The case of Harris & Dewell and Anor (2018) is interesting for us as family lawyers and those of you who work in financial services or have a role within a trust, be it as a beneficiary, trustee or appointor.
Determining whether a husband or wife’s interest in a trust will be considered by the Family Law Courts to constitute an asset or a financial resource has been litigated extensively in the past. Why? Because in each case the Court needs to determine whether the husband or the wife’s interest in the trust as a beneficiary goes beyond a mere expectation that he or she will be considered for distributions of income or assets by the trustee.
The case of Harris & Dewell and Anor (2018) considered a unit trust established by the husband’s father (“the father”) five years before the husband and the wife (“the parties”) began living together. The trust was known as the E Unit Trust (“EUT”). The father held all of the units in the EUT. The EUT was administered by a corporate trustee, of which the husband and the father were the shareholders and directors. The father held four shares and the husband held two shares in the corporate trustee, giving the father the control of the trustee. As a result, the husband held no beneficial interest in the EUT, but the trial judge found that the husband’s interest in the EUT was a financial resource. The EUT had a value of approximately $6,000,000 at the time of trial.
For those of you reading who are not familiar with trusts, or the roles within trusts – a very quick summary for you:
A trust deed is the document that establishes the trust and confirms who the beneficiaries of the trust are as well as the roles within the trust. The trustee is the person who has the power to administer the trust for the benefit of the beneficiaries, and the appointor (or principal as they may be described) has the power to remove and appoint trustees.
The Father held the power to remove the trustee and appoint any new or additional trustee at any time that he chose. As the sole unitholder, the father was also the sole beneficiary.
The wife’s lawyer argued that the husband’s interest in the EUT was more beneficial than just a financial resource and that it should be included as an asset in the ‘pool’ available for division between the parties. Although the father was the sole unit holder of the EUT, the wife argued that the husband had effective control of the trust. The wife relied upon the husband’s conduct in doing so, which included the husband acquiring real estate in the name of the corporate trustee using the husband’s own funds, the husband declaring that he owned units in the EUT in a loan application to the ANZ Bank, and the husband declaring in a statement of assets and liabilities in an application for finance that he owned real estate which was in fact owned by the EUT. The husband also intermingled his own funds with funds of the EUT, and used assets owned by the EUT as security for his own personal borrowings. Effectively, the husband treated the EUT as if it belonged to him.
The wife cross-appealed the initial decision, arguing that the husband was the “puppet master” and effectively had sole control of the EUT which he treated as his “puppet”. In the alternative, the wife argued that the father held the units in the EUT on a constructive trust for the husband, and that the father should be prevented from denying the husband’s equitable interest in the EUT.
The husband’s lawyer argued that the father had given the husband “the run of the trust” and said that for the trust to be considered the husband’s property, the Court would have to find that the father was the husband’s “puppet” rather than the trust, given that the father held all of the units in the trust and therefore had sole power to appoint the trustee. Effectively, the husband would have had to exert a certain degree of control over his father’s decision making rather than going straight to the assets of the trust.
As the wife did not produce any evidence to reflect that the husband was the “puppet master” and the father his “puppet”, the Court was not prepared to find that the EUT was the husband’s asset and look beyond the trust structure. The Court effectively upheld the terms of the trust deed and treated the trust as a separate legal entity, protecting its independent existence and thereby protecting the father’s interest in the EUT, noting however that the husband would inherit all of the units in the EUT in the future.
The Full Court acknowledged that the husband had ‘the run of the trust’ and used the trust for his benefit. On that basis, the Full Court agreed with the trial judge that the EUT was a financial resource of the husband, but should not be included in the ‘pool’ of assets available for division.
So what considerations does this case bring up for those who hold a role in a trust, and the choice of trust structure for those considering establishing a trust? It may mean that unit trust structures become the preferred option over discretionary trusts, as an asset protection strategy. It also draws focus to the need for good governance of trusts – greater control by the trustee to ensure the trust is being administered correctly and the assets of the trust are being used correctly to avoid any potential doubt over the use or misuse of the trust. In this case, if the husband had not dealt with the assets of the trust in the way that he had, he and his father may have avoided a costly legal battle.
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Disclaimer: The content in this article provides general information however it does not substitute legal advice or opinion. Information is best used in conjunction with legal advice from an experienced member of our team.