In our last issue (What use is a Trust when Family Law gets involved? Part 1 of 2) we focussed on the ability of the Family Court to set aside transactions involving trusts as occurred in Kennon & Spry.
In this issue, we consider the Court’s approach to more ‘routine’ discretionary trust cases and what factors apply when deciding if trust property is property of the relationship for the sake of a family law split.
Bailey involved sixth generation farmers. The trust was held to be for the benefit of the wider family and not property divisible in the marriage. Crucially, the accountant was the trustee and gave evidence that the husband’s deceased Dad, who established the trust in the ‘60’s, had told him the trust was for all the generations in perpetuity, so he would definitely not distribute capital to the husband.
Therefore, the court simply took into account the income stream of the trust as a financial resource available to the husband in the family law split.
Differently, in Goodwin, the husband as appointor effectively controlled the trust for his benefit. In the circumstances that trust was treated as property of the parties available for division between them.
Ward involved the husband’s mother establishing a testamentary trust for him and his children. The husband in the witness box admitted that his mother had removed him as trustee and executor two days before she died – to make sure the wife didn’t get a share of her money!
The new trustees were his sister and a solicitor, so the judge was satisfied that in reality they would make sure the husband got the trust money; therefore this was treated as property in the family law split.
In Bailey, two helpful checklists detail the considerations relevant to treating trust property as property of the parties’ relationship, including:
- The history of the parties’ treatment of the trust property (see Goodwin);
- The history of exercising powers and making variations to the trust (Kennon & Spry);
- The benefits derived from the trust by the parties such as drawings, loans, salaries, payment of expenses, use of motor vehicle;
- Capacity to borrow trust funds;
- Contributions by the parties to the trust property (Kennon & Spry);
- One party’s ability to transfer assets to either spouse; and
- Whether a party has responsibility for the daily administration of the trust, including payment of accounts, etc.
The other checklist to consider relates to the control-of-trust factors:
- Holding office as trustee;
- Legal control of the trustee (through a corporate trustee) or personal appointment;
- Power to replace the trustee (Goodwin);
- Practical control (e.g. the trustees are friends, relatives or trusted advisors who act on the request of the controlling spouse – Ward).
How trusts are set up, and how they are administered will be relevant to the Family Court’s powers and how they are exercised. At the set up phase relevant considerations should be around who controls the trust and who can benefit from it and to what extent. Broadly, the less control or benefit a party to the marriage can receive the better.
It is not just the set up of trusts that will be relevant. How the trust is used and who routinely benefits, is also an important factor.
Having said that, if certainty is required, the best planning tool is the use of Binding Financial Agreements or Inheritance Protection Agreements.
How we can help
If you or your clients have any questions about any of these matters, our expert Family Law team would be delighted to assist. Please do not hesitate to contact us.