Accountants: How the Family Court Treats Discretionary Trusts

As professionals who set up and manage trusts, the purpose of my presentation was to make them aware of matters to consider alongside the setup and management of trusts. It is vital for those involved to be aware of the possible implications of how families manage trusts and/or that changes made to trust roles can have, if at any time the Family Court were required to make a decision relating to any of the parties involved.

The property settlement process

When a property settlement needs to be made between a separated couple, there is typically a four stage process.

First, we identify all of the assets and liabilities held in joint or separate names that could be considered as part of the asset pool. Second, we assess the contributions that each of those parties have made to the accumulation and development of the asset pool. Next we look at what each party needs in the future, taking into account a number of factors including their ages, what they earn or their capacity to earn income. This also involves looking at whether they have any dependent children, if they are going to receive an inheritance in their future or if they have an interest in a trust that will be an ongoing financial resource to them down the track. And the final step is, after considering all these factors, to ensure the settlement is just and equitable.

Where trusts are relevant in Family Law is whether they are considered to be part of the asset pool and therefore, the property settlement. What needs to be determined is whether the trust is considered an asset of either of the parties.
Generally speaking, if the trust is identified as an asset of the relationship (and there are a range of factors that will contribute to whether it is or isn’t), it will be included in the asset pool for division. If however it is not identified as an asset, it is then considered a financial resource that will be available to one party in the future.

This means that the party that isn’t a beneficiary of the trust and therefore will not have access to that financial resource going forward, will have their part of the property settlement adjusted because they will not have access to that ‘financial resource’ in the future.

An asset or a financial resource?

When we look at how to determine whether a Trust should be looked at as property, the main factors that come into play is whether the parties have control of that trust.

Many people treat a Discretionary Trust as a personal bank account. The more they behave in this way and the more control they have over the trust, the more likely it will be considered an asset of the relationship and therefore included in the asset pool.

To make decisions relating to whether the trust should be considered as an asset or not, we need to determine:

If either party is the Appointor of the Trust
If either party are Trustees or Directors of the company that is a Trustee
Historically, if the parties have been receiving regular distributions from the trust
How the assets of the trust were initially acquired and financed
Whether the trust was established by one or both parties
Whether the trust was established by one of the party’s parents
Who the beneficiaries of the trust are; and
Whether there are any third-party beneficiaries that are further removed from the situation

If for example, there was a Family Trust set up and both parties accumulated the assets while they were together and have control, the trust would be considered as part of the asset pool.

If however a Family Trust was established by one of the parties’ parents (or grandparents) who contributed all the assets in the Trust, in a circumstance where both separating parties were beneficiaries of the trust (or only one party was a beneficiary but the other party was a beneficiary by virtue of being their spouse), and the trust is controlled by someone other than either party, the trust is less likely to be included in the asset pool.

Controlling trusts

But the reality is that there have been situations where even though someone external of the separating parties is a trustee or an appointor, there is evidence that someone else has been exercising control over the trust. This is referred to as being a ‘puppeteer’ or ‘puppet master’. This is where there are patterns of behaviour that include a history of distributions or a history of loans or other financial benefits they have gained via the trust, despite not being an Appointor or Trustee of the trust. This type of behaviour indicates that this person has been using the trust as an asset so it should be included in the asset pool for division.

In the case of Kennon & Spry 2009, the High Court considered a trust that included the matrimonial home and other assets. This case is of particular interest because prior to separation, the husband amended the trust deed to exclude both he and his former wife as capital beneficiaries (among other amendments to limit the wife’s control). He also moved assets from this trust into other trusts for his children. In this situation, the Family Court reversed those transactions. It was ultimately determined that the assets of that trust were to be included as property because the husband was able to use the income and the capital of the trust at his will.

So how can a Discretionary Trust be protected in a Family Law property settlement?

A trust is more likely to be outside the reach of the Family Law Courts if neither of the parties have control of the trust. That is, neither is an Appointor, Trustee or that he or she has behaved in any way that could be construed as being a ‘puppeteer’ of the Trust.

It is also wise to ensure that individuals are not receiving trust property or income if it is intended that the Trust not be included in any potential property settlements that may be in the future of any of the beneficiaries.

Further, the trust is more likely to be protected in a Family Law property settlement matter if there is a wide group of beneficiaries, not just spouses and their children but other relatives, extended family other company or trust entities, or charities. If there is a history of distributing assets or capital to a number of different beneficiaries, then that can also limit the inclusion of the trust as an asset.

My recommendation to accountants who are managing trusts for both parties? If you are in receipt of instructions to change a trust and there is a separation or anticipated separation, suggest they seek advice from a Family Lawyer so they are aware of the possible consequences. Changing a trust deed or moving trust assets does not mean the Trust will be outside of the reach of a property settlement claim.