When Family Law and Family Trusts Collide

October 15, 2020

Family Discretionary Trusts are a common structure used by intergenerational farming families to operate their businesses and hold land and other assets. What happens to these assets if a family member involved in the business separates from their spouse or partner? In this two-part series, we discuss how family discretionary trusts can get drawn into a property settlement.

What is a Family Discretionary Trust?

A family discretionary trust generally consists of:

• The trustee who holds the legal title to the trust assets and exercises its discretion to distribute income to the beneficiaries. The trustee can be a person/s or a company (known as a corporate trustee).
• The appointor who is the ultimate controller as they have the power to remove and appoint trustees.
• The beneficiaries who can receive income by way of distributions (at the trustee’s election). There is usually a wide range of potential beneficiaries, e.g. parents, children, spouses etc.

The property pool

As we discussed in our recent bulletin, the first step in any property settlement is to identify the assets and liabilities of the parties. This is referred to as the “property pool” which is divided between the parties at the conclusion of the property settlement. There is a long-held misconception that trust assets are “untouchable” in a property settlement but in reality, the Court has regularly held that trust assets can form part of the property pool.

When are trust assets included in the property pool?

A primary consideration in determining whether trust assets form part of the property pool is whether a party to the relationship has effective “control” over the trust. There are a wide range of factors a Court will consider when determining whether a party has control, including:

• If either party is the appointor of the trust, or the individual trustee or director of a corporate trustee.
• If either party has received regular distributions or other financial benefits (e.g. salary, payment of expenses, use of a motor vehicle, loans) from the trust in the past.
• If either party is a beneficiary of the trust.
• If either party established the trust and/or contributed to acquiring the trust assets.

If trust assets are included in the property pool, what does this mean for the rest of the family?

The Court has wide powers when it comes to discretionary trusts. Other family members involved in the trust (for example, as trustee or director of a corporate trustee) could find themselves joined as third parties to the property settlement proceedings. The Court can order a trustee to do things such as distribute trust capital or income in a particular manner (either to a beneficiary or to a person who is not a beneficiary) or fix the vesting date so that assets of the trust can be distributed between the parties.

Look out for part two of our series where we discuss how documents relating to a family discretionary trust get included in a property settlement.

For more information please contact a member of our Family law team at Fox and Thomas.