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Trust and Property Settlement

A trust is not a separate entity and cannot be a party to a legal proceeding. It’s a versatile structure that many people can use to their advantage for a broad range of business activities. You can use trusts with a trading function, hold shares in an operating company, or hold personal assets. In any event, trusts are beneficial because they can safeguard assets, distribute income, and reduce tax burdens.

The key parties to the trust are the settlor, trustee, appointors and beneficiaries.

The settlor is the person responsible for establishing the trust and provides the trustee with the assets to be held for the benefit of the beneficiaries.

The trustee holds the legal title to the trust property and is bound to use its legal position as owner of the property for the benefit of the beneficiaries.

The appointor has effective control of the trust and is responsible for appointing and replacing the trustee/s.

The beneficiaries do not have any proprietary interest in the trust property. Their interest is a chose in action, entitling them to call upon the trustee to deal appropriately with the trust’s income and/or capital.

However, what happens to a trust when property is divided in the event of a separation or divorce? Are trusts immune from a claim by an ex-spouse or former partner?

While every case is different, there is a general four-step process which will ordinarily be followed when it comes to dividing property between the parties in a property settlement. First step in the process is identifying the assets and liabilities of the parties and determining their value.

Whether a trust is an asset, the question of who has control of a trust is an essential factor that the court will consider. Depending on the circumstances and who controls the trust, it will be considered either as:

1. An asset; or
2. Financial resource

If a party is found to have the ability under the terms of the trust to distribute to themselves, or person or entity of its choice, all of the trust’s income, that party will usually be found to have control of the trust. If the court finds that a party to the marriage or de facto relationship has control of the trust, the court can include the trust assets as part of the property to be divided between parties.

If a party is found to have no control under the terms of the trust but is likely to continue to have access to an income stream from a trust going forward, it is found to be a financial resource, and the trust assets will not be part of the property to be divided between the parties. However, its existence could be taken into account when considering a further adjustment of available property under s 75(2) or s 90SF(3) of FLA – matters to be taken into consideration in relation to spousal maintenance.

When deciding whether or not a party/s to the marriage or de facto relationship has control over the trust and whether the trust assets should be included in a property settlement, the court will consider the following factors:

• Terms of the trust deed
• Identity of the trustee
• Control of the trustee, if the trustee is a company
• Identity of the appointor
• Trust income distribution history
• Assets of the trust and how they were acquired
• Beneficiaries of the trust
• Any relevant changes to the trustee or beneficiaries of the trust during the course of the relationship
• History of dealings with assets and income of the trust and by whom
• The degree of influence of the parties to the marriage or de facto relationship to the appointor of the trust

In Coventry & Coventry and Smith (2004) FLC 93-184; [2004] FamCA 249, the Full Court held that the husband controlled the trust despite the fact that his mother was the trustee. The husband was the principal beneficiary of the trust and the appointor of the trust since the death of his father.

In Ashton and Ashton (1986) FLC 91-777; [1986] FamCA 20, the Full Court also held that the trust was controlled by the husband and, therefore, property available to be distributed between the husband and the wife despite the fact that the trustee of the company was a company of which the husband and his cousin were trustees. The court held that the husband’s power of appointment under the trust deed and all the attributes it carried with it amounted to a de facto ownership of the property of the trust.

In the case of Kelly and Kelly (No.2 (1981) FLS 91-108; [1981] FamCA 78, the Full Court found that the husband could arrange the funds of the trust as he pleased and that he could direct the affairs of the trust. Similarly, in the case of Goodwin and Goodwin Alpe (1991) FLC 92-192, the husband exercised his power to exclude the wife and her children as beneficiaries.

Third party trustee

It is not unusual for a party to try and hide their control in a trust by having a third party listed as the trustee.

Before the introduction of Part VIIIAA of the Family Law Act 1975 (Cth) (‘FLA’), the court was required to determine whether the trust:

• Was a trust in which a party to the marriage had only a mere expectancy,
• Should be treated as the property of the parties (or either of them), or
• Was a financial resource of the parties.

If the court found that the property of the trust was in fact property of the party, it was directly available for distribution within the property proceedings¹.

If the property was found to be a financial resource, the property was not available for division within the proceedings.

If it was only a mere expectancy, it was disregarded within the property proceedings.

These considerations are still important in contemplating whether a trustee must be joined as a third party. If this becomes evident that the third party listed as a trustee is simply a paper exercise and is not, in fact controlling the trust, arguments may arise that the trust is, in fact, an asset of the relationship.

Key Takeaways

• Every trust is unique, and the nature of the parties’ interests in the trust property is a question of fact to be determined by the court.
• Ultimately, the greater control a party have over the trust and the greater the contributions made to the trust assets, the more likely it is to be included in the asset pool.

If you have questions about trust and whether the assets of the trust form property of the parties, contact us to book an initial consultation. with one of our experienced family lawyers, and we will provide you with tailored advice with respect to your unique circumstances.

Contact Us

To speak to one of our experienced Family & De Facto lawyers call 1800 999 529, email or submit an enquiry below.

We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba) or by telephone or video-conference.

This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

¹Duff and Duff (1977) FLC 90-127; [1977] FamCA 24.

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