Often there is a misconception by financial advisors and accountants that in a divorce, a Trust is going to be treated differently, or excluded from the asset pool in their client’s property settlement. If you have this misconception it may be because trusts are typically set up to protect assets or as part of a tax effective strategy of dealing with assets. However, in Family Law, the key is to understand who controls the Trust. If the Trust is controlled by the people in the relationship or marriage, then it does form part of their property pool.
This article explains both the financial disclosure process, which assists to identify the pool of assets, liabilities and superannuation to be divided when couples separate and when completing that process, how Trusts are treated.
The Financial Disclosure process
The disclosure process is one element of the financial settlement process that can begin immediately upon separation. It requires complete transparency by an exchange of documents about income, liabilities, assets, contributions made during the relationship and the future factors that impact both parties. Each person is required to produce documentation that verifies the nature and extent of the asset pool and the nature and extent of the contributions made during the relationship. This obligation includes the time during which they have been separated up until a settlement occurs.
Are trusts considered assets available for division?
Where people have a family Trust, which may have been set up as an investment vehicle or to operate a business, that Trust will be relevant in the property settlement component of the divorce process. This is because, in that circumstance, the Trust is likely to be controlled by one or both parties. The greater control someone has over the trust, the more likely it will be considered an asset and therefore considered in the property pool for distribution.
However there are different ways that trusts can be treated depending on the circumstances and who has control of it. If it is not considered an asset, it might be looked upon as what is called a financial resource.
How else can Trusts be treated?
For example, wealthy parents who have a Discretionary Family Trust, might have their children (ie. a husband or wife, who then separate) as a beneficiary of that Trust. From time to time, the parents might think to distribute the money by way of a gift. This is a very different scenario to a trust that the husband and wife set up themselves and hold assets in its entirety under their control.
Where the decision making relating to the Trust is not controlled by them, but rather, is entirely at the discretion of somebody else to decide whether distributions are made from it or what occurs with its assets, it is more likely to be taken into account as a financial resource in a family law context, if it is taken into account at all. However there is a very clear and regular pattern of distributions being received by the parties, then it is more likely to be given weight as a financial resource rather than not at all even if it is not controlled by the Husband or the Wife.
When there are large amounts of money involved, people will have arguments around how the Trust may be treated. This typically occurs where one party is an adult child of a wealthy family and the parties that are divorcing do not have many assets that they own or control themselves. If there has been significant financial support provided by the Trust or a regular pattern of distributions to them (rather than more infrequent in nature) their former partner will often try to argue that the assets of the family trust is included in the pool.
Arguments may also arise in the case of a family business where the parents have a senior management role, or still have control of the business. There can sometimes be arguments about whether the parents are actually in control or whether in fact, control has been handed over to the son or daughter who is running things. If evidence is available that it is the husband or the wife actually in control, then the Trust may be more likely to be considered an asset than a financial resource. The impact of this is that it is included in the asset pool available for distribution.
However it is important to keep in mind that each scenario will depend on its own facts and such arguments are often complex.
What are the key takeaways?
In Family Law, the Trust and its assets, where controlled by the parties, will form part of the property pool and the Court would consider it as part of the financial settlement.
Ultimately, in the case of Trusts controlled by people other than the parties, if a party to the marriage does not want to be at risk of having a trust included in an asset pool at any point in the future, then they have to ensure that they are not receiving trust income or property during the marriage. The Trust will only be protected in Family Law if there is a wide group of beneficiaries that include not just spouses and children but also other companies, trust entities, or charities. If there is a history of distribution to these parties, the trust will most likely be outside of a property settlement claim.
If you are an accountant or advisor working with a family lawyer for the property settlement of your mutual client, it is vital to consider these factors when presenting information to us as family lawyers as part of the financial disclosure process.
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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.