Family Trust v Family Court
As tax lawyers, Legal Consolidated structures clients’ affairs to legally reduce tax burdens. We are also asked to:
- consider asset protection if you or your business goes bankrupt or insolvent
- draft 3-Generation Testamentary Trust Wills to reduce the four Australian death duties
- put Divorce Protection Trusts in Wills
- put Bankruptcy Trusts in Wills
- stop the Family Court taking assets if you are a break-up
Family Court v Australian Family Trust
Let’s consider the omnipotent, omniscient and omnipresent Family Court. For indeed no Court in Australia has more power. It is free to do what it wishes with few rules of engagement.
A family law property settlement begins with the accountant identifying the assets, liabilities and financial resources of you and your ex-partner. This is easy for a family home, superannuation and cash. It makes no difference if the family home is in her name. It makes no difference if the shares are in his name. Ownership is not relevant. All assets are ‘pooled’ together.
Family Court considers a Family Trust matrimonial property
The Family Court identifies all property interests. This is for both of you. Often a Family Trust is property of the marriage. Especially if:
- one of you is Appointor (or you ‘control’ the appointor) in a Family Trust.
- one of you is a trustee of a Family Trust, Unit Trust, Death Bed Trust, Hide Asset Trust or Bare Trust
- one of you is a director of a corporate trustee
- one of you gift money to the family trust
- one of you lends money to the family trust
- your mum and dad regularly distribute income from the family trust to you (not yet forgiven)
- there are Unpaid Present Entitlements (UPEs and loans) owing from the Family Trust to you
- you forgive an Unpaid Present Entitlement
The 5 business structures the family court attacks
The issue is complicated further for the financial planner and accountant. This is when their clients have these 5 types of investment and business structures:
- Unit Trust (or more usually a Unit Trust with a corporate trustee)
- Service Trust Agreement
- Company as trustee of a Family Trust
But Australia’s favourite business structure is the Family Trust. In the eyes of the Family Court a Family Trust is also called a:
- Discretionary Trusts; or
- Family Discretionary Trust.
Family Trust vs Family Court
A Family Trust contains three groups of people:
- Trustee – it holds the legal title of the assets. But it is a puppet. This is how the Appointor fires the Trustee.
- Appointor – this is god. It controls everything, including the Trustee.
- Beneficiaries – this is not just mum, dad, children and in-laws. It includes all Australian charities. If you have a share in a public company, all the shareholders of that company. Therefore, most Family Trusts have 400,000 plus beneficiaries.
You distribute income to the persons paying the least tax in the financial year. (Watch a free training course on Family Trusts.)
Family Court considers Family Trusts a matrimonial asset?
Do Family Trusts stop the Family Court? For example, you make your father the Appointor. You then tell the Court that the assets of the Family Trust are not yours – they do not belong to your marriage. This rarely works. The Family Court has the power to direct your father to hand over assets to your ex-wife.
Are family trust assets ‘protected’? Or are they merely part of the pool of assets available for division between your ex-spouse or de facto?
Since I started practising in the 1980s, the Family Court generally ignores any protection provided by the Family Trust structure. (Divorce Protection Trusts only protect assets in your parent’s Wills.) The Court merely puts all assets in the Family Trust into the ‘pool’. What about if you remove your wife as a beneficiary – of course, this does not work.
1. Kennon v Spry –
Family Court attacks Family Trust deed updates
For example, the Family Court ‘pooled’ the assets of a 1968 Family Trust: Kennon v Spry (High Court). The Family Court is comfortable including family trust as the property of the marriage or de facto relationship.
The Spry decision resulted in trust assets of a Family Trust forming part of a property pool in family law proceedings. It also resulted in the ‘reversal’ of several updates to the Discretionary Trust which had removed the husband and wife as beneficiaries of the Trust.
Spry revolved around the marital breakdown of Dr Ian Spry and his wife Helen Spry. He is a famous retired barrister and Queen’s Counsel in the state of Victoria. I use his textbook to lecture law students on trust law.
Dr Spry and Mrs Spry marry in 1978. They separate in 2001. Dr Spry and Mrs Spry have four daughters from the marriage.
Dr Spry updates the Family Trust to defeat the Family Court
In 1968, Dr Spry created a Family Trust. The Trust Deed went through several variations. They reflect his hatred of Mrs Spry. They include:
- The Trust was put into written form in October 1981 to include Dr Spry, his siblings, their spouses and their issue as beneficiaries of the Trust.
- A variation to the Trust Deed in 1983. This is to exclude Dr Spry as a beneficiary and appoint Mrs Spry as trustee upon Dr Spry’s death or resignation, and their eldest daughter as trustee upon Mrs Spry’s death or resignation.
- In 1998, Dr Spry and Mrs Spry experience matrimonial tension. The Trust Deed is again varied. Dr Spry and Mrs Spry are excluded as beneficiaries.
- Dr Spry and Mrs Spry separate in October 2001. In January 2002, following their separation, the Trust is split into four different trusts. Each for the benefit of the four Spry daughters. Dr Spry and his friend, Mr Kennon, are joint trustees and controllers.
Beneficiaries of Dr Spry’s Family Trusts have no rights. Is the Family Court powerless?
Generally, discretionary trust assets do not automatically fall within the definition of property of a party. This is for the purposes of family law proceedings. This is because a beneficiary “could not assert any legal or equitable right in respect of them”. In most cases, trust assets of a purely discretionary trust constitute a “mere expectancy”. Therefore, they are not a financial resource. This is given the discretionary nature of a family trust.
Is Dr Spry’s Family Trust an asset of his marriage?
Ultimately, the High Court held that the trust assets are the property of the marriage. This is even though:
- the Family Trust is amended to the point where Dr Spry and Mrs Spry are no longer beneficiaries, and
- the Family Trust are separated into four separate family trusts for the benefit of the Spry children.
The Court overturned the Family Trust Deeds of Variation. All four trusts for the benefit of the Spry daughters are reversed.
The Court considered these arguments:
- were the Family Trust Deeds of Variation made to defeat an anticipated order in future Court proceedings?
- is it just and equitable to reverse the final form of the trusts? What about the benefits to the Spry children? The children later joined in the proceedings and maintained the position created by Dr Spry to “divert” assets away.
What is the degree of control that Dr Spry had over the family trust? This is despite not being a beneficiary or trustee by the end of the Family Trust’s life.
Chief Justice French stated in paragraph 70 of the judgment:
The characterization of the assets of the Trust, coupled with Dr Spry’s power to appoint them to his wife and her equitable right to due consideration, as property of the parties to the marriage is supported by particular factors. It is supported by his legal title to the assets, the origins of their greater part as property acquired during the marriage, the absence of any equitable interest in them in any other party, the absence of any obligation on his part to apply all or any of the assets to any beneficiary and the contingent character of the interests of those who might be entitled to take upon a default distribution at the distribution date.
The trust assets are property of the marriage. The control that Dr Spry had over the discretionary trust is a factor. It further established that the trust assets are property of the marriage.
Dr Spry could not bestow benefits on himself through the Family Trust. However, the Court held that Dr Spry had a significant controlling influence over the Trust.
In their concluding statement, Justices Gummow and Hayne (Para 126) state:
Observing that the husband could not have conferred the same benefit on himself as he could on his wife denies only that he had property in the assets of the Trust, it does not deny that part of the property of the parties to the marriage, within the meaning of the act, was his power to appoint the whole property to his wife and her right to a due administration.
The High Court’s decision in Spry reveals the Family Court’s wide power to dismantle Trust structures.
Dr Spry lost because he did not separate the trust from himself as the “controlling” person.
The Family Court considers three issues:
- your ‘control’ of the trust – directly or indirectly?
- did you put the assets into the Family Trust – are they really your assets?
- who benefits from the Family Trust? Are distributions going to you or your new girlfriend?
The ‘common’ Family Trust structures are matrimonial assets – no argument
Most family trusts hold your family business or investment assets. You are the Appointor. You distribute the income to yourself and your children. Obviously, the Family Trust assets are ‘pooled’. No argument.
What you do not get told in the case, is that Dr Spry was one of Australia’s leading trust lawyers. Some suggested that he treated the judges with disregard and even wrote to them after the matter to tell them off. Better to be humble when it comes to judges and regulators.
But now consider the articles below.
2. Harris v Harris –
family trust NOT assets of the couple
In Harris v. Harris  FamCAFC 221 the family trust assets are NOT pooled. This was because there was insufficient evidence to show the husband controlled the trust. The Appointor (god) was his mum. He was only the trustee (puppet). Mum could sack him anytime. The wife should have produced evidence that Mum took her marching orders from her son.
In the marriage of Harris v Harris, the Full Court of the Family Court of Australia was asked on Appeal to review the decision of His Honour Justice Bell.
Judge Bell found at first instance that the assets of a discretionary trust with an agreed value of $1,5m were effectively under the control of the husband. And, therefore, the property of the relationship, is available for distribution to the wife.
“The issue raised by the case was whether the husband had sufficient control of the Trust itself such that its assets could be regarded as his assets.”
The main shareholder of the Trustee Company of the Trust was the husband’s mother. The mother had a controlling interest in the Trust – or at least, on the face of it.
The wife sought to argue that the husband’s mother was a ‘mere puppet’ of the husband and that in reality, the husband had the real controlling influence over the Trust. The wife pointed to the fact that the husband received the vast majority of income from the Trust and that he agreed that he was the driving force of the trustee company which generated the income for the Trust (a separate entity).
At first instance, the wife was successful in her argument. However, on Appeal, the Court did not come to the same conclusion.
The mother was not called to give evidence at the trial and there was what amounted to speculation on the wife’s part rather than direct evidence about the husband’s real role and his alleged controlling influence over his mother in her dealing with the Trust.
“…while the husband was and remains a director and minority shareholder in the original trustee, Harris Nominees Pty Ltd, he is neither a director nor a shareholder in the company, HA Pty Ltd which has been Trustee of the Trust since 1 June 2007.”
It has long been open to the Court to determine that the assets of a Trust are property of the relationship. But the key factor in considering whether such property is marital property is the level of control exercised by the relevant party involved (in this case, by the husband).
The law as established in Kennon v Spry (2008) 238 CLR 366 at 387-389 (French CJ) remains unchanged:
“… that the term “property” when used in s 79 of the Act should be given a wide meaning,”
“The beneficiary of a non-exhaustive discretionary trust who does not control the trustee directly or indirectly has a right to due consideration and to due administration of the trust but it is difficult to value those rights when the beneficiary has no present entitlement and may never have any entitlement to any part of the income or capital of the trust.”
The issue in Harris which ultimately led to the husband’s Appeal succeeding and the matter being listed for a re-trial was the lack of evidence to support a finding that the husband had the ‘real’ control of the Trust.
In Harris, the Full Court complained that there was simply not enough evidence to support the assertion that the husband’s mother was a ‘mere puppet’. She may well have been – but the Court could not find same in the absence of any direct evidence:
“The difficulty, however, for the wife on this appeal is to be able to point to any evidence which would support a finding that the husband’s mother is his puppet, and that it is through her, or perhaps otherwise, that he exercises de facto control of the trustee company and of the Trust.”
3. Morton v Morton –
Family Trust NOT in the pool of matrimonial assets
In Morton v Morton  FamCA 30 the brother is a co-Appointor. Therefore, the Family Court did not include the assets in the Family Trust in the pool of matrimonial assets.
So how you structure the control of your Family Trust is important. It may stop the Family Court from considering them as part of the matrimonial property on a relationship breakdown.
Wife argues: Husband and his brother ‘control’ the Trust together
- Mr and Mrs Morton from Sydney have been married for 10 years.
- There were no children of the marriage.
- Mr Morton is a beneficiary of a discretionary trust: the Morton Trust.
- Beneficiaries: Mr Morton, his brother, parents, children, distant relatives, charities and companies.
- Trustee: J Pty Ltd. The two ordinary shares are respectively owned by each brother
- Corporate trustee directors: yes, you guessed it, the two brothers.
- Appointors: the two brothers.
- Bucket Company: T Pty Ltd, which was owned by the Trust.
The wife claims that her husband and his brother each hold a 50% share in the Trust assets and the Bucket Company. Accordingly, she wants 50% of the trust assets to be added to his pool of assets. This is for the division under the property settlement.
Husband argues to the Family Court: neither of us controls the Family Court
The husband argues:
- that as both he and his brother act in the same capacity as a director, neither of them the trust.
- As their rights were equal neither brother had effective ‘control’.
- The brothers are joint Appointors with the power to remove and appoint a trustee – but only together.
The Court declares: trust assets NOT matrimonial property
The court noted:
- a “warm and loving relationship” between the brothers.
- an inter-mixing of funds – not only their own personal funds but funds from other entities.
- insufficient evidence that the Husband had sufficient control over the Trust and Bucket Co to simply treat those assets as his.
- The Trust assets and Unpaid President Entitlements accruing in the Bucket Company are excluded from his asset pool.
- Of course, the Trust was still considered a “financial resource”.
4. Beeson v Spence  FamCA 200
A different result is reached in Beeson v Spence  FamCA 200. But the same ‘control test’ is used in Morton v Morton. In Beeson, the court “looked through” the family trust. But only because the wife:
- had control of the assets; and
- determined where the income and capital is distributed.
Beeson v Spence shows how exposed the assets of a family trust are.
The wife and husband met in 1996. They married in 1997. They had two children. They divorced in 2004. In 2001 the wife started a trust. She called it the “S Trust”.
How the Beeson v Spence trust is set up:
The wife’s father and her solicitor are the trustees. This is a waste of time, as the controller of the family trust is the Appointor.
The wife held the God position of Appointor.
- Default Beneficiaries
The specified beneficiaries are the two children of the marriage.
- General Beneficiaries
But the wife (and her husband for that matter) are within the class of general beneficiaries.
In 2003 the husband’s financial position is precarious. And with financial despair often comes a separation. And this is the case here. They break up. Quickly the wife does a Deed of Variation:
- She removes herself and her estranged husband as general beneficiaries.
This is always a waste of time. It never works against the family court or bankruptcy court.
And besides, they are still beneficiaries because the ‘children’s parents’ are beneficiaries.
- More importantly, she resigns from the god position of Appointor. Her sister is made the Appointor.
What is argued in Beeson v Spence:
- Husband – the trust is established for the benefit of the family as a whole. And not just the children.
- Wife – the trust is established for the children. And therefore the assets are not property of the marriage. And besides, I no longer hold any ‘power’ in the Family Trust. I am no longer the Appointor.
The Court in Beeson v Spence decided:
- The court ignores the change of Appointor.
- The wife retains ‘defacto’ control of the trust.
- Therefore, the family trust assets are the property of the marriage.
5. Balken v Vyner
Balken v Vyner  FamCA 955 is another example of Family Court interference to your and your parent’s family trust.
Facts of Balken v Vyner
The couple are previously married. They then lived together as a de facto for a few years. They then marry.
The marriage ends after 6 years.
Most of their assets are in a Family Trust. The family trust assets are from the husband’s dad who died just before the couple married.
The wife claims the Family Trust assets are $63m. The husband, of course, argues a lesser figure – $31m.
The Family Court asks the ‘level of control’ the husband has over the family trust
What level of control does the husband have over the family trust? With control, the family court is more likely to apportion family trust assets to the wife.
But the husband is not the sole Appointor nor the sole director or shareholder of the trustee companies
The husband’s father left a letter. It set out dead Dad’s hopes and wishes for the family trust. It is addressed to the directors and shareholders of the Family Trust trustee company.
Interestingly, there are independent directors of the trustee companies. These persons are also Appointors. The directors hold regular meetings. The directors exercise their discretion on paying trust income and capital. They fetter their discretion by following dead Dad’s written wishes. It looks like they intended to keep doing so.
The Court accepted that the directors had always acted and are likely to continue to follow dead Dad’s written wishes.
Based on the dead Dad’s wishes the husband gets a present entitlement to 40% of the income and 40% of the capital. The wife claims he is entitled to 100%. She is greedy and wrong.
Family Court considers Family Trust’s letter of wishes
The letter of wishes states:
After the death of the father of the husband, the net income of the Trusts for each accounting period shall be:
Distributed and paid as to:
1. 40% to the husband (or as he may direct)
2. 20% to the father’s daughter (or as she may direct); and
Distributed and set aside to:
3. 30% to the children of the father’s daughter as tenants-in-common in equal shares; and
4. 10% to the husband’s children as tenants-in-common in equal shares
Until each of father’s grandchildren attain the age of 24 years, sufficient funds shall be made available from their respective entitlements above to pay for their education expenses.
After the death of the father and upon vesting of the Trusts, the balance of the capital, assets, income and other entitlements arising in respect of the Trusts, if any, after taking into account all liabilities of the Trusts will be held and applied as to:
(i) 40% to the husband (or as he may direct);
(ii) 20% to the father’s daughter (or as she may direct);
(iii) 30% to the children of the father’s daughter as tenants in common in equal shares; and
(iv) 10% to the husband’s children as tenants in common in equal shares.
Notwithstanding any of the provisions in this Letter of Wishes, the Trustees may at any time make funds available to any of the beneficiaries named in this Letter of Wishes either by way of distribution of net income or advance of capital or loan to the relevant beneficiary if, in the majority opinion of the directors of the Trustees, the relevant beneficiary has reasonable cause to require assistance.
Any such payment shall be treated as a payment on account of (and not in addition to) the beneficiary’s entitlements under the above paragraphs (as the case may require).
In the event that any of the beneficiaries named in this Letter of Wishes predecease the father or survive the father but do not reach their full entitlements hereunder leaving a child or children then such of those children as shall attain the age of 21 years (and if more than one as tenants-in-common in equal shares) will take the entitlement which his or her or their parent would otherwise have taken.
This letter merely reflects the wishes of the father. It does not seek to impose any legal or binding obligations upon the Trustees except insofar as it is within the discretion of the Trustees to comply with such wishes and insofar as the Trustees as prepared to do so.
The Letter of Wishes is to be taken into account by all of the shareholders and directors from time to time of the Trustees and any successors in the offices of trustees or of Appointors and Guardians of the Trusts, in the administration of the Trusts and the exercise of the Trustees’ discretions in applying any income or capital of the Trusts after the death of the father.
If at any time any difference of opinion of exists in relation to the commission or omission or any act or any decisions, determination or consent to be made or given by the Executors under this Letter of Wishes, then unless otherwise indicated the majority opinion of the Executor shall prevail.”
As to fettering a trustee discretion. This is often a naughty thing to do. See Dagenmont Pty Ltd v Lugton  QSC 272. There is a general prohibition on a trustee fettering his discretion. The “trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power”.
Family Court finds that the husband does not control the Family Trust
The Court confirms that the husband does not control the trusts. Further, the husband cannot use the family trust assets for his own purposes.
At the regular meetings of the directors, the husband reported to those meetings. The husband is required to account to the other trustees. The husband had to justify his actions.
Family Court finds the husband is responsible for day-to-day management of the family trust
Sure the husband is responsible for the day-to-day management. However, an independent director reviews the accounts. This consultant to the group queries the husband about transactions. The husband is required to justify his actions to the other directors. One of the directors is a professional.
At times the husband got more than 40%. But under the terms of the letter of wishes, such amounts are debited against his loan account. He is either required to repay those amounts or pay interest on the loan accounts.
The matrimonial asset pool is held to be $35m. This is reduced because of the dead Dad’s letter of wishes and the directors of the corporate trustees following those wishes.
The final allocation 75% is to the husband. And 25% in favour of the wife.
Conclusion of Balken v Vyner
Ultimately the decision in Balken v Vyner  FamCA 955 provides a further reminder that appropriately structured and administered trusts achieve asset protection objectives. This from a family law perspective.
6. MacDowell v Williams –
Can Family Court look at Mum’s Will?
Want to look at the ex-spouse’s Mum’s Will? Consider MacDowell v William  FamCA 479. In that case, the Court said no. The disclosure of the tax effective Wills and trust structures of the wife’s parents are private.
The wife and the husband married in 2004. They separated in 2010. The husband tells the Family Court he wants to see his parents-in-law’s Wills and Family Trust. He claims the documents are relevant to the marital property pool. He needs the information to work out the financial resources available to his wife.
The wife’s parents objected. They argued the documents:
- are personal to them
- are not relevant as they maintained testamentary capacity and can make new Wills and amend the Family Trust
- are not relevant as neither their daughter nor her ex-husband had any proprietary interest in the Wills and Family Trust
The Family Court agreed. Trying to look at the Wills was just a ‘fishing expedition’ by the husband:
Parents-in-law can change their Wills
However, the situation may be different if the parents lose mental capacity. While they have mental capacity Mum and Dad can alter their Wills and the Appointor in their Family Trust. But both parents are alive, in good health and possess full testamentary capacity.
The daughter has no control over her parent’s Family Trust
Further, the Family Court agreed that the daughter had no control over her parent’s family trust or the corporate trustee of the family trust. (Compare this to Keach v Keach and Ors  FamCA 192.)
What about previous Family Trust distributions to the daughter? Is that a ‘pattern of distribution’?
The Family Court looked at Family Trust distributions to the daughter. Also, as is usually the case, the daughter is a default beneficiary. But, the daughter only got 28,000 over ten years. Further, other beneficiaries also got distributions. The Court said the Family Trust is clearly discretionary. The daughter had no express or implied rights.
The husband argued Kennon v Spry  HCA 56. Using that case he submits that the wife’s interest in the trust is ‘property’. This is based on her ‘right to consideration’ and ‘due administration’. This is a pretty weak argument as most family trusts have over 400,000 beneficiaries. And all of them have these very minimal ‘rights’, if you can call them rights at all.
Further, in Spry’s case, Dr Spry had put the wealth into the Family Trusts, to begin with, and and probably had total de facto control of the family trust as well.
7. Rigby v Kingston (No 4) 
Consider Rigby v Kingston (No 4)  FamCA 501:
- Dad is rich. Dad dies.
- In Dad’s Will control of the testamentary trust is with his 3 adult children.
- Sadly, it is an old-fashioned testamentary trust and the same trust is controlled by the 3 adult children together.
- The testamentary trust assets are locked away until the youngest turns 60 – this is silly for tax planning, transfer (stamp) and asset protection.
- The executor/trustees are the 3 adult children. A daughter and two sons.
- The trustee of the testamentary trust has the discretion to make interim capital distributions. This is to any beneficiary before the vesting date. So there may be nothing left in the trust by the time the youngest turns 60!
- Usually, the trustees must act unanimously. Strangely the will set out that decisions of the trustees (being the 3 adult children) are by majority. Dad puts in the Will:
“desire that the benefit of my estate should pass to my children and/or grandchildren and that it is my express desire that no entitlement should accrue to any present or future spouse of my children or grandchildren particularly if such entitlement were to disadvantage my children or grandchildren or the continuity of any of the businesses which are conducted by the group of companies controlled by me”.
- One of the adult children, the daughter, after over 15 years of marriage, suffers a relationship breakdown.
- The ‘prenup’, as usual, does not work.
- The wife contributed $10 million to the relationship. The layabout husband contributed less than $1.2 million:
- The wife returned to work after each child in the relationship.
- The husband is unemployed or unemployable. Yet still do not contribute much with raising their children.
- The husband wants assets in the various trusts the wife was in joint control.
- The husband argues the value of assets in the trusts is $100 million. The wife argues $50 million.
- The combined legal fees at the date of the trial (including those of the wife’s 2 brothers who were co-trustees of many trusts with the wife) were $2,301,196 and the wife had to sell her main personal asset (a home) to fund the legal costs.
Decision of Rigby v Kingston
The husband loses. The Trust’s assets are not property of the marriage. But why:
1. A Beneficiary of a Family Trust is of no value
The answer is dependent upon the facts and circumstances of each particular case. This includes the terms of the trust deed. A long marriage is not of itself determinative. See In the Marriage of Goodwin and Goodwin Alpe  FamCA 147.
A beneficiary of a discretionary trust does not control the trustee directly or indirectly. A beneficial merely has the lowly right to due consideration and to the due administration of the trust. That has no ‘value’. See Spry above.
The right of due administration is property (chose in action) but it has no value. See Gartside v Inland Revenue Commissioners  UKHL 6).
2. A Trustee in a Family Trust also has no value
The only property that a trustee has in the assets of a discretionary trust is the bare legal title. This also has no value.
Being a trustee or potential beneficiary in a discretionary trust has no practical value. This is for a matrimonial property adjustment. They are not an interest in a trust asset. See Karllson v Karllson  FamCA 571.
Compare this to Spry. In Spry, there is control, legal title, powers of distribution and the source of the trust fund. In Rigby v Kingston there is none of these:
- the wife did not control the trust. The legal title is:
- with her and her two brothers; or
- by corporate trustees (where the wife was one of 3 directors)
- the wife alone does not make decisions to distribute trust funds to herself.
- the source of the funds in the testamentary trust is from dead Dad. Dead Dad is a stranger to the marriage.
- The trust was not from the efforts of the wife or the husband.
The wife’s rights in the discretionary trusts are of no worth. There is no control. And, therefore, is not a proprietary interest in the assets of the trusts.
Further, all of the testamentary trust assets could be distributed by the wife’s brothers to beneficiaries other than the wife. This is before the vesting date. Any such decision is entirely consistent with the stated purpose in Dad’s Will. And note Dad is a stranger to the marriage. Dad did not want a spouse of his children to get one cent.
Discretionary powers in Rigby v Kingston
In light of the above conclusions, the husband also asked the Court to instead exercise its powers to access assets of the trusts on the basis of the powers under s 79 of the Family Law Act to “make such order as it considers appropriate” as long as the court “‘is satisfied in all the circumstances, it is just and equitable to” do so.
After a careful analysis of the issues, the Court also rejected this aspect of the husband’s claim. The Court confirmed that if the husband was unable to maintain himself adequately, then he had the right to claim spousal maintenance from the wife.
Rigby v Kingston – the Conclusion
While properly crafted trusts (including testamentary trusts) can withstand attack in family law proceedings, tax issues must still be considered.
In this case, the tax (and presumably stamp duty) consequences of a mandated early vesting date do not appear to have been considered. Cleave to the bosom of your accountant for help with taxation and (stamp) duty issues.
8. Schweitzer v Schweitzer  FamCA 445
Do I always have to show trust documents to the Family Court?
“Tell the Family Court I want to see that lying cheating husband’s family trust deeds” barks the ex-wife seeing her ex-husband’s new girlfriend for the first time.
In Schweitzer v Schweitzer  FamCA 445 the wife demands to see the trust documents. How else can the court see what needs to come to her?
The husband’s two Family Trusts, for asset protection, have corporate trustees. But the husband is not the sole director:
- Family Trust one: the directors are the husband and his dad
- Family Trust two: the directors are the husband and his mum and dad
Cleverly, the husband is not a shareholder of either of the trustee companies. But, of course, he is a beneficiary of both Family Trusts.
And to top, it off, the Appointor (controller) of both Family Trusts is the husband’s Dad.
The wife demands that the family court orders the husband to provide the Family Trust’s financial statements, tax returns, bank statements, trust deed, variations of the Family Trust Deed and the annual distribution minutes.
The wife fails.
The Family Court says no:
- This is because the husband has a fiduciary obligation. This is to protect the corporate trustee documents. This Family Trust is not some fiefdom under the control of the husband. The god-like figure is the Appointor. And the Appointor is NOT the husband. It is his dad.
- The court holds that the documents and Deeds are not under the husband’s ‘control‘. This is under the Family Court rules. (The position may be different if you were fighting this out with the ATO or state stamp duty office.)
- As we all know, the Trustee of the Family Trust (whether a human or a company) is just a squashed cabbage leaf. It is the Appointor that bosses the Trustee around. Therefore, the directors of corporate ‘servant’ trustees have no right to ‘possession’ or ‘control’. Corporates trustees (and their directors) only ‘access’ trust documents to fulfil the Trustee’s duty. This is to look after the Family Trust.
Questions never asked in Schweitzer v Schweitzer
Why did not the wife join the husband’s mum and dad in the Family Court proceedings? I would have tried this. Possibly the Family Court would not do so with this set of facts. There needs to be some nexus between the husband’s mum and dad and the matrimonial assets, perhaps?
Another question is where did the Family Trust money come from? Did the husband put in money? Did the husband put in hard work and toil to the Family Trust?
9. Barrett v Winnie (2022)
Family Trust property is excluded from the asset pool. Despite her role as appointor, the wife never had control of the trust and third parties contributed to the Family trust property
The Family Court of Australia agrees to exclude family trust assets from the property pool. See Barrett v Winnie  FedCFamC1A 99, 1 July 2022.
The dispute is over the assets of a discretionary trust. The wife is a beneficiary. The wife had previously been the appointor of this trust. However, her appointment is removed by a deed signed after the separation.
Before their separation, the parties’ only child lived with the wife. There is an informal settlement where:
- the husband demanded and received the wife’s interest in a jointly owned property; and
- the wife is removed as Appointor to the Winnie Family Trust.
As to the Winnie Family Trust:
- It is a family discretionary trust;
- It is established during the parties’ marriage;
- The Wife is always one of two or more directors of the corporate trustee company;
- The Wife had always had a 50% shareholding in the corporate trustee company (the other 50% is held by her adult son from a previous relationship);
- The Wife is the appointor of the trust until 3 years after her separation from the Husband when she is replaced by the other director of the trustee company;
- The Wife fell within the class of beneficiaries in her capacity as a parent of another child from a previous relationship; and
- The Husband had fallen within the class of beneficiaries until he ceased being the Wife’s spouse.
However, the primary judge still excludes the family trust assets from the property pool.
This is because of:
- the long delay before the bringing of proceedings by the husband, and
- an informal property settlement some 15 years earlier.
The primary judge found it is not just and equitable to make property settlement orders that included the assets in the Family Trust.
The husband is angry. He appeals. He argues that the primary judge erred in failing to make an order under section 106B Family Law Act 1975. This is to set aside the Deed of Family Trust to update the Appointor. This is the Deed that replaced the wife as Appointor.
The husband’s appeal is dismissed.
The court finds no error in the decision. This is to exclude the family trust assets from the pool. The case is distinguished from the above Kennon v Spry (2008)  HCA 56. Even if the wife remained Appointor she did not have the power of distribution over, or legal title to, the trust assets.
This is further evidence as to why Divorce Protection Trusts in Wills work so well:
“In declining to make the order pursuant to s106B of the Act, the primary judge found … that the [husband] made no contribution of any significance to the property of the Winnie Family Trust and overwhelmingly, contributions had been made by the [wife] and, significantly, third parties to the marriage’.
This factual finding distinguishes the case from Kennon v Spry  HCA 56. [Why is Spry different?] In Spry, the court finds that both parties to the marriage contributed to the property of the family trust throughout the course of their marriage …”
10. Gutteridge v Commissioner of Taxation (2013) – ‘you have got to keep control’
This is a case against the ATO. Not the Family Court.: Gutteridge v Commissioner of Taxation  AATA 947
However, the case shows how ‘control’ of a Family Trust is viewed by the courts.
The Family Trust wanted a capital gains tax small business concession. The Family Trust is selling some assets. And wants to pay a lower rate of tax. But this depends on who ‘controls’ the Family Trust.
The controller of the Family Trust is apparently Ms McKenzie’s father: Mr Gutteridge.
But Mr Gutteridge is neither the Trustee nor the Appointor. And, therefore, on the face of it, he misses out on the lower tax rate. This is for the assets his Family Trust is selling.
But, the Appointor (called a Principal in this Family Trust deed) is a professional adviser: Mr Coffey.
Mr Coffey tells the court that:
- he always follows the instructions of Miss McKenzie’s father, Mr Gutteridge.
- if Mr Gutteridge told him to do so, he would sack the Corporate trustee. (In Family Trusts The Appointor can remove Trustees at any time.)
- he ignores any directions from Miss McKenzie if they conflict with the direction of her father.
Even after hearing this the ATO still refused to allow the small business concession. This is because it believes that the daughter controls the Family Trust.
Thankfully, as is often the case in the Australian courts, the court held that the Discretionary Trust ultimately acted according to the directions of Mr Gutteridge. Therefore, the daughter did not control the Family Trust.
Mr Gutteridge’s Family Trust gets the small business concession.
So you can see, working out ‘control’ in a Family Trust depends a lot on the facts.
11. Thorne v Kennedy
In Thorne v Kennedy  HCA 49, the High Court held that where a party has a beneficial entitlement to trust income, it is more likely that the trust assets will be considered as part of the overall Family Law property pool available for division.
12. Parker v Parker  FamCAFC 186
In the case of Parker v Parker  FamCAFC 186, the Full Court of the Family Court of Australia, held that the assets of a trust may be taken into account in property settlement proceedings, where they are held by one of the parties to the marriage and the income from the trust is used to support them.
Family Trust vs Divorce Protection Trust in a Will
What is the difference between a Family Trust and a Divorce Protection Trust:
- A Family Trust is something you set up while you are living. (inter vivos)
- A Divorce Protection Trust is a trust that is put in your parent’s Wills. (testamentary)
When your parents die you get their assets but they are protected from attacks on you by the Family Court. Your spouse cannot touch those assets from your parents.
Spry’s case v’s all the other cases
These cases set precedent but each case is different. The court looks at the specific circumstances of each case when deciding whether to include trust assets in the property settlement.
In Spry’s case, the trust is just an “alter ego” of the husband. Under those circumstances, the Court merely directs the Appointor, whoever that is, to hand over the trust assets to the wife.
But for the other cases, if the judge believes the spouse is no more than a potential beneficiary the trust assets are protected.
When establishing trusts and related entities, give thought to:
- relinquishing some control at a shareholder level in the Corporate Trustee.
- appointing multiple directors of any trustee company.
- appointing more than one Appointor and requiring that they act jointly.
- the second Appointor is independent, such as a trusted adviser or accountant
What can the Accountant v Adviser do?
If you are trying to include trust assets in a property settlement, compile relevant documents at an early stage for your client. Get the trust deed, variations to the trust deed, tax returns and financial statements. Seek all paperwork and emails regarding how the family trust operates. These documents may show who gives instructions and makes decisions over the trust’s assets.
Remember, many clients illegally backdate Trust Distribution Minutes. In which case they do not work. In this case, the income goes to the “Default Beneficiary”. This is often your client’s ex. (See below.)
How to beat the Family Court
There are three other ways to get the Family Court off your back. None of them work, but here they are:
- Stupid – hand your money to your best mate
Get all your money and give it to your best friend. And then hope in years to come when the divorce is well and truly over your friend will give you back the wealth. However, your friend may die, get divorced, go bankrupt or forget who you are. You risk losing 100% of your assets. However, in a divorce settlement you often only lose half your assets
- Stupid, expensive and illegal – hand money to an overseas banker
Liquidate all your assets and gift them to a banker in a tax haven. And then when the divorce is over ask the banker if you can have the money back. You suffer massive Capital Gains Tax and you pay stamp duty again when you buy back the assets in Australia. Also, it is illegal to tell the Court or the ATO, for that matter, that you do not have the assets. This is because, the truth is, you are working in concert with the tax haven banker. Therefore, the asset always remains yours. And under your control.
- Binding Financial Agreements – no longer work
You come together with your spouse either before, during or after the marriage and decide how you want to divide up your assets if you separate. This is expensive. Legal Consolidated also believes that BFAs no longer work. Our law firm no longer prepares BFAs for that reason. For ‘prenups’, cohabitation agreements, binding financial agreements, and superannuation splitting agreements, see here:
Trustee Distribution Statements signed after 30 June
1. Your Family Trust has “default beneficiaries”. (Watch this free training course to learn about Family Trusts.) They are your two children Rob and Kevin.
2. Your son, Rob, is divorcing.
3. The diligent family lawyer subpoenas your accountant, his secretary and an ex-employee of the accounting practice. And asks each of them individually in Court:
‘Have you seen or heard of anyone in your office or a client backdating a Trust Distribution Minute and before you answer, if you lie under oath I will ask the Judge to issue a Bench Warrant so that you are arrested for perjury?’
4. Every year that the Trust Distribution Minute was signed after 30 June means that the income, for that year, belongs to your divorcing son, Rob. Well, half at least.
5. The family lawyer asks for half the assets in your Family Trust to go to your ex-daughter-in-law.
6. Your own lawyer generally recommends you write a cheque.
The moral of this story is to build your Trust Distribution each year here. Sign it before 30 June. Email a copy of the signed Trust Distribution Minute to your accountant.
Can a girlfriend challenge my Family Trust?
Q: I understand that Beneficiaries and children (whether beneficiaries or not) cannot attack Family Trust assets. Beneficiaries only have, at best, a right to be considered. The exception is a spouse or defactos. Would a girlfriend at the time of establishment fall into this category? This is even if no distributions were ever made to her.
A: I do not know what you mean by the word ‘girlfriend’. You can have a wife, mistress and gay partner. (If you had the energy.) All 3 may be deeded to be a spouse at the same time. And all three may have a claim to challenge your Will and attack your Family Trust.
Whether the ‘girlfriend’ is elevated to a ‘spouse’ is a question of fact. It is to be considered in each set of facts. In this court case, a married Melbourne man is deemed, by the Judge, to have his sex worker elevated to the position of a spouse.
You mention ‘at the time of establishment’ of a family trust. That is often not relevant. The ‘girlfriend’ may become your spouse at any time, either before or after you start your family trust.
Summary of whether the Family Trust overrides the Family Court
Business clients often have complex structures to reduce taxes and provide asset protection. This adds complexity to a divorce. Accountants and advisers are best placed to dissect and clarify where the assets are. They know the client. The accountant and adviser have financial training and skills.
The assets held in a Family Trust are not automatically the property of the marriage. However, family law legislation can easily make the trust assets “property of the marriage” for a relationship breakdown. Is the trust’s assets part of the property of the marriage? It depends on whether the trust is the alter ego of the spouse – or someone outside the marriage.
Further, the assets and income of a trust may be considered as part of the overall property pool available for division in a marriage breakdown, depending on the specific circumstances of the case. The court considers factors such as the nature and extent of the assets and income of the trust, the parties’ contributions to the trust, and the parties’ future needs in determining whether to include trust assets in the property settlement.
|Family Trust Deed – over 18,000 sold|
|Family Trust Updates:
| 1. Everything – Deed, Appointor and Trustee (recommended) – includes succession planning
| 2. Upgrade the Family Trust Deed only – streaming, Bamford, trust law & tax
| 3. Change the Appointor – includes succession planning
| 4. Replace the trustee only
|5. Change the Name of the Family Trust|
|6. Exclude a Beneficiary in the Family Trust|
|Company – Trustee of a Family Trust – corporate trustee for asset protection & business|
|Company – Bucket Company – beneficiary of a Family Trust|
|Annual Distribution Minutes for Family Trust – sign minutes before 30 June|
|Forgive Family Trusts’ UPEs – human forgives money the Family Trust owes (UPEs & loans)|
|Deed of Gift – to prove the money you put into your Family Trust was a gift (not a loan)|
|Division 7A Loan Deed – company lends trust money to Family Trust (UPEs & loans)|
|Loan Agreement – lend money to your Family Trust|
|Vesting Deed – wind up your old Family Trust (Centrelink compliant)|
|Training Course on Family Trusts – includes the Family Trust Deed|