Family Law matters and Discretionary Trust

It is often the case in Family Law matters that the financial structure of a family will include a Discretionary Trust. There has been a long standing debate as to what extent the assets of a Trust constitute property for the purposes of family law proceedings under the Family Law Act (“FLA”).

We out hereunder are some helpful hints as to the way the property of a Trust is treated under the FLA. 

Does the property of a trust constitute property for the purpose of family court proceedings? 

• Section 79 FLA gives a wide discretionary power to a Court to vary the interests in any property of parties to a marriage. 

• The decision as to whether an interest in a Trust constitutes “property” under the FLA, depends upon the facts and circumstances of each case. However of particular significance is the recent High Court decision in Spry and Kennon wherein the High Court confirmed that if a party to a marriage has the power to remove and appoint the trustee then the assets of that Trust can be held to be “property” of the marriage. The “trust” is seen as the “alter ego” of that person. 

The standing of discretionary beneficiaries? 

• If a party is a potential beneficiary in a discretionary Trust their interest in that Trust or trusts must be disclosed.
   
• A discretionary beneficiary to a trust must make full and frank disclosure of their interest. This includes providing to the other party documents such as Trust Deed; Minutes of Meeting of the Trustee and all financial records of the Trust including financial statements and tax returns.

It frequently happens that families do not provide their children with financial statements for a Trust, however any beneficiary of a discretionary Trust has a right to inspect trust documents (i.e. the Trust Deed and the Financial Statements) It is no excuse to say "my father (or mother) will not give the records to me". 

Is the interest of a discretionary beneficiary capable of valuation?

• In Spry and Kennon the High Court held that: 

‘[In the absence of] a specific application of Trust capital or income to one of the [beneficiaries] there was no equitable interest in its assets held by anyone [capable of valuation]'

• Therefore the rights of discretionary beneficiaries extend only to a right to due consideration and due administration of the trust. It is difficult to value those rights when the beneficiary has no present entitlement, and may never have any entitlement to any part of the income or capital of the trust
   
• If a party is a discretionary beneficiary to a trust, the interest of the party is generally seen by the Court as a financial resource only. How this will affect the property settlement depends on many factors.