Trusts and Property Division

A trust is an entity in which certain persons are entrusted to hold assets for the benefit of certain persons or entities. Various assets can be held on trust, including, property, money and even businesses. Trusts can sometimes be taken into account in a family law property settlement.

The main parties involved in a trust include:

The Settlor: This party is responsible for establishing the trust fund. The settlor may be a beneficiary of the trust and have an interest in that capacity. Their sole responsibility is usually to establish the trust fund. The settlor usually does not have any other form of control of the trust.

The Trustee: This party possesses the legal title to the property and has a fiduciary (complete trust) obligation to use their position to the benefit of the beneficiary. The trustee may be an individual or a company. The trustee has no other interest in the trust.

The Appointor: This party holds the position of control over the trust. The Appointor is able to control who holds the position of trustee of the trust, and can make changes at anytime.

The Beneficiary: The beneficiary is an object of the trust. He/she is the party who is entitled to the assets held on trust.

In property settlement proceedings pursuant to section 79 of the Family Law Act 1975, a Court has to identify what the assets and liabilities of the relationship are (the property pool). The Court has to make a determination as to what assets are considered as property and what are, in fact, financial resources.

This distinction is important because a Court is limited by what it can do in relation to property that is matrimonial property and property that is considered as a financial resource.

Under section 79 the Court has the power to make Orders adjusting the interests of parties in “property”. The Court does not have the power to make an Order adjusting the interests of parties in “financial resources”.

The Court has to be careful when making a determination to not make decisions that unduly affect the interests of third parties.

In family law property proceedings, a trust can be seen as either being property or a financial resource. Whether it is property or not depends on the type of trust and the party’s control over the trust.

With a fixed trust, the interest held by the beneficiary can be the subject of an order under section 79. With a discretionary trust, the beneficiary has a mere expectation of receiving benefits under the trust. (For a detailed discussion on the different types of trusts, see our section on Trust Structures.)

The type of control a party can exert over a trust depends on whether they are a settlor, or a trustee, or a beneficiary or an object of a trust.

If a party treats trust property as their own then the trust property may be treated in property settlement applications as their property.

An elaborate trust structure may also be disregarded if it is clear that a party to the marriage effectively treats the trust property as his or her own and has control over the trust.

Cases have reinforced the view that trustees cannot be directed to act in a manner which is inconsistent with the trustee’s duties pursuant to the trust deed or in conflict with the due administration of the trust.

By the interrelation between section 79(4)(e) and section 75(2)(b), the Court can take into account the existence of a financial resource in the hands of one party so as to balance the share the other party is to receive to achieve a just and equitable outcome.

What if the trust was established prior to the breakdown of a marriage?

Section 106B of the Family Law Act 1975 states that:

“In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.”

With regard to this section, “a disposition includes” a trust. This section indicates that if a trust is established to manage property in anticipation of a divorce or any other event which may threaten the assets of an individual or company, the Court can overrule the trust and the assets of the trust will be available for the other party to claim as assets in the asset pool.

Also, any changes to the structure of the trust may be reversed. For example, in the case of Kennon v Spry, the husband had all his property in trust and held himself and his wife as capital beneficiaries. A few years later, he removed the titles of beneficiary held by his wife and himself and transferred the assets into a separate trust for his children, however, he remained as trustee. Upon the breakdown of the marriage, the Court found that the wife was found to be entitled to the assets within the trust as the original dispositions were set aside by the Court. She had initially been a capital beneficiary and she relied on section 106B. Also, the husband owed a fiduciary duty as trustee to his wife. He was in the position to determine when power would be exercised as, at any point during the marriage, he could have appointed the entire trust to his wife.

If you require assistance with a property settlement or in making an application for Property Orders, our experts at Prime Lawyers – Family Law Division can help. Contact us to make an appointment with a family lawyer at your nearest Prime Lawyers office.

We have offices in Sydney, Parramatta, Chatswood, Sutherland or Wollongong.