Can I gift assets to children or other loved ones, and protect it from a divorce or de facto relationship breakdown1?
Yes – Protection can be achieved in various circumstances – there are always other factors to be considered to ensure the legacy is as effective as possible. This is no cookie-cutter solution, professional drafting and advice is your best solution.
How do we achieve this?
In short, we rely upon effective drafting of a Discretionary Trust created within your Will (coming into effect once you have passed away), coupled with other mechanisms of ‘control’ and practical operation of the Trust.
In what ways does the Court work out a property settlement?
There is a 4 Step Process that the Court undertakes under Section 79(4) of the Family Law Act 1975 (Cth). This includes:
- Identifying the property pool for division;
- Assessing the financial and non-financial contributions to the acquisition, conservation and improvement of that property;
- Future needs of each party to the marriage; and
- Whether the proposed division is ‘just and equitable’ in accordance with Section 79 (2) of the Family Law Act.
So a Trust can be part of a relationship’s assets, available for division or considered a ‘financial resource’ of one party?
Yes. ‘Property’ of a relationship is construed ‘widely’ in the Family Law jurisdiction. 2 The assessment of division of property will consider the ‘income, property and financial resources of each party’. So, a ruling under the Family Law jurisdiction could take into account a party’s potential financial resources (including from a Trust in some circumstances).
So what are some options to maximise protection?
- Purchasing assets in a carefully drafted Discretionary or Heritage Protective Trust, during your lifetime, and taking care with who controls (either directly or indirectly) on your death.
- Alternatively, creating a similar structure that allows assets to pass to this Protective Trust once you or your surviving spouse pass away.
- Quarantining Trust assets in structures that maximise opportunities for flexibility, whilst retaining control with someone other than the person you are trying to protect.
- Creating specific rules within your Trust to limit decisions of Trustees and Appointors so that only certain people can ever be appointed (whether outside independent people such as your Accountant, Trusted Family Friends or a Group of Siblings together)
- Limiting the role of certain Trustees to particular decisions (including income being available to all family members, spouses included if you wish), but ‘Capital’ being kept in a custodianship manner for the ultimate benefit of lineal descendants (your children and grandchildren).
- Practically carrying out the Trust terms in the manner planned.
How do we know that “divorce protection” is even possible?
There is a history of cases dealing with this issue, including whether or not a Discretionary Trust (particularly one created within a Will/deceased estate) can be protected from family relationship disputes. In 1981 and again in 2008, the High Court of Australia3 actively dealt with these issues, making statements such as:
“Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it. The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.” 4
“In order for property of a discretionary trust to be considered the property of a beneficiary there must be direct or indirect control of the trust by that beneficiary.” 5
In 2019, the Family Court of Australia delivered a judgement Bernard & Bernard  FamCA 421 re-iterating some well-known statements in this area, effectively denying a wife an order against a form of Discretionary Trust created in her father-in-law’s Will, in which her husband was a beneficiary.
Each case is determined on its’ own set of facts, but some relevant issues considered in other cases include the following:
ORIGIN OF ASSET
- Whether assets are acquired during the marriage (whether from inheritance, through efforts of one or both spouses, whether before or during the marriage) will play a role.
- An attempt to move assets acquired during a marriage to a Trust controlled by one party will not be exempted from the ‘property of a marriage’. 6
- Assets gifted within a Will to 2 children (whether of adult age or otherwise) via an appropriately drafted Trust, despite an existing 24year relationship of one child, can be excluded from property disputes (other than as a resource of a party).
- Action intended to defeat a property claim, can be set aside under the Family Law Act 1975 (Cth).
- Argument that “the Trust Assets were derived by an independent third party, so cannot be held to be property of the marriage” – have been rejected in some decisions. 7
- Does the Trust enable each sibling to have a particular portion or share of capital transferred to their trustee of sub-trust, 8 and do they control the sub-trust?
- Whether the Trust and its assets were ever treated by parties as a matrimonial asset or as a resource which they could access. 9
- A Trust may be “property of the parties” even though there is no direct input of either or one of them (eg where a Grandparent creates a Trust for grandchildren). 10
- Control by a party, whether directly or indirectly is relevant (in Bernard & Bernard the husband had no control either as Trustee or as Appointor to remove the Trustee).
- Power to appoint a trustee can be determinative of ‘control’.
- “Control” by itself is not sufficient to determine trust assets become part of proceedings.
- The actions of the party may determine whether someone effectively ‘controls’ a trust. Does the party to a marriage have ‘effective’ control of an asset11, such as control of a Trustee Company12?
- The nature of two Testamentary Trusts acting in partnership (even where those trusts may be described as mirror images of the other, with differing control mechanisms), does not evidence ‘effective control’ by a party. 13
- Is legal title held by the person in the marriage14 (ie they are the Trustee)?
- There is potential to quarantine ‘capital’ for Grandchildren only (for example). 15
- Husband’s interest as beneficiary, rights and powers as appointor/guardian place him in position of owner of property. 16
- No person other than the husband/wife has any real interest in the property or income of the Trust except at the will of the husband/wife. 17
- Clear evidence of carrying out deceased person’s wishes, minutes of meetings, major decisions for the purchase or restructure of trust assets, the history of distributions of income and/or capital, etc may all play a role.
- In Bernard & Bernard, the judgement recognised the very clear record-keeping and scrupulous company dealings as providing evidence the Trust was not a ‘sham’.
- Indicators of control within the Discretionary Trust are considered including: Mechanisms of decision – making; Minutes of meetings; Major decisions made for purchasing or restructuring of Trust Assets; The history of distributions of income and/or capital; Interrelationship between members, trustees, appointor etc.
- No ‘direct’ control of the trust, as Husband was not the appointor or the trustee of the trust. 18
- In order to prove that there is indirect control of a trust, evidence must be provided to support a ‘puppet’ scenario, rather than relying on the Court to consider the history of trust distributions. 19
- A ‘puppet situation’: the person with the legal control of the trust is a puppet of the beneficiary. 20
- “Sham transactions may always be disregarded.” 21
TRUST LAW & EQUITY
- A discretionary beneficiary has a right to have his/her interest protected by a Court of Equity, and this ‘right to due consideration’ can be regarded as property.22
- A person who is the object of a Discretionary Trust does have a right to be considered, however there is no guarantee they will receive any part of that property [Gartside v Inland Revenue Commissioners (1968) AC 553]. The value of this right might be difficult, though perhaps not impossible, to determine. 23
- Where a Trust Deed describes a person as a ‘mere beneficiary’ (even if defined as a Primary Beneficiary), and if they are not the Trustee, they are dependent upon the trustee to distribute income, accumulate it or make distributions under the Trust, they do not have right to any set part of that property/income.
- There is no obligation to apply assets or income of the trust to any one person24, when a Trust has a range of ‘discretionary’ beneficiaries.
- The ex-partner having a role as a potential beneficiary in the Trust is not determinative of the Family Law dispute
- Trustees have an obligation to exercise their discretion fairly, reasonably or properly – and a failure to do so can lead to an application by other beneficiaries to set this aside. The interest of a discretionary beneficiary is no less than the interest of any other beneficiary under the Trust.
- A beneficiary’s interest in a discretionary trust has also been described as a ‘chose in action’ – a ‘right to due administration and to call upon the trustee to deal appropriately with the income or capital of the trust’.
- “Section 92 (3) FLA enables the Court to make an order either in favour of or against an intervener if such order is one that can properly be made as a matter of substantive law. …. It does not give the Family Court power to impose new duties upon, or to annul the rights of, third parties who are interveners.” 25
- The Family Court cannot directly affect the rights of third parties. 26
For further information, please contact Tammy Parsons or the Private Wealth Team at Rouse Lawyers on 07 3648 9900.