Divorce Protection Trust in your Will – stop step-children taking your money at death
Your daughter-in-law knows you have money and that you are old. She tolerates living with your son a little longer. You die. She immediately leaves your son. She asks the Family Court for half of your son’s inheritance.
When you build your tax-effective Wills on our website the trusts available in your Wills include:
- 3-Generation Testamentary Trusts – to reduce Capital Gain Tax, Transfer duty (stamp duty) and income tax
- Superannuation Testamentary Trusts – remove the 15% or 30% (plus Medicare) tax on your Superannuation when your Superannuation goes to adult children
- Protective and Maintenance Trusts – if a child, grandchild or a beneficiary is under the Age of Majority
- Bankruptcy Trusts – if a beneficiary is bankrupt
- Divorce Protection Trusts – if a beneficiary suffers a split up from a spouse or de facto partner
- Considered Person Clause – to stop people from challenging your Will
- Special Disability Trust – child keeps getting Centrelink benefits after you die
- Able to sell your parent’s home 2 to 3 years after their death – CGT free
How does the Divorce Protection Trust work in my Will?
The Divorce Protection Trust seeks to delay or stop capital and income going to the beneficiary who is suffering a divorce or separation. It reduces the opportunity for the Family Court to get its hands on your money.
In a divorce, the Family Court looks at how the assets came into the trust. It considers who gave the money to the trust in the first place.
1. If assets come from one of the couple during the relationship and are then put into a trust, the assets are considered part of the marriage. The Court is free to order the transfer of the assets to your child’s ex-spouse.
2. However, this may not apply where the money comes via a Will. Instead of your divorcing child putting money into a trust, it is you who is putting the money into the trust (via a Divorce Protection Trust). It is arguably different where the person’s parents gift their assets into a Divorce Protection Trust.
Trusts set up to limit the reach of the Family Court can be disregarded by the Family Court as a sham. However, that relates predominantly to where one of the separating couple has taken their money and tried to hide it in a trust. This is not the case here. This money is not from one of the separating couple. Rather, the money is from a parent of one of the separating couple. The money is from an inheritance of a parent, grandparent or great-grandparent. The Divorce Protection Trust is designed so that the inheritance never becomes an asset of the marriage. It is designed to be a trust for the benefit of many beneficiaries, not just the separating person.
Divorce Protection Trusts more resilient to Family Court attacks
A Divorce Protection Trust is one of the many types of Testamentary trusts we put in your Will. There are not many cases on Testamentary Trusts. However, from our experience, the Family Court is less likely to break open a trust in a Will. Testamentary Trusts are less often plundered by the Family Courts. The Divorce Protection Trust provides further restraints to escape the Family Court. This is over and above all our other types of trusts, we put in your Will.
Dad dies. Son divorces 3 years later – Bernard v Bernard
In Bernard v Bernard  FamCA 421 the husband and wife married in 1988. They separated in 2015. They divorced in 2017. In 2012, the husband’s father dies leaving his estate equally to the husband and the husband’s sister. This is under two discretionary testamentary trusts. The husband is the trustee of his sister’s trust. His sister is the trustee of his trust.
Each is the primary beneficiary of their own trust. Each trust has a number of potential beneficiaries. These include the spouse, children and grandchildren of the primary beneficiary. The facts are:
- Dad dies.
- The son uses the Divorce Protection Trust in dead Dad’s Will.
- Three years later the son divorces.
Testamentary Trust provides spouse protection in a relationship breakdown. Bernard v Bernard facts:
- Divorce Protection Trust: set up in Dad’s Will
- Divorce Protection Trust name: they used the divorcing son’s name (pretty irrelevant, I know, but the family court is psychological warfare)
- Primary Beneficiary: divorcing son
- Appointor: friendly third party (often the accountant or financial adviser)
- Trustee: divorcing son’s loving sister
- Beneficiaries: the usual suspects, including the divorcing son, his children, spouses (including the divorcing wife), distant relatives, charities, etc…
Wife tries to defeat the Will’s Divorce Protection Trust
The wife argues that :
- the divorce protection trusts mirror each other.
- the husband and his sister have the same rights and obligations as trustee of each other’s divorce protection trust
- they use the two trusts to operate a partnership
- the husband controls his own trust as did the sister hers
- the husband controlled his own trust and that this control equated to “property of the marriage”
Bernard v Bernard Decision: Good news: Divorce Protection Trust not part of the matrimonial pool.
The Court held that the Divorce Protection Trust did not form part of the matrimonial pool. The divorcing wife could not touch the assets. This is because:
- Settlor (Will-maker): was dead dad, not the divorcing son.
- The trusts were established from the assets of the late father’s estate and not from property acquired by the husband either before or during his marriage to the wife.
- Trustee: was the sister, not the divorcing son
- Appointor: was not the son
- Power: remained solely with the Appointor and Trustee (the sister). The husband is a mere beneficiary of his trust. He had no more than a right to due administration and consideration. He has no control over his sister to procure a distribution or appointment of the trust’s assets in his favour. As the trustee, his sister legitimately owed fiduciary obligations to all of the beneficiaries, not just her brother.
- Primary Beneficiary: while the husband was a primary beneficiary, this of itself created no legal title to the trust property
- Sham? there was nothing to suggest that the structure of dead Dad’s Will was a sham
- Sister had her own Divorce Protection Trust in dead dad’s Will: that is fine. Having more than one Divorce Protection Trust in a Will is acceptable
- Good records: the Court was impressed with the accountant for his excellent records, resolutions and tax returns. Each trustee was ‘scrupulous’ in filing separate tax returns, making resolutions under the trust deed and avoiding the mingling of trust assets. Professor Brett Davies stated, “rarely does the Court see a family law matter where tax returns and disclosure is so up-to-date and thorough.”
Was the trust merely for the benefit of only the divorcing son?
This is not directly mentioned in the case. However, it is clear that the Divorce Protection Trust is not just for the sole benefit of the divorcing husband. This is not a ‘bare trust‘.
Instead, it is a trust from which many generations can share the wealth. That is one of the four requirements we put in your Divorce Protection Trust.
For divorce and asset protection should brothers control each other’s 3-Generation Testamentary Trusts?
Q: I completed a Legal Consolidated tax effective Will yesterday. The accountant has forwarded to their commercial solicitors, as you suggested.
The 3-Generation Testamentary Trust Will names both sons as executors. Each receive 50%.
The commercial lawyer is of the opinion that each brother should be the respective trustee of the others death trusts. So that the trustee is not also the Primary Beneficiary.
A: The commercial lawyer is smart. And I completely agree.
And you will be happy to know that the 3-Generation Testamentary Trust Will allows that strategy (and many other versions of it) to be followed. It has sufficient flexibility to allow this excellent approach which is put in place after the Will maker’s death.
The weaponry to protect your clients is in the 3-Generation Testamentary Trust Will. And available to be used as they see fit as their lawyer, adviser and accountant advise after the Will maker is dead.
It may be the case that the brothers hate each other when dad dies. Or a brother is dead.
This is why the number one requirement of a Will is flexibility. You do not know the hour of your client’s death. You do not know what assets the dead person will have. And we have no idea of the laws of the land. Tax, superannuation, family law and bankruptcy are forever changing. The greatest gift that a Will can give the children is ‘flexibility’. And the most flexible Will is a 3-Generation Testamentary Trust Will.
When does the Divorce Protection Trust operate?
The Divorce Protection Trust sits dormant in the dead person’s Will until needed. The Divorce Protection Trust activates for the benefit of the married person and that person’s children and grandchildren. (This is your divorcing child, then their children and their grandchildren). The assets in the Divorce Protection Trust is provided by the parents (being you), not the married person (e.g. your child). There is higher protection from the Family Court because of this. See, for example, Bernard v Bernard. The money is not from the divorcing couple. It is from an external person – the Will-Maker.
Your descendants (children, grandchildren and great-grandchildren) are beneficiaries of the Divorce Protection Trust but not owners of the assets.
What if a descendant controls the trust? This is where the descendant is the sole trustee or appointor. (This position of power controls the trust.) The Family Court states that the ‘controller’ is also the ‘owner’.
In these circumstances, a court may decide that it has the power to make an order affecting assets held by the trust. For example, the Court orders the transfer of the trust assets to the former spouse of the controller or to a trustee in bankruptcy.
However, the Divorce Protection Trust removes that person’s power to control the trust while they are suffering the separation. This removes control.
Who is the new Trustee of the Divorce Protection Trust?
The Primary Beneficiary under attack is automatically removed from all positions of power for their testamentary trusts. This includes the Appointor and Trustee positions. The power passes to the other executors named in the dead person’s Will – or their next of kin if they are also dead – or if there are none then blood relatives of the Primary Beneficiary. Of course, the Primary Beneficiary can always amend the Divorce Protection Trust to change this.
For example, widower Dad has 3 children. He leaves them everything and makes them the executors. Dad dies leaving 33 1/3% of the assets to his son Gavin. Ten years after dad dies Gavin separates from his hot trophy wife. Immediately his two other siblings are automatically in control of all his testamentary trusts that Gavin got from his Dad. However, one is dead and their children take on the job. They must act only in Gavin and his children’s best interests. So the siblings and their children can’t benefit themselves from the trust.
The Divorce Protection Trust benefits the current and succeeding generations. It not only protects your children. It also protects your grandchildren and grandchildren, for up to 80 years after you die. This helps protect the assets from the Family Court.
Why does the family court attack assets you ‘don’t own’?
The matrimonial pool includes:
- assets held in the parties’ individual or joint names
- inheritances received in their personal names
- assets held within trust structures.
Financial resources typically include trust income or capital that the parties access.
Not all testamentary trusts protect against the powers of the Family Court. The Court has wide powers:
- power to make orders against trustees of trusts
- power to make orders which direct or alter the rights, liabilities or property interests of a third party
- power to attribute a trust as a financial resource of a party to the marriage and adjust the matrimonial pool available for distribution accordingly.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]