Can Family Trusts override the Family Court?

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Family Trust v’s Family Court

As tax lawyers, Legal Consolidated structures clients’ affairs to legally reduce tax burdens. We are also asked to:

  1. consider asset protection – if you or one of your structures goes bankrupt or insolventFamily trust divorce family court hide assets
  2. stop the Family Court taking assets if you is a break-up

Let’s consider the omnipotent, omniscient and omnipresent Family Court. For indeed no Court in Australia has more power. It is free to do what it wishes with few rules of engagement.

A family law property settlement begins with the accountant identifying the assets, liabilities and financial resources of you and your ex-partner. This is easy for a family home, superannuation and cash. It makes no difference if the family home is in her name. It makes no difference if the shares are in his name. Ownership is not relevant. All assets are ‘pooled’ together.

The Court even considers your dead father’s estate. (Obviously, if your dead Dad has a Divorce Protection Trust in his Will, then those assets are protected from your family court proceedings.) The issue becomes problematic for the financial planner and accountant when their clients have investment and business structures.

Six most problematic business structures for the family court:
  1. Company
  2. Unit Trust (or more usually a Unit Trust with a corporate trustee)
  3. Partnership
  4. Service Trust Agreement
  5. 3-Generation Testamentary Trust in your Will
  6. Company as trustee of a Family Trust

But Australia’s favourite business structure is the Family Trust. (Also known as Discretionary Trusts.)

Family Trusts

A Family Trust contains three groups of people:

  1. Trustee (it holds the legal title of the assets. But it is a puppet. The Appointor hires and fires it at will.)
  2. Appointor (this is god. It controls everything, including the Trustee)
  3. Beneficiaries (this is not just mum, dad, children and in-laws. It includes all Australian charities. If you have a share in a public company, all the shareholders of that company. Therefore, most Family Trusts have 400,000 plus beneficiaries)

Free training course on Family Trust here.

You distribute income to the persons paying the least tax in the financial year. (Watch a free training course on Family Trusts.)

Does the Family Court consider Family Trusts as assets of the relationship?

Do Family Trusts stop the Family Court? For example, you make your father the Appointor. You then tell the Court that the assets of the Family Trust are not yours – they don’t belong to your marriage. This rarely works. The Court has the power to direct your father to hand over assets to your ex-wife.

Are family trust assets ‘protected’? Or are they merely part of the pool of assets available for division between your ex-spouse or de facto?

Since I started practising in the 1980s, the Family Court has generally ignored any protection provided by the Family Trust structure. The Court merely puts all assets in the Family Trust into the ‘pool’. What about if you remove your wife as a beneficiary – of course, this does not work.

Kennon v Spry

For example, the Family Court ‘pooled’ the assets of a 1968 Family Trust: Kennon v Spry (High Court). The Family Court is comfortable including family trust as the property of the marriage or de facto relationship.

The Spry decision resulted in trust assets of a Family Trust forming part of a property pool in family law proceedings. It also resulted in the ‘reversal’ of several updates to the Discretionary Trust which had removed the husband and wife as beneficiaries of the Trust.

Spry revolved around the marital breakdown of Dr Ian Spry, a retired barrister and Queen’s Counsel in the state of Victoria, and his wife, Mrs Helen Spry. Dr Spry and Mrs Spry were married in December 1978. He subsequently separated in October 2001. Dr Spry and Mrs Spry had four daughters from the marriage.

In 1968, Dr Spry created a Family Trust, of which he was the settlor and trustee. The Trust Deed went through several variations. They reflect his hatred of Mrs Spry. These included:

  • The Trust being put into written form in October 1981 to include Dr Spry, his siblings, their spouses and their issue as beneficiaries of the Trust;
  • A variation to the Trust Deed in 1983 to exclude Dr Spry as a beneficiary, and appointing Mrs Spry as trustee upon Dr Spry’s death or resignation, and their eldest daughter as trustee upon Mrs Spry’s death or resignation.
  • In 1998, Dr Spry and Mrs Spry were experiencing difficulties in their marriage. The Trust Deed was again varied, with Dr Spry and Mrs Spry excluded as beneficiaries; and
  • Dr Spry and Mrs Spry separated in October 2001. In January 2002, following their separation, the Trust was split into four different trusts, each for the benefit of the four Spry daughters, with Dr Spry and his friend, Mr Kennon, as joint trustees.

Generally, trust assets do not fall within the definition of property of a party for the purposes of family law proceedings. This is because a party “could not assert any legal or equitable right in respect of them”. In most cases, trust assets of a purely discretionary trust constitute a mere expectancy, and not a financial resource, given the discretionary nature of such a trust.

The issue in Spry up to the full High Court Appeal was whether the trust assets are property of the marriage.

Ultimately, the High Court held that the trust assets are property of the marriage. This is even though:

  • the Trust was amended to the point where Dr Spry and Mrs Spry were no longer beneficiaries, and
  • the Trust had been separated into four separate trusts for the benefit of the Spry children.

The Court overturned the Family Trust Deeds of Variation. All four trusts for the benefit of the Spry daughters are reversed.

The Court considered these arguments:

  • where the Family Trust Deeds of Variation made to defeat an anticipated order in future Court proceedings?
  • is it just and equitable to reverse the final form of the trusts? What about the benefits to the Spry children? The children later joined in the proceedings and maintained the position created by Dr Spry to “divert” assets away.

One of the main considerations in Spry was the degree of control that Dr Spry had over the trust. This is despite not being a beneficiary or trustee by the end of the Trust’s life.

Chief Justice French stated in paragraph 70 of the judgment:

The characterization of the assets of the Trust, coupled with Dr Spry’s power to appoint them to his wife and her equitable right to due consideration, as property of the parties to the marriage is supported by particular factors. It is supported by his legal title to the assets, the origins of their greater part as property acquired during the marriage, the absence of any equitable interest in them in any other party, the absence of any obligation on his part to apply all or any of the assets to any beneficiary and the contingent character of the interests of those who might be entitled to take upon a default distribution at the distribution date.

The trust assets are property of the marriage. The control that Dr Spry had over the discretionary trust was a factor. It further established that the trust assets are property of the marriage.

Even though Dr Spry could not bestow benefits on himself through the Trust, the Court held that Dr Spry had a significant controlling influence over the Trust.

In their concluding statement, Justice Gummow and Hayne (Para 126):

Observing that the husband could not have conferred the same benefit on himself as he could on his wife denies only that he had property in the assets of the Trust, it does not deny that part of the property of the parties to the marriage, within the meaning of the act, was his power to appoint the whole property to his wife and her right to a due administration.

The High Court’s decision in Spry displays the Court’s wide power in the Family Law jurisdiction to dismantle Trust structures.

Dr Spry lost because he did not separate the trust from himself as the “controlling” person.

Three factors in your Family Trust that he The Family Court considers:
  1. your  ‘control’ of the trust – directly or indirectly?
  2. did you put the assets into the Family Trust – are they really your assets?
  3. who benefits from the Family Trust? Are distributions going to you or your new girlfriend?
The ‘usual’ Family Trust structures are matrimonial assets

Most family trusts hold your family business or investment assets. You are the Appointor. You distribute the income to yourself and your children. Obviously, the Family Trust assets are ‘pooled’, with no argument.

What you don’t get told in the case, is that Dr Spry was one of Australia’s leading expert lawyers in trust law. Some suggested that he treated the judges with disregard and even wrote to them after the matter to tell them off. Better to be humble when it comes to judges and regulators.

But now consider the articles below.

Harris v Harris

In Harris v. Harris [2010] FamCAFC 221 the family trust assets are NOT pooled. This was because there was insufficient evidence to show the husband controlled the trust. The Appointor (god) was his mum. He was only the trustee (puppet). Mum could sack him anytime. The wife should have produced evidence that mum took her marching orders from her son.

In the marriage of Harris v Harris the Full Court of the Family Court of Australia was asked on Appeal to review the decision of His Honour Bell J .

Judge Bell found at first instance that the assets of a discretionary trust with an agreed value of $1,5m were effectively under the control of the husband. And, therefore, the property of the relationship, available for distributing to the wife.

The issue raised by the case was whether the husband had sufficient control of the Trust itself such that its assets could be regarded as his assets.”

The main shareholder of the Trustee Company of the Trust was the husband’s mother. The mother had the controlling interest in the Trust – or at least, on the face of it.

The wife sought to argue that the husband’s mother was a ‘mere puppet’ of the husband and that in reality, the husband had the real controlling influence over the Trust. The wife pointed to the fact that the husband received the vast majority of income from the Trust and that he agreed that he was the driving force of the trustee company which generated the income for the Trust (a separate entity).

At first instance, the wife was successful in her argument. However, on Appeal, the Court did not come to the same conclusion.

The mother was not called to give evidence at the trial and there was what amounted to speculation on the wife’s part rather than direct evidence about the husband’s real role and his alleged controlling influence over his mother in her dealing with the Trust.

“…while the husband was and remains a director and minority shareholder in the original trustee, Harris Nominees Pty Ltd, he is neither a director nor a shareholder in the company, HA Pty Ltd which has been Trustee of the Trust since 1 June 2007.”

It has long been open to the Court to determine that the assets of a Trust are property of the relationship. But the key factor in considering whether such property is marital property is the level of control exercised by the relevant party involved (in this case, by the husband).

The law as established in Kennon v Spry (2008) 238 CLR 366 at 387-389 (French CJ) remains unchanged:

“… that the term “property” when used in s 79 of the Act should be given a wide meaning,”

and

The beneficiary of a non-exhaustive discretionary trust who does not control the trustee directly or indirectly has a right to due consideration and to due administration of the trust but it is difficult to value those rights when the beneficiary has no present entitlement and may never have any entitlement to any part of the income or capital of the trust.”

The issue in Harris which ultimately lead to the husband’s Appeal succeeding and the matter being listed for a re-trial was the lack of evidence to support a finding that the husband had the ‘real’ control of the Trust.

In Harris, the Full Court complained that there was simply not enough evidence to support the assertion that the husband’s mother was a ‘mere puppet’. She may well have been – but the Court could not find same in the absence of any direct evidence:

“The difficulty, however, for the wife on this appeal is to be able to point to any evidence which would support a finding that the husband’s mother is his puppet, and that it is through her, or perhaps otherwise, that he exercises de facto control of the trustee company and of the Trust.”

Morton v Morton

In Morton v Morton [2012] FamCA 30 the brother was a co-Appointor. Therefore, the Family Court did not include the assets in the Family Trust in the pool of matrimonial assets.

So how you structure the control of your Family Trust is important. It may stop the Family Court considering them as part of the matrimonial property on a relationship breakdown.

Wife argues: Husband and his brother ‘control’ the Trust together
  1. Mr and Mrs Morton from Sydney are married for 10 years.
  2. There were no children of the marriage.
  3. Mr Morton is a beneficiary of a discretionary trust: the Morton Trust.
  4. Beneficiaries: Mr Morton, his brother, parents, children, distant relatives, charities and companies.
  5. Trustee: J Pty Ltd. The two ordinary shares are respectively owned by each brother
  6. Corporate trustee directors: yes, you guessed it, the two brothers.
  7. Appointors: the two brothers.
  8. Bucket Company: T Pty Ltd, which was owned by the Trust.

The wife claims that her husband and his brother each hold a 50% share in the Trust assets and the Bucket Company. Accordingly, she wants 50% of the trust assets to be added to his pool of assets. This is for the division under the property settlement.

Husband argues: neither of us control

The husband argues:

  1. that as both he and his brother act in the same capacity as a director, neither of them the trust.
  2. As their rights were equal neither brother has effective ‘control’.
  3. The brothers are joint appointors with the power to remove and appoint a trustee – but only together.
The Court declares: trust assets NOT matrimonial property

The court noted:

  1. a “warm and loving relationship” between the brothers.
  2. an inter-mixing of funds – not only their own personal funds but funds from other entities.
  3. insufficient evidence that the Husband had sufficient control over the Trust and Bucket Co to simply treat those assets as his.
  4. The Trust assets and Unpaid President Entitlements accruing in the Bucket Company are excluded from his asset pool.
  5. Of course, the Trust was still considered a “financial resource”.

Family Trust vs Divorce Protection Trust

A Family Trust is something you set up while you are living. A Divorce Protection Trust is a trust that is put in your, say, parent’s Wills. When your parents die you get their assets but they are protected from any attack on you by the Family Court. Your spouse cannot touch those assets from your parents.

Conclusion

In Spry’s case, the trust was just an “alter ego” of the husband. Under those circumstances, the Court merely directs the Appointor, whoever that is, to hand over the trust assets to the wife.

But as can be seen from the above cases, if the judge believes the husband is no more than a potential beneficiary the trust assets are protected.

When establishing trusts and related entities, give thought to:

  • relinquishing some control at a shareholder level in the Corporate Trustee.
  • appointing multiple directors of any trustee company.
  • appointing more than one appointor and requiring that they act jointly.
  • the second appointor being independent, such as a trusted adviser)

What can the Accountant & Adviser do?

If you are trying to include trust assets in a property settlement, compile relevant documents at an early stage for your client. Get the trust deed, variations to the trust deed, tax returns and financial statements. Seek all paperwork and emails regarding how the family trust operates. These documents may show who gives instructions and makes decisions over the trust’s assets.

How to beat the Family Court

There are three other ways to get the Family Court off your back. None of them work, but here they are:

  1. Stupid
    Get all your money and give it to your best friend. And then hope in years to come when the divorce is well and truly over your friend gives you back the wealth. However, your friend may die, get divorced, go bankrupt or forget who you are. You risk losing 100% of your assets – in a divorce settlement you only generally lose half your assets
  2. Stupid, expensive and illegal
    Liquidate all your assets and gift them to a banker in a tax haven. And then when the divorce is over ask the banker if you can have the money back. You suffer massive Capital Gains Tax and you pay stamp duty again when you buy back the assets in Australia. Also, it is illegal to tell the Court or the ATO, for that matter, that you don’t have the assets. Since you are working in concert with the tax haven banker the assets are still yours.
  3. Binding Financial Agreements – no longer work
    You come together with your spouse either before, during or after the marriage and decide how you want to divide up your assets if you separate. This is expensive. Legal Consolidated also believes that they no longer work. Our law firm no longer prepares BFAs for that reason. For ‘prenups’, cohabitation agreements, binding financial agreements, superannuation splitting agreements, see here:
    https://www.legalconsolidated.com.au/bfa-pa/
    https://www.legalconsolidated.com.au/married-man-marries-lady-of-the-night/

Trustee Distribution Statements signed after 30 June

1. Your Family Trust has default beneficiaries. They are your two children Rob and Kevin.
2. Your son, Rob, is divorcing.
3. The evil family lawyer subpoenas your accountant, his secretary and an ex-employee of the accounting practice. And asks each of them individually in Court:

‘Have you seen or heard of anyone in your office or a client backdating a Trust Distribution Minute and before you answer, if you lie under oath I will ask the Judge to issue a Bench Warrant so that you are arrested for perjury?’. 

4. Every year that the Trust Distribution Minute was signed after the 30 June means that the income, for that year, belongs to your divorcing son, Rob.
5. The evil family lawyer asks for half the assets in your Family Trust to go to your ex-daughter in law.

Summary

Business clients often have complex structures to reduce tax and provide asset protection. This adds complexity in a divorce. Accountants and advisers are best placed to dissect and clarify where the assets are. They know the client. The accountant and adviser have financial training and skills.

The assets held in a Family Trust are not automatically the property of the marriage. However, family law legislation can easily make the trust assets “property of the marriage” for a relationship breakdown. Is the trust’s assets part of the property of the marriage? It depends on whether the trust is the alter ego of the spouse – or someone outside the marriage.

See also:

Loans to children

Are Family Trusts replacing Self-Managed Superannuation Funds

Contractual Will agreements for 2nd marriages

Family Court looks at dead father’ estate

Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
National taxation partner
Legal Consolidated Barristers & Solicitors
Australia wide law firm
Mobile: 0477 796 959
National: 1800 141 612

Update the Family Trust for Bamford streaming only:

legal consolidated

Or, update Bamford streaming PLUS update the rest of the Deed:

Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:

Or just update the Trustee:

Or just update the Appointor:


To set up a new Family Trust Deed:

To prepare the Annual Trust Distribution Minutes:


To deal with Division 7A (loan or UPE from your company to the Family Trust):

Or, to forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):


Change the name of your Family Trust:

To wind up and vest the Family Trust, when you no longer want it:

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