Are Family Trusts Protected From Divorce?

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Divorce

Are Family Trusts Protected From Divorce?

The popularity of trust structures is because they offer some significant advantages when it comes to the amount of tax you need to pay on income, as well as a way to protect assets.

Discretionary ‘family’ trusts are a particularly popular form of trust, giving the nominated trustee the ‘discretion’ to distribute income to the trust’s beneficiaries, who are generally the close family members of the person who created the trust. This form of trust not only offers tax and asset protection advantages but close control of assets within a family.

There has been a lot of legal argument in recent years expended on the question of what happens to the assets in a family trust when a couple divorces or a legally recognised de facto relationship ends. Are the trust’s assets to be considered as ‘property’ to be divided between the ex-partners as part of an overall property settlement? Or are they protected from a claim by an estranged partner and, therefore, a preferable structure to hold assets for those who want to protect them from such a claim once the relationship ends?

This article will provide some more information on this question but if you have questions or concerns about the place of trust assets in a divorce or separation, contact Big Law for expert legal advice.

Are the family trust’s assets considered ‘property’ in divorce proceedings?

When two people divorce or a de facto couple separates, trust assets are generally not considered as part of the property ‘pool’ to be divided between them in any proceedings under the Family Law Act 1975. This is because the assets in the trust represent an ‘expectancy’, not a financial resource, distribution of which is subject to the discretion of the trustee. In legal terms, the partner who claims a share of the trust’s assets in a settlement may not necessarily have a legal or equitable right to do so.

In the significant 2008 High Court case Kennon v Spry; Spry v Kennon (‘Spry’), however, the law was clarified concerning whether assets in a family trust were available for division in a property settlement between divorcing partners.

In summary, the High Court decided that the assets in the discretionary trust created by Dr Spry in 1968 (and of which he was the settlor and trustee) could be considered part of the pool of property to be divided in family law proceedings. Dr Spry and Mrs Spry were married from 1978 until 2001 and had four daughters. Over that period the trust deed was changed several times. At one stage Mrs Spry was even appointed as trustee in the event of Dr Spry’s death or resignation, but by the end of their marriage the trust had been split into four separate trusts – one for each daughter – and Mrs Spry had been excluded as a beneficiary.

In simplified terms, the court’s decision, which reversed the various amendments to the trust deed, turned on the degree of control Dr Spry exercised over the discretionary trust, despite not being either a trustee or a beneficiary by the time it came to be decided whether the assets in the trust were to be considered marital property. The judgement found that Dr Spry had a significant controlling influence over the trust and that the assets in the trust had the “origins of their greater part as property acquired during the marriage”.

Taking into account whether it was just and equitable to reverse the amendments and whether the amendments had at the time been made to defeat an anticipated future order in family court proceedings, the Court decided the assets of the trust were the property of the parties to the marriage.

The implications of Spry

The decision in Spry means that the assets held in a discretionary family trust can be classified as property to be divided in a divorce or property settlement.

For this reason, many people who create a family trust now seek to distance themselves as controller of the trust from the beneficiaries so that the assets of the trust are not considered as marital property in the event of divorce.

It’s important that this link be actually severed. Appointing a trusted financial adviser or close associate as the trustee or appointer/principal, with the power to change trustees, is not enough if it’s clear they are acting under the direction of one of the parties to the marriage.

Instead, there are a number of ways to set up a discretionary family trust, including ensuring neither party to the marriage alone can implement decisions relating to the trust; excluding the parties to the marriage as beneficiaries so that neither can both control and benefit from the trust (but which means they can’t take a financial benefit from the trust); entering provisions in the trust deed where the parties to the marriage cease to be beneficiaries if certain events occur, such as marriage breakdown; or creation of a portioned trust.

The last option is a sensible course for dealing with a family trust in an estate plan and ensures that:

  • fixed interest is provided to the family of each principal beneficiary;
  • these interests are discretionary within the group comprising the family of a principal beneficiary;
  • control of the trust is shared between the principal beneficiaries;
  • certain assets can be allocated for the benefit of a particular principal beneficiary’s family;

How the Court deals with trust assets as part of a property pool

Once the Family Court decides that trust assets can form part of the property in settlement proceedings between ex-partners, it will also consider the financial and non-financial contributions of each party. This can be a complicated process involving the production of historical records and other documentation relating to the trust as evidence.

The Court may then treat the trust assets as belonging to one or both of the parties to the marriage and make an order against one party to source the funds for the settlement amount, including from the trust assets. In this way, it does not need to make a specific order transferring the trust asset out of the trust.

The Court may also set aside transactions or prevent any variation of the trust deed which seeks to prevent it from adding the trust assets to the pool.  It also has the power to declare the trust a sham and that one or other of the parties is the actual owner of the property claimed to be held on trust. Finally, the Court may alter the ownership of property of the parties.

The importance of good advice

The development of the law in this area, therefore, answers the question: assets held in a discretionary trust are not necessarily excluded from a property settlement arising from divorce.

Trusts are a complicated area of the law and availing yourself of expert legal advice is most definitely advised. At Big Law, property settlements when two people separate are a specialty of ours. We will provide advice and guidance with understanding and compassion in what can be trying circumstances, including guiding you through the complexity where a discretionary family trust is at issue.

Call us today on 1800 431 592 or email us at [email protected] for an initial consultation about your property settlement matter.

How We Can Help

Big Law Lawyers Strathpine offers you the same comprehensive suite of legal services that you would expect to only find in the city.

We are a successful well-established legal practice based in Strathpine, Brisbane. We have earned a reputation for providing trustworthy, practical legal advice to a diverse range of clients, in both Brisbane and regional Queensland.

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