Family Trusts Asset Pool
A family trust is a discretionary trust established to hold a family’s assets or to manage a family business. This structure allows someone to hold onto the ownership of property without being the legal owner of the property. Trusts are typically established to protect assets from certain eventualities, such as legal proceedings, or as part of tax minimization strategies. On occasion, someone will establish a family trust under the mistaken belief that the assets of family trusts are protected from a family law asset pool. As this article will explore, this is generally not the case.
How are Family Trusts included in the Asset Pool?
The Family Law Act defines the items for inclusion in the asset pool as the property that a person is “entitled [to], whether in possession or reversion”. In other words, the assets of a trust may be considered property if either member of the couple has an interest or control of the trust. If the court finds that property within a family trust form part of the asset pool of the marriage or de facto relationship, then the court can distribute the assets of the trust as is just and equitable.
One of the key factors in considering whether a family trust is property for the purposes of a shared asset pool is who has control of the trust. If one of the parties has sufficient control over the trust to distribute income or assets to themselves or their spouse, then the assets of the trust are generally considered part of the asset pool. In assessing whether either party has control, the court will consider the identity of the trustee, director, beneficiaries, shareholders and appointers of the trust.
The court also assesses the terms of the trust deed, including the purpose for which the trust was established. The court will have a different view of a family trust that had been established many years previously to protect an asset pool for the future inheritance of children, versus a trust that is recently established (or where the terms of an existing trust have been changed) with intent to hide assets from a property settlement.
Court Orders and Family Trusts
If the court finds that the family trust is part of the asset pool, then it can order the trustee to distribute capital or income to the parties or fix a vesting date at which time the assets of the trust will be divided between the couple. If the court does not find that the assets of the trust are property for division, it can still assess the potential for either spouse to receive further benefit from the trust in the future, in which case the trust may be considered a future financial resource.
Example of Family Trust Case
Case law pertaining to family trusts has repeatedly held that trusts are in fact part of the asset pool and liable for division between the separating spouses. In Kennon v Spry (2008) the High Court reaffirmed this precedent, finding that the assets of a discretionary trust were property of the parties to the marriage.
In this case, the husband had established a discretionary trust two years after his marriage. He appointed himself as trustee. The beneficiaries were himself and his siblings, his and their issue, and the spouses of all of them. During the marriage, he excluded himself as a beneficiary of the trust and appointed his wife as trustee in the event of his death or resignation. Throughout the marriage the trust acquired assets.
After his separation from his wife, the husband created four trusts for the children of the marriage. He appointed himself as one of the trustees and transferred into the children’s trusts equal quarters of the income and capital of the original trust.
The court found that the original family trust held property of the marriage, and therefore the property in the children’s trusts was part of the asset pool. The court reached this conclusion for three main reasons. First, as trustee, the husband was the legal owner of the assets of the original trust, and these assets were under his control. Second, prior to removing his wife as a beneficiary, the husband had the power to distribute all of the assets of the trust to his wife. Finally, the majority of the assets of the trust were acquired through the efforts of the couple during the marriage and there were no third-party interests in those assets.
The law relating to family trusts and asset pools is complicated and it is best to consult a lawyer with expertise in this area. You will need to provide your solicitor with all the relevant information relating to the trust, including the trust deed, any financial statements, deeds of variations and other information if it can be obtained. If you need advice about family trusts or property settlements in general, Armstrong Legal can help. Please call us on 1300 038 223 or send an email to make an appointment with one of our family lawyers.