family law matters involving trusts, there is often a dispute about whether the trust assets are available for division between the parties.

Each family law property matter (whether or not it includes a trust) broadly involves a four step process:

1. identify the assets and liabilities of the relationship; 

2. identify the financial and non-financial contributions of the parties;

3. the Court then assesses a range of additional factors (called “future needs” factors) under section 75(2) of the Family Law Act 1975.  These factors take into account the needs of each party, both now and in the future.

4. consider whether the proposed division is fair to both parties in all the circumstances.

At step 1, the trust assets must be classified as being either:

a) property of the parties, meaning that they are available for division; or

b) a financial resource, meaning that they are not available for division, but will be taken into account at step 3.

The classification of trust assets will depend on the circumstances of each case.

Basic Principles of a Trust

A trust is a tool for structuring property ownership, usually with a view to minimise tax and/or protect assets.

Trusts involve the following stakeholders:

a) the settlor – who establishes the trust, and then ceases to have any active role;

b) the trustee – who has legal ownership of the trust assets;

c) the beneficiaries – who have equitable (beneficial) interest in the trust assets; and

d) the appointor and guardian – who is responsible for removing and appointing trustees.

The exact terms of the trust will be stated in the Trust Deed and any Deeds of Variation. In general, the trustee will manage and invest the trust assets for the benefit of the beneficiaries. The trustee may make distributions of trust income and capital to the beneficiaries, in accordance with the terms of the Trust Deed.

A trustee may also be one of the beneficiaries of a trust.

Trusts as Property

Section 4 of the Family Law Act 1975 (Cth) defines “property” as property to which one or both parties to the marriage are entitled, whether;

a) they actually possess that property; or

b) they do not possess that property, but they have the right to do so.

For the 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 test that the court uses is whether one of the parties has actual or de facto (effective) control of the trust. In other words, if one party has the power to make a distribution of trust assets to one or both of the parties as beneficiaries, then the trust assets are taken as being available for division.

Romano & June [2013]

The parties met in 1993, married in 2000 and divorced in September 2009. There were no children of the marriage.  The Husband set up a discretionary family trust in the 1980s. The Husband was one of two directors of the corporate trustee of the discretionary family trust. The Husband was also the primary beneficiary of the discretionary family trust.  At the time of Trial, the trust assets had a net value of $68,774.

The Husband’s position was that he did not control the trust. He said he was merely a beneficiary who may potentially benefit from a distribution of trust assets. The Wife’s position was that the Husband had real control of all aspects of the trust.

The Court found that:

a) while the Husband did not have legal control of the trust, he had effective control of the trust;

b) the Husband purposely avoided being in a position of legal control of the trust;

c) the Husband always regarded and treated the trust assets as his; and

d) the Husband utilised trust assets for his own benefit and for the benefit of others of his choosing.

The Court concluded that the Husband had real control of the trust assets, and therefore they were included in the asset pool available for division.

Trusts as a Financial Resource

If trust assets are not considered property available for division, then they will still be taken into account at step 3 of the four step process 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.

Sham Trusts

If a trust is designed for the specific purpose of defeating Family Court orders, then the court is likely to deem that trust a sham. The Family Court has the power to set aside any trust instruments that are found to be shams; s 106B of the Family Law Act 1975 (Cth). The trust assets can then be included in the pool available for division.

This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

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