Specific to Australia, this page will provide you answers to these questions:
- Do I need to disclose an interest in a family trust?
- When are assets in a trust protected from divorce (and de facto separation)?
- When are trusts not considered part of the property pool?
Because trust structures are regularly used for asset protection purposes as well as tax planning, it is not uncommon for people to presume that any assets held in a trust will not be included in a property settlement claim.
It’s important to know that this is often not the case, particularly in a situation where one or both of the parties has a controlling interest in the trust.
The assets and income of a trust can be at risk in situations where there is a claim for property settlement or spousal maintenance, even though trust structures whilst regularly used for asset protection purposes are sometimes “sold as being Family Court profit”.
Are Trusts Protected From Divorce & De Facto Property Settlement Claims?
When an Interest in a Trust Should Be Disclosed
When a couple separates, one of the first steps is for each party to set out for the other, the assets, liabilities and financial resources in which they have an interest. This is otherwise known as establishing the asset pool. This includes assets, liabilities and financial resources that are held in their sole name, their joint names, or in joint names with other third parties or in companies or trusts which they control.
As part of that process, individuals are required to provide the other with information and documents to verify the nature and extent of the assets, liabilities and financial resources that each party holds. This is often referred to as the process of disclosure.
As part of this disclosure process, if either party is a beneficiary of a trust, they are required to provide copies of all documents to confirm their interest in that trust. Such documents can include:
- The deed that established the trust (including any variations of the deed); or
- Copies of the financial statements and tax returns for the trust for the 3 financial years prior to separation (It should be noted here too, that the requirement to provide these documents will depend on the nature of the parties’ interest as a beneficiary of the trust and whether the party has any control over the trust).
Related: What is Financial Disclosure in Separation & Divorce – How Can I Manage It?
Determining If An Interest In A Trust Is To Be Included & Subject To A Property Settlement Claim
There are essentially two different ways a trust can be treated in a property settlement. Depending on the circumstances and who controls the trust, it will either be considered:
- An asset; or
- A financial resource.
Generally speaking, if one party has control over a trust, it is more likely to be considered an asset. Control of a trust is typically determined by looking at the trust deed and who is the appointor or principal as they can dismiss or appoint the trustee.
When Are Assets in a Trust Protected From Divorce (and De Facto Separation)?
If the trust is considered an asset of the relationship, then the assets of the trust will be included in the pool of assets to be divided between the parties of the relationship as part of their property settlement.
Depending on how and when the trust was established, and the level of control one party has over that trust, the party who has an interest in the trust may receive what is known as ‘credit’ for having that trust included in the asset pool. This means if the trust and its assets were established because of the efforts and means of one party alone and existed prior to the relationship, then that party may receive a higher property settlement entitlement because they were the one who contributed the trust and its assets to the pool.
It is important to note however, that receiving ‘credit’ for contributing an asset to the asset pool does not necessarily mean it will be ‘credited’ to that party at the exact dollar amount at which it was included initially.
When Aren’t Assets in a Trust Protected From a Property Settlement Claim?
If the trust is a financial resource of one of the parties and not the other:
- It will not be included in the pool of assets; but
- It will be considered as something that is available to one of the parties at the time and is likely to continue to be available to that party in the future.
That is, if one party has and is likely to continue to have access to an income stream from a trust going forward, then the other party may receive a percentage adjustment in the division of the asset pool in their favour due to not having access to the trust moving forward.
This adjustment or (compensation) will not be made on a ‘dollar for dollar’ basis in terms of the financial resource available to one party and not to the other, going forward.
Importantly, to adequately understand the answer to the question ‘Are trusts protected from divorce?’ you must first understand how the Court determines if an interest in a trust is an asset or financial resource.
How To Determine if the Interest in a Trust is an Asset or a Financial Resource
The main factor the Court looks at when deciding if a trust is an asset of a relationship or not, is whether one or both parties has a controlling interest in that trust. To determine that, generally your family lawyer will work out who controls and owns the trust by looking at the trust deed.
The trust deed will usually reveal:
- Who the trustee is – is it one or both of the parties or is it a company of which both or one of the parties is a director or shareholder?;
- Who the appointor or principal of the trust is – because that is the person who can remove the trustee and replace them with a new one at their election; and
- Who the beneficiaries of the trust are – is it one or both of the parties or one party and their siblings, or does it include members of their extended family?
Your lawyer will also need to consider:
- How are the assets and income of the trust being treated by reviewing the spouses’ personal tax return and if available, the financial statements of the trust? For example, has either spouse been:
- receiving income distributions on a regular basis or drawing funds from the trust by way of loans over a period of time; or
- using the assets of the trust for personal use. For example, have they borrowed against them or do they live in or spend time in a property owned by the trust?
In some cases a trust, on the face of the deed, appears to be owned and controlled by a third party. That is, another person or company outside of the two parties is the trustee and/or the appointor. Sometimes that third party is someone who has a connection or personal relationship with one of the parties such as a parent of one of the parties, or an accountant or other advisor of one of the parties. In these situations, the other party may argue that the trust is actually an asset of the relationship because that person has received income or used assets of the trust as if they belonged to one person individually.
In order to demonstrate that one party is in control of a trust, the other party needs to prove that the third party – who appears on paper to own and control the trust – is in fact the ‘puppet’ and the other party is the ‘puppet master’, so to speak. This means you need to prove that the person who appears to control the trust actually acts at the direction of one of the parties.
If the Trust is an Asset, Who Keeps It?
If a trust is to be considered an asset and included in the asset pool, next comes the question ‘Which party will keep the trust?’
This will all depend on the structure of the asset pool and what other assets are available to meet the entitlement of each of the parties. For example, if there are insufficient assets outside of the trust to meet a party’s entitlement, there may need to be a transfer of an asset or payment of cash from a trust to that party . If that is the case, we would say that it is imperative that both parties obtain accounting advice to ascertain the tax consequences of transferring assets out of a trust or paying distributions.
In cases where the asset pool is made up of many large and complex corporate and trust structures, the tax implications of achieving a settlement may be very significant which will, in turn, diminish the value of the asset pool. Sometimes to mitigate this, the party who is not retaining the trust structure will agree to receive their property settlement over a period of time.
This could include an interest component or at a higher payment amount overall to ‘compensate’ them for having to wait for their settlement. In doing so, security and default provisions in the binding financial agreement are vital in case the payments do not eventuate.
Family Trust and Divorce Settlements
If you are the party who is a beneficiary of a trust that is controlled by other family members, you need to very carefully consider how you deal with the income and assets of that trust during the relationship. This is because the trust in this circumstance may be included as an asset of the relationship, and that might not align with the original intent of the trust when it was set up.
On the other hand, if you are the party who has limited awareness or control of the partner’s interest in a trust, then you need to obtain all the source documents relating to that trust as soon as possible after separation. This is important so you can ascertain the nature and extent of your partner’s involvement in the trust and obtain accounting and legal advice about it.
Property Settlements With Trusts
What is really important, is that you have, up front, all the documentation so you know what is involved when you are negotiating your property settlement. This is because if a large portion of your assets are held within these kinds of structures, you are going to have to work out how to extract some of the cash and assets, whether that’s straight away or over time.
If you are looking to separate and you know you have complex financial structures involved, including trusts, you should speak to a family lawyer who is highly experienced in this area. They can seek to request this information as part of the financial disclosure process and give you an understanding of what happens in the family law context. Additionally, we recommend that you speak to your financial advisors to determine what would be in your best interests, given any potential tax consequences.
Related Information
Additional Property Settlements, Prenuptial & Financial Agreements Information
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