How Discretionary Trusts are treated in Family Law matters

A trust is an entity in which certain people are entrusted to hold assets for the benefit of certain people or entities. Various assets can be held in trust, including money, property and businesses.

A discretionary trust is where a trustee is placed under a duty to distribute Trust property and income to such persons among a class of persons as they in their absolute discretion decide. A discretionary Trust typically exists where the Trustee can decide which beneficiaries amongst a class of beneficiaries or further beneficiaries can be appointed and which amounts of income and capital can be distributed from time to time.

For the contents of a trust to be available for claim in a property settlement, either one or both of the parties must have interest in the trust. The level of involvement, control and influence of a party to a trust determines its interest.

If a party to a property settlement is a trustee or beneficiary to the trust, the contents of the trust will be counted as property of the party and can be considered in a property settlement. If neither party is a trustee or beneficiary to a trust, then generally, the property is inaccessible buy the other party.

Section 106B of the Family Law Act 1975 (Cth) states that: In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.

With regards to this section, a disposition includes a trust. This section indicates that if a trust is established to manage the property in anticipation of a divorce or any other event which may threaten the assets of an individual or company, the court can overrule the trust and the assets of the trust will be available for the other party to claim as assets in the asset pool.

In a recent appeal hearing The Full Family Court, in resolving the issue of whether the discretionary trust is the property of the husband, discussed the case of Kennon vs Spry. It was held in this case, that for the assets of the discretionary trust to be treated as the property of the beneficiary, there must be direct or indirect control of the trust by the beneficiary. It was ruled that the trust’s assets should be treated as the Husband’s property because he exercised indirect control over it. The assets of the trust were held to form part of the property pool to be divided between the parties.

The Full Court in reviewing the Harris case affirmed the principle of law that a beneficiary of a discretionary trust who does not have direct or indirect control of the same has a right to due consideration and administration of the same. However, if the beneficiary has no entitlement and may never have an entitlement to the capital or income of the trust, then it is difficult to value and assessed those rights.

In deciding the case of Harris vs Harris, the Full Court overturned the decision of the trial judge. The Trust is not to be considered an asset to the husband and should not be included in the property pool to be divided between the parties.