Family Trusts in Family Law

Introduction

This article provides an overview of how discretionary trusts are treated under Australian family law, particularly in the context of property settlements following the breakdown of a marriage or de facto relationship. Discretionary trusts, often referred to as family trusts, are a common legal structure used for asset protection, tax planning, and wealth management. However, their treatment under family law can have significant implications for parties involved in property disputes.

Overview

Under the Family Law Act 1975 (Cth) (FLA), discretionary trusts may be treated as either “property” or “financial resources” in family law proceedings, depending on the level of control a party to the marriage has over the trust. The Federal Circuit and Family Court of Australia (FCFCA) has broad powers to include trust assets in the pool of marital property if it determines that one party has effective control over the trust. However, beneficiaries of discretionary trusts generally do not have proprietary rights in the trust assets unless they have effective control or a right to compel the due administration of the trust. This article explores the legal principles and case law governing the treatment of discretionary trusts in family law.

Legal Rules

1. Definition of Property under the Family Law Act 1975 (Cth):
   • Section 4 of the FLA defines property as “property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion”.
   • The definition of property includes a wide range of interests, including incorporeal interests, but excludes mere hopes or expectations, such as discretionary payments under a trust .
2. Treatment of Discretionary Trusts in Family Law:
   • Discretionary trusts may be treated as property under section 79(4) of the FLA or as a financial resource under section 79(5) of the FLA, depending on the level of control a party has over the trust 
   •  The FCFCA has jurisdiction to make orders with respect to property of parties to a marriage, and trust assets can be included in the marital property pool if a party has effective control over the trust 
3. Control and Discretionary Trusts:
   • The High Court in Kennon v Spry held that property held under a discretionary trust could be considered “property of the parties to the marriage” if one party has effective control over the trust 
   •  The court can also set aside transactions or variations to a trust that are intended to defeat anticipated family law orders under section 106B of the FLA 
4. Asset Protection and Discretionary Trusts:
   • Discretionary trusts provide asset protection as beneficiaries do not have proprietary rights in the trust assets unless the trustee exercises discretion in their favour .
   • However, the FCFCA has the power to make orders that bind third parties, such as trustees, and can include assets under the control of or held for the benefit of a party in property settlements .

Analysis

Discretionary trusts are a common tool for asset protection and wealth management in Australia, often used by families to hold assets or conduct family businesses. However, their treatment under family law can be complex and depends on the specific circumstances of the case.

Under the FLA, the definition of “property” is broad and includes both tangible and intangible interests. However, it does not extend to mere expectations or hopes, such as the possibility of receiving discretionary payments from a trust. This means that a beneficiary of a discretionary trust does not automatically have a proprietary interest in the trust assets.

The key factor in determining whether a discretionary trust will be included in the marital property pool is the level of control a party to the marriage has over the trust. If a party has effective control over the trust, such as being the trustee or having the power to appoint or remove trustees, the court may consider the trust assets as part of the marital property. This principle was affirmed in the High Court case of Kennon v Spry, where the court held that the husband’s control over the trust allowed the trust assets to be treated as marital property.

In addition to being treated as property, discretionary trusts may also be considered as a financial resource under the FLA. This is particularly relevant when determining the future needs of the parties, as the court may take into account the potential benefits a party could receive from the trust  .

While discretionary trusts are often used for asset protection, their effectiveness in shielding assets from family law claims is limited. The FCFCA has the power to make orders that bind third parties, including trustees, and can set aside transactions or variations to a trust that are intended to defeat anticipated family law orders. This means that even if a trust is structured to exclude one party as a beneficiary, the court may still include the trust assets in the marital property pool if it determines that the exclusion was made to avoid family law obligations.

Conclusion

Discretionary trusts are a valuable tool for asset protection and wealth management, but their treatment under family law can be complex and depends on the specific circumstances of each case. Accountants, lawyers and financial advisers advising clients on the use of discretionary trusts should be aware of the potential implications under the Family Law Act 1975 (Cth), particularly in the context of property settlements. It is crucial to consider the level of control a party has over the trust and the potential for the court to include trust assets in the marital property pool. Proper structuring and careful drafting of trust deeds can help mitigate some of these risks, but they cannot entirely eliminate the possibility of trust assets being subject to family law claims.

Article by Riccarda Stock
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