By Zak McMurray – Lawyer
Disputes involving discretionary Family Trusts are among some of the most complex in family law property proceedings.
Family Trusts can raise questions about what constitutes “property”, and when Courts may include Trust assets or a party’s interest in a Family Trust, in a property settlement.
To determine the nature of the parties’ interest in a Family Trust, the Court considers several factors which we will explore in this article.
What is a Family Trust?
Before we explore the various factors the Court considers, it is important to understand what a Family Trust is.
A Family Trust is typically a discretionary trust set up for the benefit of a person’s family unit to hold family assets, manage certain investments or distribute income from a business.
Family Trusts are often established for asset protection or taxation purposes, for the benefit of the Trust’s beneficiaries.
Under a discretionary Family Trust, the Trust assets (income or capital, or both), received by each beneficiary is determined by the Trustee in accordance with the terms of the Trust Deed.
What is a Trust Deed?
A Trust Deed is a written document which details:
- how the Trust is to operate.
- who controls the Trust.
- how the assets of the Trust are to be distributed and how decisions are made.
- the beneficiaries of the Trust.
What is the Court’s approach?
When dealing with discretionary Family Trusts, the Court must determine whether the property of the Trust is:
- Property available for distribution between the parties.
- A financial resource available to one of the parties.
- A mere expectancy.
If the Court determines the assets of the Trust to be the property of the parties, the assets are directly available for division in a property settlement.
If the assets of the Trust are considered a financial resource, this is relevant to the assessment of the parties’ current and future circumstances, considered pursuant to sections 79(5) and 90SM(5) of the Family Law Act 1975 (FLA).
If the assets of the Trust are considered a “mere expectancy”, the assets of the Trust will not be taken into consideration. A mere expectancy refers to the possibility or ‘hope’ of becoming entitled to assets in a Trust in the future. For example, being a named beneficiary of trust assets in the will of a living person who still has testamentary capacity is likely to be considered a mere expectancy and not property or a financial resource.
The various factors the Court considers when determining the nature of a party’s interest in a Family Trust include:
- Whether a party is a beneficiary of the Trust.
- Whether a party has control of the Trust.
- The history of benefits and distributions from the Trust.
- The timing and creation of the Trust.
- The beneficiary’s right to due consideration and proper administration of the Trust.
Whether a party is a beneficiary of the Trust
An important step is to determine whether a party is a beneficiary of the Trust or within the defined class of potential beneficiaries, which is detailed in the Trust Deed.
Beneficiaries cannot compel a distribution, but they do have the right to due administration of the Trust in accordance with the Trust Deed and to be properly considered and receive benefits if the Trustee so decides.
In Kennon v Spry (2008) HCA 56 (Kennon v Spry), the High Court of Australia (HCA) determined that even discretionary rights of beneficiaries could be treated as “property” in family law proceedings, in the right circumstances.
In Kennon and Spry, the respondent husband, Dr Spry was both trustee and beneficiary. His ability to vary the Trust Deed and distribute property to himself was central to the HCA’s finding that the Trust assets should be taken into account in the family law property proceedings.
Who has effective control of the Trust?
The Court considers whether a party has control over the Trust. This control includes legal, practical or de facto control.
Control can arise in many ways, such as:
- Being the Trustee, or director of a corporate trustee.
- Being the Appointor of the Trust and having the ability to appoint and remove Trustees.
- Possessing a veto power or casting vote under the Trust Deed.
- Influencing decisions through family governance structures or informal arrangements.
Even when control is shared with another Trustee(s), the Court may find that a party’s influence is sufficient to treat their rights as property.
In Woodcook & Woodcock (No 2) [2022] FedCFamC1F 173 (Woodcock), the husband was one of several directors of the corporate trustee (a company). Despite this, the Court found that the husband’s influence, taken together with other factors such as the history of distributions, made it appropriate to make a finding that the assets of the Trust be included in the property pool available for division between the husband and the wife.
Historical benefit or past distributions
As seen in Woodcock, the history of how a Family Trust has operated is a key consideration for the Court.
If the Trust has been the primary vehicle for family wealth, this demonstrates the beneficiary is a key object of the Trust.
The Court often examines:
- The amount and frequency of past distributions.
- The proportion of distributions received by the party in the family law proceedings as compared to other beneficiaries of the Trust.
- Whether the Trust has been operated for the benefit of the family unit that is the subject of the family law proceedings, or for a broader group.
In Woodcock, the husband had received approximately $15 million in distributions over several years. This history suggested that further distributions were likely, supporting the Court’s decision to treat his rights in the Trust as property.
Conversely, if a party has received little or nothing from a Trust and there is no pattern suggesting they will in the future, the Court is less likely to include the Trust assets in the asset pool available for division.
Timing and creation of the Trust
The Court also considers when the Family Trust was established, who settled it, and whether either party contributed to its management.
Pre-relationship Trusts are not immune from consideration. However, if the Trust was created long before the commencement of the relationship and was used primarily for the benefit of other family members, the assets of the Trust may be treated as a financial resource rather than property.
If the parties jointly contributed to a Trust created during the relationship, Courts are more likely to treat the assets of the Trust as part of the asset pool. But it is one of only many factors.
The timing of changes to the Trust Deed is also relevant. If control was altered after separation to remove a party as a beneficiary or to dilute their rights, the Court may set aside such transactions under section 106B of the FLA if they were intended to defeat a claim.
The beneficiary’s right to due consideration and proper administration
Even where Family Trusts are involved, beneficiaries generally have core equitable rights, such as:
- The right to have the Trust properly administered.
- The right to be genuinely considered for distributions.
Courts are increasingly willing to treat these equitable rights as property.
In Kennon v Spry, the HCArecognised that the right to due consideration was capable of enforcement and had value.
The Federal Circuit and Family Court of Australia in Woodcock went further by holding that equitable rights were valuable enough to be included as property in the asset pool. Due to the history of distributions to the husband, the Court held that there was a high probability that the husband would continue to benefit from distributions from the trust in the future.
Property settlements involving Family Trusts are a complex aspect of family law and require expert legal advice specifically tailored to your needs. If you would like advice about navigating a family law settlement involving a Family Trust, please contact us on (03) 8672 5222 to arrange an appointment with one of our experienced family lawyers.
