Discretionary Trusts are also used with an expectation that
assets will be protected in the event that one of the Trustees, or
beneficiaries, separates from their partner.
It's true that Discretionary Trusts can be used this way but
there is a fundamental misconception that Discretionary Trusts
won't be treated as property in Family Law matters. For the
purposes of the Family Law Act, the Court will generally take the
Trust into consideration, including it as property or otherwise
making an adjustment to the other party, should the Court find that
it is "just and equitable."
I have written before about the process for dividing property
under the Family Law Act. The Court uses a five step process to
determine the division as follows:
Does the Court have jurisdiction to hear the matter?
What are the assets, financial resources and liabilities of the
parties and what values can you attribute to those items?
What contributions have each of the parties made before, during
and after the relationship (financial, non financial, homemaker and
Should there be an adjustment to one or both of the parties on
the basis of future needs?
In all the circumstances, is the division just and
The Court considers any Discretionary Trust at step 2 of the
process, namely whether it is considered property of a party to the
relationship and treated as an asset to be taken into account. The
case law indicates that each matter will be determined on its
merits. However the Court has made observations on the events and
circumstances which will result in a Discretionary Trust being
considered property. Factors considered include:
That one of the parties of the relationship has the sole power
to appoint a Trustee
That the Trustee (if it is a company) is completely controlled
by one of the parties
A party (or the company completely controlled by a party) is a
That circumstances could arise where one of the party receives
the majority of the benefit of that Trust.
In several cases I have found that the Trust Deed has varied
after separation. This may have some benefits to the distributions
post separation, however the Court may find that these variations
have been designed to defeat the claim of the other party and
consequently set them aside.
If the Court determines that the Discretionary Trust isn't
property (as one or both of the parties lack the necessary control
of the Trust and its distributions) then the Court may still find
that it's a financial resource of the parties and taken into
account at step 4 of the process (where the Court considers an
adjustment to one of the parties). If there's consistency of
distributions, and all the beneficial interest can be quantified,
then it's highly likely that the Court will take it into
It's important that clients, when setting up a Discretionary
Trust, seriously consider the reasons why the Trust is being
created and whether it will in fact protect the assets from the
intended consequence. Ultimately, in order to protect the asset
from being included, the parties may need to relinquish control or
consistency of distributions - in turn, this may be a disadvantage
to the client and the financial structure of their affairs.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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