How does the Family Court treat assets held within a Trust?

A common question asked by clients when seeking advice about family law property settlements, whether prior to separation or following separation, is whether assets can be simply transferred into a family trust, therefore guarding those assets against any potential family law claim.

Such a view is one held commonly by clients, and is often corroborated by advice from their accountants or financial planners. However, the question of whether assets held within a trust would form part of the property pool available for division in a family law property settlement matter is a question the family law court has grappled with over the years.

This article aims to provide an overview of how the family court approaches trust assets in contested family law matters, and common pitfalls where the court has allowed trust assets to form part of the property pool.

The purpose of a trust

Trusts, in particular discretionary family trusts or Unit Trusts, are often created by families for two main purposes; the first is to take advantage of the various tax benefits a trust provides (such as allowing the distribution of income for beneficiaries of the trust to take advantage of differing tax brackets), and the second being for asset protection purposes.

In regards to the second, a trust at its core is simply an arrangement for a person, people or a company (the Trustee) to hold assets for the benefit of another (the Beneficiary). The trust itself, and how the trust assets are to be used, are governed by a trust deed, which is entered into by the parties to a trust when the trust is established. A key player in a Trust Deed is the Appointor, whose primary responsibility (depending on the trust deed), is to appoint the trustee.

Once the trust is established, as a matter of law, the beneficiary has no proprietary interest in the property of the trust. Commonly, it is the trustee’s role to decide how any assets or income of the trust is distributed to the beneficiaries.

The Family Court’s View

As a matter of course, the family court cannot make orders or injunctions binding third-parties, unless:

The order is reasonably necessary, or reasonably appropriate and adapted to effect a division of property between the parties to the marriage;
The third-party has been afforded procedural fairness in relation to the making of the order;
The court is satisfied that in all circumstances it is just and equitable to make the order; and
The court is satisfied that it has taken into account any taxation effect of the proposed orders, the economic, legal or other capacity of the third party to comply with that order.

This is a high threshold to meet so family law parties tend to have the trust assets included in the property pool by arguing that the trust was either created to defeat a future family law claim, or that the trust is simply the alter ego of the beneficiary and thus, the trust assets are in that beneficiary’s complete control.

The above has been subject to lengthy litigation, and some important cases on the issue are summarised below:

Kennon & Spry (2008) 238 CLR 366

This was a landmark High Court case where the Husband (who was also a practicing Barrister) was the settler/appointer, the trustee and a potential beneficiary. When the parties were married, the Husband removed himself as a beneficiary and the Wife was inserted as a trustee if the Husband resigned that position or died. Around separation, the Husband varied the trust so that the Wife would not be a beneficiary and the children would become the trustees upon his death or resignation. The Husband then took the step of creating four trusts in favour of the parties’ four children, giving them a quarter each of the capital income in the original trust.

Ultimately, the Wife successfully had the original variation of the first trust set aside and the children’s trust set aside when the matter first came before the court. The Court considered that the transaction was done to defeat a family law claim, which is not permitted pursuant to Section 106B of the Family Law Act 1975. The full family court upheld this decision, so the Husband appealed to the High Court for a final determination.

In dismissing the appeal, and upholding that the trusts should be set aside, the Court made a number of helpful comments to assist future parties:

The court said: “For so long as Dr Spry retained the legal title to the Trust fund coupled with the power to appoint the whole of the fund to his wife and her equitable right, it remained, in my opinion, property of the parties to the marriage for the purposes of the power conferred on the Family Court by s 79. The assets would have been unarguably property of the marriage absent subjection to the Trust”

From this case and cases since, it has emerged that the control of the trust is one of the most important considerations in deciding whether trust assets should be included in a family law matter. It involves a consideration of not only the Trust Deed to see who the appointor is and who has the ultimate power of appointing a trustee but also looking at the circumstances of how the trust has operated.

For example, if a person is the appointer, trustee and beneficiary of a trust and has been making regular distributions to themselves they clearly have control of the trust. Therefore, when considering establishing a trust for asset purposes, it is important that you carefully consider the roles each party will be given as per the trust deed. A person who is an appointor and trustee would have a very difficult time arguing that they do not have control of the trust.

The above is not to say that control is the determinative consideration for the courts.

Harris & Dewell & Anor [2018] FamCAFC 94

This was a case involving an appeal by a Wife against Orders which excluded the Husband’s father’s Unit Trust. The corporate trustee’s director was the Husband’s accountant who acted on the Husband’s instructions. The Husband otherwise did not hold any units in the trust, and whilst the original Trial Judge said that the Husband controlled the trust, the Trial Judge said that the interest should be considered a financial resource, not property added to the balance sheet.

The Full Court of Appeal agreed with the Trial Judge, dismissing the Wife’s appeal and said that, “common to… [cases where trust assets are added to the trust deed] is ‘the capacity of a party to the marriage to use existing powers pursuant to the trust deed or through the trust deed companies so as to effect the lawful distribution of property to themselves.”

The Court continued, saying “Control is not sufficient of itself. What is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust”.

The Court ultimately concluded that “Ultimate control has at all times rested with, and currently resides with the [Husband’s] father.”

Protecting assets for family law purposes ideally should be undertaken well before separation by way of a Financial Agreement (colloquially known as a pre-nuptial agreement). Baker Love Lawyers has extensive experience in drafting such documents for family law clients.

Alternatively, if parties have already separated, noting the complexity of the current case law regarding the treatment of Trust Assets by the family law courts, specialised family law advice is essential.

If any of the above applies to you, please contact Baker Love Lawyers on 02 4944 3322 to make an appointment with our Accredited Specialist in Family Law, Mr Hayden Carr.