Trusts – “Indiscretionary” Discretion is NOT Advised

Am I a family lawyer? No. Though, through the sheer beast that is litigation, my path is often crossed with those colleagues who practice in this area of law. Often, we receive referrals from such colleagues whose client’s enquiry is often prefaced by the words “they can’t touch it, it’s in a trust! Or can they?”

…and the usual response I provide is, “It depends.”

Before we delve into the intricacies of trust assets in family law disputes, below is a brief overview of a trust.

What is a trust?

In brief, a “trust” is an obligation on one person to hold property for the benefit of another. Commonly, they are either:

  1. Discretionary Trusts, where the beneficiary’s entitlement to both income and capital is generally at the discretion of the trustee.
  2. Unit Trusts, where each unit holder has a fixed entitlement in the trust estate and any income flowing through the trust is distributed to each unitholder in proportion to their entitlement.
The discretionary trust – Who’s who in the zoo?
  1. The Settlor: Contributes a nominal amount to establish the trust.
  2. The Trustee: Powers and responsibilities of the trustee are often extensive and ought to be recorded in the trust deed. The trustee also has legal ownership of the trust assets, despite not being able to use the assets for its benefit.
  3. The Beneficiaries: Have a beneficial interest in the trust’s property. Any distributions of income are not fixed, as such an amount is at the discretion of the trustee.
  4. The Appointor/s: The appointor, the King of Kings, can appoint and remove the trustee.
Busting the trust

The Family Court has the power to deal with property interests under the Family Law Act and can make orders that it considers appropriate to alter the property interests of the parties involved. “Property” is defined by the Family Law Act as “property to which a party is entitled” however, property has a very broad meaning which, in some circumstances, include the assets of a trust.

Even if trust property happens to fall short of “property” as defined, such assets may be characterised as a financial resource of a party and the Family Court will look to the benefits that a party has received or is likely to receive when deciding how to make property alterations.

When determining whether trust assets are property of the marriage the Family Court will look at who controls the assets. In considering the question of ‘control’, among other things, the Family Court will consider:

  1. Whether one of the spouses is a sole appointor and has the power to appoint and remove a trustee;
  2. In the case of a corporate trustee, whether the company is completely controlled by one of the spouses;
  3. Whether a spouse or a company completely controlled by the spouse, is a beneficiary;
  4. Whether circumstances may arise where one of the spouses receives the majority of the benefit of that trust; and
  5. Whether the trust is a ‘sham’.

If the Family Court determines that the trust assets do not form part of the property pool, but rather, a financial resource, then the Family Court cannot make any adjustment to the assets of the trust. However, it can seek to change the ultimate division of the asset pool to favour the party without the financial support of the trust.

If you’re worried about what’s at stake, or that you’re not getting your fair share, please contact our office (and be sure to bring your trust deed).

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