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Discretionary trusts and property settlements

Discretionary Trusts And Property Settlements

What happens in a family law property settlement when property is held in a discretionary trust? It’s important to start with the basics.

Section 79(1) of the Family Law Act says: “In property settlement proceedings, the court may make such order as it considers appropriate:

  • In the case of proceedings with respect to the property of the parties to the marriage or either of them – altering the interests of the parties to the marriage in the property.”

So, when property is held in a discretionary trust, the question is, is it “property of the parties to the marriage of either of them”?

In many Family Court cases this question has been answered yes. Property held in a discretionary trust has been treated as the property of one of the parties if the trustee is the “alter ego” or “puppet” of the party. The cases talk about looking at the “reality” of the position and seeing if the relevant party has control of the trustee.

In the 2007 case of Stephens v Stephens, Chief Justice Bryant provided a summary of the position of the Family Court when she said: “…a party who is the trustee of a discretionary trust, or has the capacity to appoint himself as trustee, and is also a beneficiary, or who has the capacity to become a beneficiary or become a majority shareholder in a company (who is or can become a beneficiary) can have the assets of the trust treated as if they are his or her own property… Were it otherwise, it is obvious that a party could, by simply acquiring or placing assets in a discretionary family trust, effectively avoid an order being made which would enable the other party to share in the property owned by the trust.”

An alternative approach sometimes taken by the Family Court has been to consider the property held by the discretionary trust, not as property of the parties to the marriage or either of them, but as a financial resource. This means that the property held by the discretionary trust is not included in the list of property to be divided. It is taken into account in dividing the ‘other’ property. In some cases, if there is sufficient ‘other’ property, it may make little difference whether the property held by a discretionary trust is considered property of the parties to the marriage or either of them or it is considered to be a financial resource. How the property held by the discretionary trust is considered, will certainly make a difference if there is minimal ‘other’ property. The court can only alter interests in property. If the property held by the discretionary trust is considered a financial resource, there may be nothing for the party without the interest in the trust to receive.

Very few family law cases end up in the High Court. So, lawyers take notice when they do! In the context of discretionary trusts, it is important to consider the case of Kennon v Spry, which was decided by the High Court in 2008. In this case, the trial judge considered that the property held in a discretionary trust was property to be taken into account in the property settlement. The appeal to the Full Court of the Family Court backed this view. So did the appeal to the High Court, by a 4-1 majority. But, like many cases, it is important to read the Judgments, as different judges had different reasons for coming to the decision that they did. And the facts are complicated!

Just focussing on the Judgment of Chief Justice French:

  1. He held that the property held by the trust was “property of a party to the marriage” because the facts of this case were:
    • The property held by the trust were acquired during the marriage;
    • As trustee, the Husband had legal ownership of the trust property;
    • As trustee, the Husband had power to appoint the assets to the Wife; and
    • The Wife had the right to be considered as a person to whom the assets could be appointed.
  2. He went on to say: “Where property is held under a trust by a party to a marriage and the property has been acquired by or through the efforts of that party or his or her spouse, whether before or during the marriage, it does not, in my opinion, necessarily lose its character as “property of the parties to the marriage” because the party has declared a trust of which he or she is trustee and can, under the terms of that trust, give the property away to other family or extended family members at his or her discretion.”

Essentially, the majority of the High Court decided that if a party has control of a discretionary trust then the interest in the trust will be property to be included in the pool of property to be divided between the parties. Specifically, the majority concluded that the right to due administration and consideration is property.

It is, of course, true (and perhaps frustrating) to add that each case is decided on its own facts. But, it should be noted that the Family Court has a track record of often deciding that the property held by a discretionary trust is “property of a party to the marriage” or alternatively deciding that it is a financial resource to be taken into account when dividing the property.

If you would like further advice on discretionary trusts and property settlements, please contact us online or call (02) 4929 3995.

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