It's a family affair - family trusts in family law

Family & Relationship Law - 9 July 2019

There is an increasing trend toward creating a discretionary family trust for the purpose of asset protection and tax minimisation. In light of this, it is important to understand how family trusts may be treated in family law proceedings.

What is a family trust?

A family trust is a vehicle that families often use to hold income generating assets and distribute that income to beneficiaries, who are often family members. The beneficiaries are set out in the trust deed and generally include classes of beneficiaries connected to those named persons. For example, their spouses, their children, any company or other trust/entity connected to that person.

In a family trust, the trustee has the discretion to decide which beneficiary will be distributed income and the appointor of the trust has the power to remove and appoint trustees. It is often the case that one party will hold the position of both appointor and trustee (or director of the corporate trustee) and will therefore have the power to control the trust's assets. Often, the assets of the trust are assets which, but for the trust, would otherwise be property of the parties.

So, what happens when the party in control of the trust separates with their spouse? Does the trust get included in a property division for family law purposes or is it protected?


How is a family trust relevant for family law purposes?

In family law, the Court identifies all property interests of the parties in the relationship. This extends to interests held by either party in a family trust. In many cases, a trust will be property of the marriage, where the parties hold the roles of appointor, trustee and beneficiary.

Even where a party is only a mere discretionary beneficiary (i.e. with no present entitlement to trust assets), the Court will still take that into account as a financial resource of that party when determining the overall property settlement.

Mansfield & Mansfield [2018]

In the recent case of Mansfield1, the Wife claimed that the Husband had access to significant wealth, including properties held through trusts established by his father, Mr Mansfield Senior. The Wife therefore sought to join Mr Mansfield Senior and his related entities as third parties to the proceedings.

In considering whether Mr Mansfield Senior and his related entities should be joined to the proceedings, Judge Brown confirmed that "each case, involving issues relating to discretionary trusts, must turn on an examination of its circumstances". The Husband and his sister, being the only children of Mr Mansfield Senior, were named beneficiaries under the trust deed of the relevant trusts and minority shareholders of the corporate trustee. The Wife, through her relationship with the Husband, was also a beneficiary of the trust. However, Mr Mansfield Senior was the appointor of the trusts, director and majority shareholder of its corporate trustees, and only distributed income from the trust to himself.

Judge Brown therefore dismissed the Wife's application, finding that Mr Mansfield Senior had absolute control of the trusts and its assets. His Honour found that the Husband had a lack of control in relation to the trust assets and had never received any distributions from the trust. In this case, the trust was not a "sham" or "alter ego" of the Husband, as was found to be the case in Kennon v Spry where the Husband was a trustee, appointor and beneficiary and therefore had control over the trust's assets.

Interestingly, Judge Brown made a costs order against the Wife in the sum of $20,632.802, as a result of the degree of separation between Mr Mansfield Senior, his associated entities and the matrimonial proceedings. His Honour confirmed "suspicion and coincidence alone are not sufficient to create control over the assets concerned in the husband".


Lessons learned

This case highlights the need to be clear as to who has control of a trust, and indicates the need for a cautious approach where the parties to the relationship are mere beneficiaries of the trust.

Mansfield also highlights the risks for trustees of family trusts being involved in family law proceedings, to clarify how such a trust should be treated.

Whilst in many cases a family trust will not be contentious, we recommend obtaining legal advice in any separation where trust structures may be an issue.

If you or someone you know is going through a separation involving complex property structures, we recommend you seek legal advice.

 

Further information


1. Mansfield & Mansfield & Ors (No. 3) [2018] FCCA 970
2. Mansfield & Mansfield & Ors (No. 4) [2019] FCCA 318

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