Australia: Breach of trust: Family trusts and your property settlement

We have often been asked by clients in family law property cases if it is possible to set up a family trust to protect assets held by the trust from a claim by their spouse or partner in the event of a breakdown of the marriage or relationship.

There seems to be an impression among the general population, perhaps encouraged by non-legal professional advisers such as accountants, that assets in a family trust, especially held by a corporate trustee, are one step removed from a party in a relationship breakdown and therefore not able to be claimed as an asset of the marriage or relationship by their former spouse or partner.

Generally speaking, an asset held in a family trust is able to be claimed as an asset of the marriage or relationship by the other party in the context of a relationship breakdown.

Like everything else in family law, the Courts have a very wide discretion indeed to included assets in a family trust as assets of the marriage or relationship, and it invariably depends on the level of control a party has over the trust and the asset of the trust.

What approach do the Family Courts take to trusts?

A common argument that is raised within property proceedings is that a party to the proceedings has the control or influence over the trust which, if proven, would lead to a finding that the property of the trust ought to be attributed to the parties as property available for distribution between the parties in a property settlement.

Prior to changes in the Family Law Act in late 2003 the Court had to determine whether a trust was on one of:

  • a mere expectancy, where the spouse was simply a beneficiary in a class of beneficiaries of a discretionary trust, in which case the asset was not included in the assets;
  • the property of both of the parties, where the Family Courts found that the property of the trust was in fact property of parties then it was directly available for distribution within the proceedings;
  • a financial resource of the parties, where it could be considered not as an asset but a future interest of one or other of the parties, in which case the asset was not available for division between the parties but is somehow taken into account when it reaches its financial decision.

Trusts as third parties in proceedings

Since 2003, the Family Courts has extensive powers to include trusts and companies as third parties in proceedings between parties to a marriage or relationship and above facts still figure in determining whether a trustee (a person or company acting as trustee of a trust) must be joined as a third party.

Where the Family Courts decide that the trust property is property available for distribution with between the parties, it has wide powers to make such orders as it deems fit.

The key question to ask is whether the pool of assets contain sufficient assets from which to obtain a settlement without the necessity for the making of an order against a third party.

Control of the trust

The question of who has control of the trust is is an essential factor for the Family Courts to consider when determining what orders should be made.

Where a party is found to have the ability under the terms of the trust contained in the trust deed to distribute to themselves all of its income, then that party will be found to have control of the trust and a right of property in the assets of the trust to its full value as if they were the legal owner.

The Family Courts will have regard to the following when considering whether one party has control of the trust:

  • has the party benefited from the trust by way of loans salaries or payment of expenses?
  • what historical traditions has a trust made?
  • does the party have capacity to borrow trust funds how have the parties previously treated the trust?

All the above factors will lead to the conclusion that the party has effective control of the trust and that therefore the trust property needs to be taken account in any settlement.

Trust documents

In order for us to give you advice, whether you are the party alleged to have an interest in a trust or the other party alleging this, we will look at the evidence including following documentation

  • minutes of meetings of the trustees
  • taxation returns for the trust
  • trust banking records documents relating to the trust structure which would include trust deeds, deeds of variation, and the Constitution of the corporate trustee

Can beneficiaries inspect these documents?

Beneficiaries (and this may well include a spouse) are entitled to inspect trust documents and trustees must keep records on behalf the trust.

The trustee must keep documents specifically referred to in the trust deed by State and Territory trust legislation, so inevitably these documents are discoverable (that is, it is compulsory that they be disclosed) in any family law proceedings.

The Courts' ability to issue injunctions

Importantly the Family Courts have injunctive powers to deal with third parties, including trusts.

An injunction is an order restraining a person from beginning or continuing an action threatening or invading the legal right of another, or compelling a person to carry out a certain act.

The Family Courts have the power to direct the party to take a positive step which can include, for example:

  • a direction to exercise the power of appointment and replace a trustee; or
  • to exercise their power as trustee to utilise trust property to meet wholly or partially a property settlement obligation.If you believe your former spouse or partner has control over a trust, you may be entitled to the following remedies:
  • an injunction to prevent an anticipated breach;
  • a mandatory injunction requiring your former spouse or partner to exercise powers control over trust in particular way or to protect you interests;
  • compensation and account as personal remedies for breach of trust;
  • recovery of trust property;
  • setting aside transactions completed in breach of trust;
  • appointment of receiver upon removal of trustee obtaining the Court sanctioned to depart from the terms of the trust or other duties of the trustee;
  • seeking the advice and directions of the Court.

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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