04/11/2021

Welcome to Part 2 of the series - a Family Court perspective.

The Family Court is a court of statute. The Family Court does not have powers in respect of the law on partnership but it can exercise powers to alter the interests of the parties to the marriage or defacto marriage.

Specifically, section 79 of the Family Law Act 1975 (Cth) allows the Family Court to alter property interests of the parties including: assets of a business, property, individual investments and pre-marital owned property.

Typically, the Family Court will take a four-step approach when dealing with property:

1. determine the pool of assets and liabilities;
2. evaluate each of the parties’ financial and non-financial contributions during the marriage and post separation;
3. determine if that contribution figure requires adjustment in light of the relevant section 75 factors; and
4. consider whether the proposed result is ‘just and equitable’ in all of the circumstances having regard to the actual result in dollar terms.

 

Kennon v Spry

It is ironic that Discretionary Trusts are designed to protect our assets yet we see the case of Kennon v Spry, where even though Dr Spry removed his wife as a beneficiary of the trust, she was still held by the High Court (applying family law principles) to be entitled to money from the trust.

Dr Spry created a Discretionary Trust and was the settlor and trustee. The Trust Deed went through several variations to accommodate their marital issues including separating the trust into four separate trusts for the children. The Court even reversed the separation of the trusts.

The issue in this case was whether the trust assets would be a property of the marriage. The Court held that the assets were in fact part of the marriage due to the control that Dr Spry had over the trust.

Family Law Act 1975 (Cth)

Generally, the goal is to protect family wealth from ex-spouses. With the appropriate planning it may be possible to ensure that trust assets are not assets of the marriage or relationship. However a court can find that the assets are a financial resource of one party and make that alteration of the property interest if “just and equitable”. If the assets were acquired by one spouse during the marriage, the court will likely find that a marital asset. The Family Court will look at control when making this determination along with legal and equitable interests in trust property and interests of third parties.

Control – Morton v Morton

The case of Morton v Morton, outlined the importance of thorough planning when starting a family trust for asset protection. This case outlined whether or not the assets of a Discretionary Trust of which the husband was a beneficiary should be included in the pool of financial resources subject to the division of property in the divorce.

Mr Morton was a beneficiary of a Discretionary Trust. The other beneficiaries of the trust included his relatives. Mr Morton was also the director of a company owned by the trust and he and his brother held a 50/50 share. Mrs Morton said her ex-husband ‘controlled’ the trust so that the assets should form part of the asset pool to be divided in a family law division of property.

Mr Morton argued that he did not control the trustee company. The court found that although Mr Morton and his brother were joint appointers, and had the power to remove and appoint a trustee, there was no evidence of Mr Morton having sufficient ‘control’ to treat the assets as his - which meant the assets were not subject to the divorce.

The court pointed out steps in establishing an absence of ‘control’.

1. appointing multiple directors of any trustee company;
2. appointing more than one appointer; and
3. requiring appointors to act jointly.

 

Normally when there are a number of trustees or directors of the corporate trustee, the party to the marriage who is a beneficiary of the trust would need to obtain agreement from the other trustees/directors before that party to the marriage could receive money from the trust.

Bernard v Bernard

In 2019, the Family Court delivered judgement denying a wife an order against a Discretionary Trust created in her father-in-law’s Will, in which her husband was a beneficiary.

Cases are decided on a case-by-case basis but the Court considers the following relevant factors:

1. Origin of asset test – Whether assets are acquired during the marriage (inheritance, joint, or individual, before or during marriage)
2. Control test – control by a party, whether directly or indirectly is relevant (seen in Bernard v Bernard where the husband had no control as Trustee or Appointer to remove the trustee.)
3. Practice test – in respect of a trust created by a Will, clear sufficient evidence of carrying out the deceased person’s wishes, minutes of meetings, major decisions for purchase or restructure of trust assets, the history of distributions of income and/or capital, etc may all play a role.
4. Trust and Equity Law – a beneficiary in a Discretionary Trust has a right to have their property protected by a court though until the trustee actually resolves to distribute something to them from the trust all they have is simply a right to be considered by the trustee when making its decisions. That right to due consideration can be regarded as property.

 

The High Court decision in Kennon v Spry shows the court’s power in Family law to take apart trust structure for family law purposes. It is wise to separate the trust from a ‘controlling’ person.

Ultimately, it should be noted that assets held in a Discretionary trust are not necessarily protected from property settlement in divorce proceedings, though with some careful planning they may be.

For further information, please contact Townsends Business & Corporate Lawyers on 02 8296 6222 or email info@townsendslaw.com.au.