How are inherited trust funds considered by the Family Court in a divorce?

From an estate planning and structuring perspective, we know an important objective of many of our clients is to maximise asset protection and preserve intergenerational wealth. This often results in assets being held in a variety of structures, including trusts.

From a family law perspective, upon the breakdown of a relationship, the Family Law Act 1975 (Cth) (“the Family Law Act”) has far reaching powers in determining what is and is not property of a party to a relationship and how property should be divided to ensure a just and equitable outcome.

It is well established that the Federal Circuit and Family Court of Australia has the ability to determine assets held in discretionary trusts to be property of the relationship.

The recent case of Rigby & Kingston (No.4) (2021) has emphasised how the careful structure and administration of trusts can provide protection in the event of a relationship breakdown.

  1. The Wife’s Father died and was survived by his three adult children, being the Wife, Ms Kingston and her two brothers. The Wife’s Father created the Kingston Group in his lifetime consisting of various trusts and companies.
  2. Under the Wife’s Father’s Will, a testamentary trust was created. The following facts were crucial in the later determination of the Husband and Wife’s family law property settlement:
    (a) the trust would vest and the assets transferred to the adult children, upon the youngest child turning 30;
    (b) the trustees, the three adult children, were to make any decision by majority;
    (c) the trustees had discretion to make interim capital distributions to any beneficiaries prior to the vesting date, meaning that there was no guarantee the three adult children would receive anything on vesting of the trust;
    (d) the Wife’s Father expressly stated that he desired, “that the benefit of my estate should pass to my children and/or grandchildren and that it is my express desire that no entitlement should accrue to any present or future spouse of my children or grandchildren particularly if such entitlement were to disadvantage my children or grandchildren or the continuity of any of the businesses which are conducted by the group of companies controlled by me”.
  3. The Wife and Husband separated after the Wife’s Father’s death. The Husband issued proceedings in the Family Court of Australia seeking, amongst other things, that the Wife’s entitlement to the assets held in the Kingston Group was property of the marriage. The Husband unsuccessfully attempted to join the Kingston Group to the proceedings.
  4. It was ultimately held by the Family Court, after protracted ligation, that the Wife did not control the assets held in the Testamentary Trust. The control rested with her brothers, and she could not make decisions alone about distributing funds to herself. Further, the assets of the Testamentary Trust had not yet vested and the source of funds in the Testamentary Trust was not from the efforts of the Husband and Wife.
  5. Importantly, the Court gave consideration to the following factual circumstances of the case:
    (a) the Husband and Wife had signed a pre-nuptial agreement in 1991, turning their minds to what rights each would have to the property individually owned by them prior to and acquired after marriage including inheritances. The pre-nuptial agreement was not enforceable at the time the Husband issued proceedings due to a change in the relevant legislation, however was relevant to the parties’ intentions;
    (b) the Husband and Wife recorded their individual expenses to ensure their contributions were equal;
    (c) throughout the marriage, the Wife provided the accommodation for the family at no cost to the Husband. She alone obtained finance where finance was required and paid off the loans; and
    (d) At no time did the Husband and Wife acquire any property in joint names nor did they hold any joint bank accounts.

Rigby & Kingston provides an example of how it is important to consider how your estate plan is structured and who you are passing control of a trust to upon death. It further emphasises that your estate plan cannot be considered as sufficient asset protection in a vacuum and the Federal Circuit and Family Court will still consider the individual circumstances of each relationship and how their finances were managed.

How we can help

For expert advice regarding Estate Planning & Structuring, or advice in relation to the commencement or breakdown in a relationship, please do not hesitate to contact us.