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Family Law Blog

Are Family Trusts Protected from Property Settlements in Separation?

Does placing assets inside some kind of family trust mean that they can be ignored when seeking a property settlement during separation?

Many people believe that having significant assets held in a family trust will mean that those assets are not part of the property pool, and therefore will survive separation without being considered by the Court. But is that really the case?

What is a Family Trust?

A family trust is a common vehicle used to protect assets, gain flexibility with income and, sometimes, to get certain taxation advantages.

Basically:

  1. The assets or income are held by the legal owner, called the “trustee”. This person or company technically owns the property. In a family trust this is often a company set up by the family, or the parents of the family.
  2. The trustee, however, owns the property for the benefit of others called the “beneficiaries”. These might be particular named individuals (most relevantly the family members), charities or classes of people. In a family trust it is ordinarily members of the same family who are the beneficiaries.
  3. The beneficiaries get the benefit of the income of the trust. So, the trustee can distribute income from the assets (e.g. rent from an investment property) to those beneficiaries to use, even though they are not the legal owners.

Let’s say Joe and Mary set up a family trust. The trustee is Marjo Pty Ltd – a company of which they are directors.  Strictly, neither Joe nor Mary own the assets. The trustee can, at its discretion, distribute income or property to either or both of them (which is why it is called a discretionary trust).

So do those assets still get captured by the separation process? If not, what about the potential future income?

What Does the Family Law Act Say about Property?

When you are separating, the Family Law Act applies to govern what property needs to be part of any property settlement that might occur.

That Act says that “property” is any asset that a person has entitlement to, whether “in possession or reversion”.

Ignoring the technical language, this is designed to ensure that if you are a beneficiary of a family trust, your interests in that trust will potentially be captured by the property settlement process.

So placing assets inside a trust that you can benefit from does not necessarily protect it from the separation process, in that your interest in the trust can certainly be counted as “property”.

Nor, however, does it mean that all trust assets will automatically be included in the property pool.

Are Assets in the Family Trust part of the Property Pool?

While trust assets might be counted as “property”, there is no hard and fast rule that they will be included in the property pool. The Court is going to look at all the circumstances of the trust and the individual’s connection with it.

Specifically, the Court is going to look at substance over form, especially relating to the issue of control. That is, who really controls the trust?

This is because there are two main kinds of ways that a spouse might relate to a family trust:

  1. A simple beneficiary; or
  2. Someone who has significant control over the trust (who may also be a beneficiary).

Take, for example, the daughter of a wealthy family. If she is a beneficiary of her parents’ family trust, it would not be fair nor just to make all the assets of that trust available part of the property pool (and therefore available for distribution to her ex) simply because of her role as a beneficiary. The wealth, ultimately, is more her parents than her own. She normally has no real control over distributions nor any automatic entitlement to income.

Alternatively, what about Joe and Mary from our example above? Let’s say that they are the directors of MarJo Pty Ltd, and the “default” beneficiaries under the trust. It’s much more likely that the trust assets will be counted as assets of the relationship in that instance, because they are really the controlling minds behind all of the decisions of the trust. In that case, it’s reasonably possible that the assets will form part of the relationship’s property pool.

The Alternative Treatment - Assets vs Financial Resources

If a trust asset is considered part of the property pool, then it will be part of the property settlement orders and considered as part of the distribution process.

However, even if the trust assets are not part of the property pool, they can still be considered as a “financial resource”.

Trusts are, typically, income generating. Therefore the access to, or non-access to, that resource in the future will regularly be factored in as part of the property settlement process. So for example, if a spouse will no longer have access to the share investment portfolio and its associated income stream, then that is a relevant factor in determining what a fair and equitable outcome is going forward.

So Are Family Trusts Protected from Property Settlements in Separation?

Sometimes, but not always.

If one or both spouses have significant control over the trust and the exercise of its discretion then the assets are more likely to be considered part of the property pool.

Even if not, however, trust assets might be treated as a financial resource, and therefore still be relevant factor in the final outcome of the property settlement.

Either way, it’s important that you discuss any involvement you might have with a family trust (whether as trustee, director of a trustee, or beneficiary) with your family lawyers to ensure that your financial disclosure is done properly, and so that they can consider how to argue for the most fair outcome for you.

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