Family trusts and family law property settlement proceedings

Family trusts are nowadays prevalent both as a means of managing assets and of reducing tax.  They are the subject of many cases, most notably, in the area of family law, in Kennon v Spry (2008) 238 CLR 366, decided by the High Court of Australia.

Most family trusts take the form of what are popularly known as discretionary trusts.  This is not a wholly accurate description.  First and foremost, the trustee is normally given powers, not trusts, to distribute income and capital.  Sitting in the background, there are trusts in default of the exercise of the powers.  Often these trusts are fixed, rather than discretionary.  Usually, the trustee, most likely a company, has the principal beneficiaries as its directors and shareholders. 

The trustee is itself liable to appointment and removal by an appointor, usually the principal contributor or contributors to the trust fund (as distinct from the nominal settlor).  The primary beneficiaries are the appointor’s family and perhaps some charities.  The family may be extended more or less.  For example, grandparents setting up a trust may choose to exclude their married children, so as to protect the trust fund from the ravages of divorce, but to include other issue.  Beneficiaries may include spouses but not ex-spouses.  It all depends on the terms of the trust; ie, what is written in the trust deed or deeds.

Absent the parties to a marriage having entered into a binding financial agreement under the Family Law Act, the Family Court, in property settlement proceedings, has to decide, broadly, two things.[1]  First, it has to decide what is in the matrimonial property pool.   And secondly, it has to decide how that property should be distributed, having regard to various factors, such as contributions financial and non-financial to the acquisition and conservation of property, needs, means, and what is just and equitable.

If an asset is outside the pool, it cannot be got at, though its availability, for example as a resource, may affect the distribution of such property as is in the pool.  So for example, I would argue that the court can’t (by exercising its powers to alter interests in property) order that property outside the pool be mortgaged or sold.  But the court can increase the percentage of money or property in the pool which it distributes in favour of a particular party.  If the other party can’t or won’t pay, he or she may go bankrupt.

What then is in the pool? 

Property of the parties to the marriage or either of them or property that was their property before divorce.  In addition, trust property dealt with by a nuptial settlement.  In applying the test for what’s in the pool, you need to be aware that property is construed widely.  

[1] I say broadly, because the court has what might be called an auxiliary jurisdiction besides its basic jurisdiction. 

I say broadly, because the court has what might be called an auxiliary jurisdiction besides its basic jurisdiction. 

For example, means of control, eg, through ownership of shares in a corporate trustee, may amount to ownership of property.   Or to give another example, a power of appointment may be property.

Assume that a particular trust is not a sham, that the trustee (the legal owner of trust property) is not a party to the marriage, that a party to the marriage has an interest under the terms of the trust by virtue only of his or her being a member of a class of persons to whom the trustee may, should it so decide, distribute trust property, and that substantial distributions are made to persons other than the parties to or issue of the marriage.  In such a case, it will be a struggle for the court to get at trust property.  This is because, on those bare facts, the trust property is not property of either party to the marriage.  It’s the trustee’s or perhaps the appointor’s property.   Further, the trust is unlikely to be a nuptial settlement.

The trouble is, the world being what it is, the facts are rarely so simple.  If a party to the marriage has contributed to the acquisition or maintenance of trust property, for example by helping to build up the capital of a business, the court might say that party has thereby acquired some kind of equitable interest of his or her own, which, despite not being acknowledged by the terms of the trust deed, exists nevertheless.  In such a case, you need to look beyond the trust deed.

What steps, in a practical sense can be taken by those setting up or administering trusts, to keep assets outside the pool?  This will be the subject of the next instalment.

Michael Hines can be briefed to advise, draw documents, and appear as counsel in family law (and other legal) disputes.   His details are as follows:

Clerk: John Dever
Phone: (03)92257999
Fax: (03)92257728
Dever's List web address: www.deverslist.com.au

Liability limited by a scheme approved under Professional Standards Legislation.

Michael Hines is a member of the Victorian Bar Professional Standards Scheme approved under Professional Standards Legislation.  His liability is limited under that Scheme.  A copy of the Scheme will be supplied on request.