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      Treatment of Trusts in Family Law Proceedings

      Treatment of Trusts in Family Law Proceedings

      Treatment of Trusts in Family Law Proceedings 1024 682 Dorter

      Following the breakdown of a relationship, the characterization of Trusts, and the assets they hold, can be hugely influential in property proceedings

      Due to this, the characterisation of the Trust and Trust assets can be a fiercely debated issue between parties.

      What is a Trust? 

      Trusts are financial structures frequently used to hold assets for the benefit of others, and for a variety of tax related purposes. Whilst there are a variety of Trusts that exist and which are seen in Family Law matters, the most common Trust structure encountered is known as a discretionary ‘Family Trust’. 

      While no two trusts are ever the same, discretionary trusts are usually established through the implementation of a Trust Deed, which sets out the functions of the Trust and importantly will confirm who holds the following roles: 

      1. An ‘Appointor’ who has the ability to appoint or remove Trustees. 
      2. A ‘Trustee’ (or multiple Trustees) who has control of the Trust assets. They have the authority to decide what happens with the Trust assets, including what distributions/payments are made to the Beneficiaries of the Trust. 
      3. The ‘Beneficiaries’ receive the benefits of the Trust. Usually, the Trustee has the discretion as to what benefit they will receive unless the Trust Deed specifically sets this out. 

      It is often the case that parents will set up Trusts for the benefit of their children or grandchildren. It is common that the Trust will own either Real Property (houses and land) or other valuable assets such as shares or other forms of investments. 

      So how do these assets get handled when a party to a trust separates from their spouse? 

      Separation and Family Trusts

      When dealing with property in any Family Law matter, the Court will follow a four-step process, which can be simply stated as: 

      Step 1: Identify and value the assets, liabilities and financial resources of the parties;

      Step 2: Consider what contributions that each party made throughout the relationship; 

      Step 3: Consider and identify what the future needs of each party may be; and 

      Step 4: Determine whether the property settlement is ‘just and equitable’ in all the circumstances. 

      The identification and characterisation of the parties’ assets and resources is where Trusts, and the assets that they hold, may come into question. Mostly, the identification of what assets a Trust actually holds, and their value can usually be easily determined. However, it can be a lot more difficult to determine whether these assets are an actual Financial Asset available to the parties for sale or transfer or whether they are a Financial Resource which can’t be sold or transferred. 

      The classification of a Trust can be hugely significant in determining what assets are available for distribution when parties separate. If it is the case where a Trust and its assets are determined to be the Financial Assets of one of the parties, it can result in larger property pool available to the parties. On the other hand, if the Trust and its assets are determined to be a Financial Resource of one of the parties, then the property pool will be smaller as the Trust assets will not be seen as available to the parties for distribution. 

      As Family Law is a discretionary jurisdiction, there is no magic formula when determining whether a Trust should be seen as a Financial Asset or Financial Resource. Due to this, it is common that one party will want Trust assets to be viewed as a Financial Asset whereas the other will want it to be classified as a Financial Resource.

      However, in many cases if one of the parties has had a controlling position in the Trust, such as being an Appointor and a Trustee, then the Trust and its assets are usually seen as property of the marriage as that party has control over the assets owned by the Trust.

      If a party only has an interest in a Trust that is determined at the discretion of someone else, like when someone is a discretionary beneficiary, then their interest in any assets will likely be seen as a Financial Resource. This is because there is usually little to no control for that party to make any decisions relating to the asset in questions, let alone selling or transferring it.

      In cases where Trusts are determined to be a Financial Resource, the Court does not simply disregard this interest. Rather, the Court will consider it when determining a party’s future needs. For example, if a party has previously received distributions from a Trust, or they will in the future, the Court will take this into account and will likely determine that that party’s future needs are not as great as they otherwise might have been, had they not had any interest in the Trust. 

      It is also important to note that liabilities owed to a Trust also need to be considered. Trusts, just like companies or banks, can loan parties money. If this has occurred, and the loan has not been repaid prior to separation, then it is likely the loan will be viewed as a liability that needs to be repaid.

      Have you separated while having an interest in a Trust?

      To obtain specialist advice about property matters and the impact that an interest in a trust may have, please contact our expert family lawyers at Dorter Family Lawyers and Mediators on (02) 9929 8840 and we will assist you.

      Anthony Shaw

      Associate 

      Rebekah Dorter

      Principal