Family Law and Trust Assets
The Family Law Courts’ general approach to trust assets
Many people worry about how the assets of a family trust will be treated on divorce or relationship breakdown. In this article we hope to give the reader a general idea of the approach the Courts will take when considering whether or not trust assets should be divided between the parties under the Family Law Act. Every case is different and we recommend, if you have specific queries that you contact our Ms Jane Ekin-Smyth to discuss.
A trust is not a separate legal entity, in the way that a person or a company is. Invariably on divorce or relationship breakdown, there is some argument as to whether or not the assets of the trust are property within the meaning of the Family Law Act. This is a crucial issue. If the Court decides the assets are property, then the assets of the trust are available for potential division between the parties. If the Court decides the assets are not property, then the assets of the trust are not available for distribution between the parties. In the latter case, the Court may decide the assets of the trust are a financial resource available to one of the parties.
Accordingly the critical question is whether or not the Court will decide that the trust assets are property of either the husband or wife.
There are general rules which apply. However the outcome in each case will depend on the particular circumstances of the case. A trust does not have a standard form and structure, and in each case the Court will consider the particular circumstances surrounding the trust under consideration.
To this end the Court will consider the relevant documents including the Trust Deed and the Trust's financial documents. In each particular case the Court will analyse the obligations, responsibilities and identities of the settlor, the trustee, the appointor, the guardian, the protector, the controller and the beneficiaries. It is important that these people (or entities) are identified and their relationship to the parties is explored. The Court will also require an explanation as to the source of funds or assets of the trust.
In the early days of the Court, the Court took a restrictive approach, not categorising trust assets as property, even when a party effectively controlled the trust. However, this approach did not benefit the other party, particularly if the bulk of the parties' assets were owned by the trust.
Later the Court's judgement, in the marriage of Ashton (1986) FLC 91-777, indicated a shift in approach. The Court found the husband was in full control of the assets of the trust, and he applied the assets and the income for his own benefit. The court concluded the trust was no more than the husband's alter ego. The court concluded the husband had de facto ownership of the property in the trust.
The law was developed further in the High Court Case of Kennon & Spry 2008 HCA 56. In that case the High Court held that the trust assets were property within the meaning of the Family Law Act. The husband created the trust in 1968. The husband was sole trustee, he, his siblings, their spouses and their children were named beneficiaries. The husband married in 1978. In 1983 the husband excluded himself as beneficiary for land tax reasons, in 1998 the marriage was in difficulties so the husband varied the trust to exclude himself and his wife as capital beneficiaries. The husband and wife separated in 2001. In January 2002 the husband divided the income and capital of the trust between 4 trusts he established for his daughters.
At trial the husband argued the assets of the trust were not property and should not be shared with his wife. The Court found the assets of the trust were property, and the steps the husband took in 1998 and 2002 were designed to keep property away from the wife and the Family Court. So the court set aside the 1998 variation and the 2002 disposition of assets.
In the recent case of Harris & Dewell & Anor  Fam CAFC 94 delivered 25 May 2018, the Full Court of the Family Court of Australia considered an appeal from a judgement of a Family Court judge.
The parties had been married 24 years. The wife asserted that the assets owned by a unit trust should have been included in the pool of assets available for division by the parties and defined as property within the meaning of the Family Law Act. The wife claimed that the unit trust was the husband's puppet or alter ego. The husband argued the trust was a third party to the litigation and the court did not have the power to deal with its substantive rights.
The trust was established by deed in mid-1981, the trust had a corporate trustee from inception and at the date of trial. The corporate trustee was incorporated in mid-1981. The establishment of the trust pre-dated the parties' relationship by 5 years. The beneficial interest in the trust was divided into 60 units. The husband's father was the sole unit holder and the husband was never a unit holder. The husband and husband's father were the sole shareholders in the corporate trustee. The husband ceased acting as a director of the corporate trustee in 2011. The ostensible picture of control of the trust thus presented was of ultimate control vesting in the husband's father by reason of his sole unit holding and his control of the voting rights in the trustee. On consideration of the evidence the Judge found that since 2002 the husband treated the trust assets as his own. Further the husband will on the death of his father inherit the trust units. The judge found "I am not satisfied that whilst the husband's father remains the owner of the trust the husband has some lawful right to benefit from the assets of the trust. Despite the control exhibited by the husband in respect of the dealings of the trust I am not satisfied that the trust is an alter ego or device used by the husband for his sole benefit".
Accordingly the trust assets were not held to be property in this particular case.
If a trust is a puppet or alter ego of the husband or wife then there is a risk the Court will regard the assets of the trust as property available for division between the parties.