What use is a Trust when Family Law gets involved? Part 1 of 2

Sometimes trusts are great at protecting assets during family law disputes, other times not. This two part series will start with a High Court case involving variations to a trust deed, and conclude with details of exactly what factors are important in deciding if trust assets are in or out of the matrimonial pool. 

As a starting point, the Family Law Act says that the Court can only make orders in relation to “property” of the parties to the relationship (married or not). Hence the trust assets must be effectively property of a party if both parties are to clearly get a share.

The Family Court has a number of powers that can be used when trusts are involved including:

  • the ability to set aside transactions;
  • the ability to determine whether trust assets are in the pool of property available for division; and
  • the ability to make orders against third parties (including trustees of trusts).

The High Court case of Kennon v Spry is a significant decision that predated the ability of the Court to make orders against third parties. The issue in this case was around setting aside transactions.

The case involved Dr Ian Spry – a famous barrister who wrote textbooks on trust law. Dr Spry first created his trust in 1968 by declaring an “oral trust”. After the marriage in 1978, he formalised this with a trust deed in 1981. He was the trustee, and the beneficiaries were himself, the wife and their 4 children. He could alter the trustee in his absolute discretion.

In 1983 he removed himself as a beneficiary of the trust. In 1998, when the marriage was in trouble, he amended the trust deed again, appointing two daughters as trustees and irrevocably excluding himself and his wife from any further distributions.

In 2001 they separated and Dr Spry then established another four trusts, controlled respectively by the four children, and he distributed the assets of the original trust equally between those four trusts.

Consequently, the trust could no longer be property of the parties as it was out of their control. However, the Court then looked as section 106B of the Act. This provides that if someone has made an instrument or disposition, which may have the effect of putting assets out of the reach of a Family Law Court order, whether intentionally or not, then the Court can set aside the instrument or disposition.

The Court easily decided that this had indeed happened. They set aside the variations of trust made in 1998 and 2002, leaving in place the 1983 variation with the wife a beneficiary and the husband the trustee. The Court then said, since he had control of the trust and had the power to appoint all the trust property to the wife, the trust property could be treated as property of the parties and divided pursuant to the Family Law Act.

Planning Issue: Restructuring and other transactions taking place during a relationship are more likely to be at risk of being set aside by the Family Court. 

In our Next issue, we will describe the characteristics of trusts which make them more or less open to family law assault. Click here to read Part 2 of 2.

How we can help

If you have any questions about any of these matters, or if your client needs to explore this, please do not hesitate to contact us.