In a very recent decision, the High Court has upheld by majority a Family Court Judge's decision that assets held within a family trust structure, at first glance supposedly beyond the reach of the husband and the wife, constituted "property" available for distribution between the husband and the wife upon breakdown of their marriage.
The Trust had been established in 1968 by the husband (H). By a series of steps over a number of years, H, who was the settlor and sole trustee of the Trust, tried to distance himself from the assets held within the Trust. He did this by firstly (in 1983), excluding himself as a beneficiary of the Trust, then in 1998 (when the marriage was in difficulty), by excluding himself and his wife as capital beneficiaries of the Trust. Finally, in January 2002, a few months after the couple separated, H established four Trusts, one for each of the parties' adult children, and applied to each Trust one quarter of all the income and capital of the Trust, and appointed himself sole Trustee of each of the children's trusts.
The wife (W) sued H in the Family Court for a property settlement and applied to set aside these various transactions to in effect recoup sufficient trust assets (comprising several $m) to enable a property settlement to occur.
The Family Court (and the Full Court of the Family Court on appeal) held that the 1998 and 2002 transactions were entered into to defeat the interests of W and to put assets beyond the reach of the Family Court. Those transactions were set aside and it was held that the assets of the Trust constituted property of H on the basis that he controlled the assets by virtue of his power as Trustee.
H and the Trustees of the Children's Trusts subsequently appealed to the High Court on the grounds that the earlier deeds could not be revoked or cancelled and therefore the Trust assets could not be treated as H's property.
The High Court rejected the appeal and upheld the Family Court's conclusions that the earlier transactions entered into by H should be set aside, with the result that the assets of the Children's Trusts were to come back into the main Trust, leaving those assets available for distribution between H and W. Further, W's right as a beneficiary to the due administration of the Trust constituted "property" for the purposes of the Family Law Act, particularly given H's power (as Trustee) to appoint the whole of the Trust assets to W (her removal as a beneficiary having effectively been revoked). It was irrelevant that H was unable to apply the Trust assets for himself (by reason of his removal as a beneficiary).
Conclusion
The case illustrates the potential limitations in attempting to use family trusts as a means of defeating the interests of spouses. As has always been the case, the question of who, in reality, controls the Trust will be determinative. Therefore the choice of appointor and trustee assumes critical importance in all estate planning decisions. The case also underlines the value of other asset protection devices in relationship breakdowns, particularly Binding Financial Agreements (also known as "Pre Nuptial Agreements").
