Lots of families have Discretionary Trusts (often simply known as “the family trust”) which they run their business through, or which hold investments for them. They are often intended to assist in protecting assets from civil liability or to allow for tax planning.
Another objective which people sometimes have is to limit their exposure to a family law claim if their relationship breaks down. A common myth is that if an asset is held by a Trust then no claim can be made against it.
The reality is (as always) a bit more complex, but in most cases, it can be boiled down to this rule of thumb: if a Discretionary Trust is ultimately controlled by one or both of the parties to the relationship or something which one or both of the parties benefits from – then it is probably an asset the Court will be able to deal with in a family law case.
Trusts as Assets of the Relationship
Broadly speaking, there are three main roles in most trusts: Beneficiaries (the people who are allowed to receive things from the Trust); Trustees (the people who control the day-to-day running of the Trust and make payments to the Beneficiaries); and Appointors (the people who can hire and fire the Trustees, among other things).
Where one or both parties are the Appointor(s), or where a party is both a Trustee and a Beneficiary of a Discretionary Trust, the assets of the Trust may well be included in the pool of assets to be divided between the parties, because holding those positions provides a significant degree of control.
There can also be cases where the parties might not technically have control over a Trust, but where the Court is convinced that they control it in reality. In those cases, the Court will usually include it in the asset pool to be divided between the parties.
An example of when this can happen is where a Trust’s paperwork has been set up so that a friend or relative of one of the parties is technically in control of the Trust, but then the friend or relative simply does everything that one of the parties tells him or her to do. Depending on the specific details, this would probably be a case where the Court would say that in reality the Trust was controlled by one of the parties, and that it should therefore be included as an asset of the relationship.
On the flip side, generally a Trust will not be seen as part of the relationship’s asset pool if it would be unfair to include it in the asset pool of the relationship because someone else has a genuine right to the Trust, or where someone else has real control over the Trust.
Proving how a Trust is controlled is an involved process, and requires copious details about how the Trust was operated. Because of these complexities, we would always recommend seeking legal advice early in the process if you think that the question of who controls a Trust might be relevant in your case. Getting advice early can help to minimise costs by ensuring that you only focus on the relevant issues.
Even in cases where the parties do not have enough control over a particular Trust for the Court to treat it as an asset of the relationship, the Court can still classify it as a party’s “Financial Resource”.
An example of when this might happen is when a Trust has made regular, reliable payments to a party for years and there is no reason to expect those payments to stop. Another example is where the parties do not control the Trust, but it is clear that whoever does control the trust intends it to be used for one of the parties.
Having a Trust classed as a Financial Resource is important because when the Court is working out how to divide assets between the parties, one of the factors it has to take into account is each party’s future needs. That includes considering each party’s Financial Resources, and someone who has a Financial Resource to rely on will generally receive a smaller proportion of the pool of assets than if they did not have that Financial Resource (for more about how a Property Settlement is worked out, see our Property Settlement page).
This means that even when a Trust is not included in the asset pool, it can still have a significant impact on the outcome of a case.
As a side-note, this is one of the reasons that we recommend making a Binding Financial Agreement as the best way of protecting your assets from a relationship breakdown. A Binding Financial Agreement can be made at any stage of your relationship, and it can be made for either de facto relationships or marriages.
If you have questions about how your Trust entities might be dealt with in a family law case, or if you need help working through a family law case right now, please feel free to get in touch with our Family Law Team on (03) 9629 9629 or at email@example.com.