One of the most common questions I am asked as a family lawyer when dealing with a property settlement, is how to protect assets or inheritances from the other spouse either before, during or after separation.
The answer is very simple: “It depends”!
You might have a loose understanding or appreciation for what a ‘Trust’ is, and you may even have one yourself. Generally speaking, a Trust is a corporate entity that you create to hold property on your behalf. The most common form of Trust is the ‘Family Discretionary Trust’ which appoints Trustees, Beneficiaries, and Appointors. I don’t propose to give a lecture in this article on the in’s and out’s of Trusts, but for our purposes, we can safely say that a Trust can hold property on Trust for the family and the Trust will be directed (by the Trustees) to pay money (make a distribution) to the beneficiaries (i.e. the people named in the Trust who can be paid money. They can be named as specific people, like “Tom” “Dick” and “Harry” or they could be named as classes of people like “children of the Trustee” for example).
So, how can you use a Trust to protect assets? It depends upon who is trying to protect the asset and who is in control of the Trust. The case of Kennon v Spry is a famous judgment (at least, in Family Law circles) concerning a husband who created a Trust early in the relationship and then, over time, he added a property to it and changed the ‘terms and conditions of the Trust itself. In the end, Dr Spry’s children ended up controlling the assets through the Trust. The Family Court decided that Mr Spry was clearly trying to manufacture a situation – kind of like a transaction to defeat creditors (when an insolvent company makes payments to directors instead of creditors, and then declares bankruptcy) – that meant he would ultimately keep everything and the wife would receive nothing. Using the Court’s inherent jurisdiction it was decided that the Trust would be ‘rolled back’ to an earlier version where the Husband was the sole Trustee and the wife a beneficiary and accordingly, the property held by the Trust was capable of being divided.
There has been a recent decision in the case of Bernard & Bernard which involved a party to a relationship receiving an inheritance of some significant size, though the inheritance remained in what we lawyers call a ‘testamentary trust’. In summary, the husband in that matter and his sister received an inheritance ‘on trust’ for one another, which meant that both of them were the Trustee for the other’s share and they could control it as they pleased. The Court determined that the Trust assets could not form part of the property pool, because the husband had no control over his share, he did not create the Trust and he had no say in how the Trust distributed the assets. Essentially, his sister was in full control of the husband’s inheritance and for that reason, the Court determined the Trust property could not form part of the pool.
That said though, Section 79(4) of the Family Law Act gives a Court discretion to take into consideration a parties’ financial resources. Whilst a Trust might offer some protection for a specific asset, it is unlikely to make it invisible for the purposes of determining a just, fair and equitable settlement. So to bring it full circle, depending upon your individual circumstance depends upon whether or not assets can be protected with Trusts – but even then, it might not save the rest of the asset pool from being divided in an alternative manner. Getting legal advice early on is key to achieving successful outcomes so if we can assist you with your property settlement please don’t hesitate to make an appointment today.