By Emily Marles, Lawyer & Sophia Pippos, Special Counsel
First, back to basics. What is a trust? A trust is a legal arrangement where one person or entity (e.g. a company) (called the trustee) holds and manages property or assets for the benefit of another entity or someone else (called the beneficiary). The person who creates the trust is known as the settlor or appointor.
Most commonly, families also utilise what is known as a discretionary trust (sometimes also called a family trust). These types of trusts are typically established to benefit members of a family group and are often used to hold assets, operate family businesses, manage investments and financially support its nominated beneficiaries. A trust is established by way of trust deed which sets out the terms and conditions under which the trust operates and names the trustee, appointors and beneficiaries of the trust. These roles become very important in the event of a separation.
If either person in the separated couple has a direct or indirect interest in a trust structure, the question or issue that arises is whether the assets or any part of the assets held within that trust should be treated as property available for distribution between the parties in their property settlement.
The answer is also dependent upon the facts and circumstances of each particular case, including the terms of the relevant trust deed.[1] There are, however, certain principles established in case law to assist in determining this, being:
1. the level of control and discretion a party has over the trust;[2]
2. the purpose of the trust’s establishment and the range of its beneficiaries;[3]
3. whether the trust is a sham;[4]
4. historical distributions of the trust;[5] and
5. the source of contributions to the trust.[6]
Control over the assets of a trust plays a key role in determining whether those assets form part of the net property pool for division. This means the Court will consider each party’s role under the trust deed and their part in the general management and operation of the trust assets.
The High Court in Kennon v Spry ultimately found that the trust assets were property of the marriage as a result of the husband’s interest as sole trustee, settlor and one of the beneficiaries (which also included the wife). It was noted that:
The characterisation of the assets of the Trust, coupled with Dr Spry’s power to appoint them to his wife and her equitable right to due consideration, as property of the parties to the marriage is supported by particular factors. It is supported by his legal title to the assets, the origins of their greater part as property acquired during the marriage, the absence of any equitable interest in them in any other party, the absence of any obligation on his part to apply all or any of the assets to any beneficiary and the contingent character of the interests of those who might be entitled to take upon a default distribution at the distribution date.
By contrast, in Morton & Morton [2012] FamCA 30, the Court found that the husband lacked sufficient control, despite his role as joint trustee and appointer alongside his brother. The Court found that because the brothers had a “close, warm and loving relationship” and that “there has been a good deal of inter-mixing of funds, not only their own personal funds, but funds from various entities which they have created”, neither brother had a better right than the other and neither could be considered to control the trust.
The intention behind the establishment of a trust can also influence whether its assets should form part of the property for distribution between the parties. In Webster & Webster [1998] FamCA 1517, one of the trusts in question was established for the benefit of the children in the marriage, of which, the wife was the appointer, sole shareholder and director of the corporate trustee. The Court said (at para 104):
Whether the assets of any trust are to be included in the assets available for distribution is a matter of fact to be determined taking into account various considerations. More often than not the assets of discretionary trusts are included in the net asset pool because the factual analysis suggests they ought to be. But there is no automatic assumption or presumption that they be treated this way as distinct from constituting a resource to the controlling party. Here in this case, the facts suggest that the trust was indeed specifically established for the children’s benefit and protection, that was done consciously as part of the arrangements in re-settling the CM Lawson Trust, it was a step which clearly had the support not only of the wife but also the husband at the time. That ought to be respected now.
If you are considering setting up a trust for the purpose of only the children to the marriage, it is extremely important to ensure the person involved in its creation has a clear understanding of your intentions, and that the trust deed accurately reflects those intentions. Taking these steps ensures the trust functions as intended (i.e. for the purpose of the children) and reduces the risk of it becoming exposed in the event of separation.
If the Court finds a trust has been established for the purpose of avoiding any obligations under the Family Law Act 1975 (Cth), the Court has the power to disregard the trust and treat the trust assets as property to be divided.[7]
The Court also looks closely at all distributions made over the course of the life of the trust,[8] particularly if they were made by either party of the relationship and specific pattern in which they were made.
The Court will also consider how and when the trust value was established. Specifically, it is relevant whether the contributions to the trust were made during the relationship and where they originated from.
Basically, there is no one strict rule and no easy answer. There can also be a great deal of risk and cases/financial settlements can turn immensely on these points.
In this regard, trust structures may have a profound impact on financial settlements following the breakdown of a relationship, and we strongly encourage parties to seek considered advice from an experienced family lawyer. Not just in the event of separation, but also in the event you are proposing to establish a trust for a certain purpose, and you have concerns around the trust in the event of any separation.
Speak to one of our family law experts:
If you’re seeking advice in relation to your family law matter, Mills Oakley Family Law Brisbane will be happy to assist. Please contact the team on (07) 3010 8021.
[1] Marriage of Goodwin FLR 392.
[2] Kennon v Spry [2008] HCA 56.
[3] Keach & Keach and Ors [2011] FamCA 192.
[4] Keach & Keach and Ors [2011] FamCA 192.
[5] Keach & Keach and Ors [2011] FamCA 192.
[6] Kennon v Spry [2008] HCA 56; Simmons & Simmons [2008] FamCA 1088.
[7] Keach v Keach and Ors [2011] FamCA 192.
[8] Keach v Keach and Ors [2011] FamCA 192.
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