Australia: How discretionary trusts are treated in family law matters

In this issue of Lifestyle and the Law, Rosemary Carreras, head of the Wills and Estates Department, has spoken about Discretionary Trusts and their use in estate planning.

Discretionary Trusts are also used with an expectation that assets will be protected in the event that one of the Trustees, or beneficiaries, separates from their partner. 

It's true that Discretionary Trusts can be used this way but there is a fundamental misconception that Discretionary Trusts won't be treated as property in Family Law matters. For the purposes of the Family Law Act, the Court will generally take the Trust into consideration, including it as property or otherwise making an adjustment to the other party, should the Court find that it is "just and equitable."

I have written before about the process for dividing property under the Family Law Act. The Court uses a five step process to determine the division as follows:

  1. Does the Court have jurisdiction to hear the matter?
  2. What are the assets, financial resources and liabilities of the parties and what values can you attribute to those items?
  3. What contributions have each of the parties made before, during and after the relationship (financial, non financial, homemaker and parent)?
  4. Should there be an adjustment to one or both of the parties on the basis of future needs?
  5. In all the circumstances, is the division just and equitable?

The Court considers any Discretionary Trust at step 2 of the process, namely whether it is considered property of a party to the relationship and treated as an asset to be taken into account. The case law indicates that each matter will be determined on its merits. However the Court has made observations on the events and circumstances which will result in a Discretionary Trust being considered property. Factors considered include:

  1. That one of the parties of the relationship has the sole power to appoint a Trustee
  2. That the Trustee (if it is a company) is completely controlled by one of the parties
  3. A party (or the company completely controlled by a party) is a beneficiary
  4. That circumstances could arise where one of the party receives the majority of the benefit of that Trust.

In several cases I have found that the Trust Deed has varied after separation. This may have some benefits to the distributions post separation, however the Court may find that these variations have been designed to defeat the claim of the other party and consequently set them aside.

If the Court determines that the Discretionary Trust isn't property (as one or both of the parties lack the necessary control of the Trust and its distributions) then the Court may still find that it's a financial resource of the parties and taken into account at step 4 of the process (where the Court considers an adjustment to one of the parties). If there's consistency of distributions, and all the beneficial interest can be quantified, then it's highly likely that the Court will take it into account.

It's important that clients, when setting up a Discretionary Trust, seriously consider the reasons why the Trust is being created and whether it will in fact protect the assets from the intended consequence. Ultimately, in order to protect the asset from being included, the parties may need to relinquish control or consistency of distributions - in turn, this may be a disadvantage to the client and the financial structure of their affairs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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