Trusts: Property under Section 79 of the Family Law Act?
The dissolution of a marriage requires the division of property in which the parties to the marriage have a declarable interest.
Section 79 of the Family Law Act confers a broad discretionary power on the Court to vary the legal interests in any property ‘to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion’ and to make orders for settlement of property interests in consideration of what is ‘just and equitable’.
It is well established that trusts fall within the ambit of property divisions, however the rights of beneficiaries in a discretionary trust are generally restricted to the due consideration and administration of the trust.
The landmark High Court decision of Kennon v Spry [2008] HCA 56, presented relatively unusual circumstances which has since allowed the Court, through a series of cases, to broaden the concept of property in the context of characterising interests of a spouse as beneficiary under a discretionary trust.
Principles of Property Settlement
The Court in exercising its discretionary powers for the division of property to a marriage is guided by the core principles set out under sections 79(2) and 79(4). These principles are applied through the “Four Step Process”:
- Identify the assets and liabilities of each party individually and jointly (i.e. what you own, and what you owe), and what they are worth.
- Identify the contributions made by each party during the marriage:
- direct financial contributions by each party, such as property each had when they began to live together, and wage and salary earnings while living together;
- indirect financial contributions by each party, such as gifts and inheritances from family members;
- non-financial contributions to property, such as renovations to a home, management of investments, or running a business; and
- contributions to the welfare of the family, such as caring for children and doing housework.
- Consider each party’s future needs – a court will take into account things like age, health, financial resources, care of children and income earning capacity.
- Assess whether the Orders are just and equitable in the circumstances.
Rights and Interests in Discretionary Trusts
Beneficiaries to a trust, discretionary or otherwise, are entitled to ensure the due administration of the trust by the trustee.
As noted in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, if a beneficiary requests it, a trustee is in general obliged to provide documents and information to the beneficiary, at his cost, in relation to the trust property, and to provide an accounting in respect of the administration of it. Historically, the basis of the right to inspect documents was regarded as proprietary on the basis that trust documents are in equity the property of the beneficiaries, albeit vested to the trustee.
The entitlement to request documents is limited only to those documents which can be categorised as being ‘trust documents’ as Re Londonderry’s Settlements [1965] Ch 918 noted the following features of trust documents:
- they are documents in the possession of trustee; and
- they contain information about the trust which the beneficiaries are entitled to know; and
- the beneficiaries have a proprietary interest in the document and are accordingly entitled to see them.
Notably, correspondence does not fall within the category of being trust documents.
Kennon v Spry
The circumstances of Kennon v Spry were noted by the Court to be unusual, insofar as they included a discretionary trust created by the husband prior to the marriage, of which he was both settlor and trustee allowing the Court to find that at all relevant times the trust was a vehicle for the benefit of the husband and the wife and the children.
The Court expressly recognised the wife’s right to the due administration of the trust was accompanied in equal measure by the husband’s duty to consider in what way the power should be exercised, including whether to appoint the whole of the assets of the trust to the wife. Accordingly, these circumstances caused the Court to conclude the trust was direct property of the parties to the marriage or to either of them. This combination of corresponding rights and duties caused the parties at all material times to be in direct control of the trust in a way not dissimilar to other property under section 79 of the Act and the divorce did not preclude the trust from being an asset to the parties.
Following the decision of Kennon v Spry, the Court qualified and clarified the broadening of the concept of ‘property’ for the purposes of section 79. In Rigby & Kingston (No 4) [2021] FamCA 501, the Court clarified that it was not a blanket extension of the meaning of property to include a discretionary beneficiary’s mere expectancy or possibility of a future proprietary right. It is the combination of one party being the trustee and the other being the beneficiary which results in the trust assets falling within the meaning of applicable property for the purposes of property settlement.
The Court has noted that the bare equitable right of a beneficiary to a discretionary trust alone may obtain a value and be considered an asset of one party alone, but that such a conclusion requires expert actuarial evidence and that such a right would be considered a ‘financial resource’ available to one party.
Woodcock v Woodcock
The question of whether a party’s rights under various intergenerational family discretionary trusts are property within section 79 and capable of valuation, has been answered by the recent decision of Woodcock v Woodcock (No 2) [2022] FedCFamC1F 173.
Unlike the previous cases, the Court did not make a finding that the husband in Woodcock was the sole trustee nor that ‘at any point in the marriage’ he could have received the entirety of the trust assets. However, the Court found that over a period of four years the husband received approximately $15 million from the various trusts and held a ‘position of considerable influence’ over those trusts. This considerable influence included the ability to block distributions from the trusts to other beneficiaries.
Drawing on the principles of Kennon v Spry and Rigby & Kingston (No 4) the Court found that this was sufficient to find there was a ‘legally endorsed concentration of power of things or resources’ so that the trusts were able to comprise property to the marital pool and be capable of valuation.
Arising from the principles of an equitable interest in a discretionary trust and the definition of property within the Act, the Court determined through the decisions of Kennon v Spry and Woodcock that discretionary trusts fall within the ambit of family law property settlements and are capable of valuation. This expansion of the definition of property to include discretionary trusts relies on the trust or trust assets being subject to a legally endorsed concentration of power by one or both parties to a marriage, whether through a trustee/beneficiary dynamic or through the holding of a position of considerable influence over the trust.
Talk to our team
Assessing whether a trust or trust assets are property capable of valuation requires knowledge of the particular circumstances and context. If you are involved in a property settlement dispute and require further information about the intersection of family law matters and interests held in discretionary trusts, Dorter Family Lawyers & Mediators are experienced family lawyers and can assist you.
Call us on 02 9929 8840 or book a consultation online here.
