Oftentimes families that have amassed a certain level of wealth are concerned about protecting their financial interests. As a result, they may put into place discretionary trusts to shield their accumulated assets from the perils of business and personal losses, particularly those losses that can come from divorce.
Initially it is important to note that the family court system is primarily concerned with the fair and equitable distribution of the accumulated and current wealth of a married couple. Hence, any property they jointly own and benefit from is considered as asset that must now be shared equitably. When it comes to jointly owned property, such as real property, the division of the asset is clearer and easier. The asset is valued by the court, each parties contributions are considered, and the court makes a distribution in accordance with fairness and equity.
However, when there is an asset where ownership appears, or is claimed to be, the sole property of one spouse, the determination as to whether or not it is a marital asset can become more complex. The definition of property is broadly addressed in the Family Law Act of 1975. The Act allows for a generous interpretation of a community assets and hence leans toward the likelihood that an asset that has befitted both parties and is one that must be equitably distributed.
Yet, there are specific rules that come into play when a discretionary trust is involved. The following are the factors that the court will take into consideration when determining if the whole, or part, of a discretionary trust is a marital asset, or solely the property of one spouse. If after careful consideration of the these factors the court determines that the trust is the sole property of one spouse, then the asset will not be subject to the marital division of assets;
- Control of the Trust – Does a single party or either party have the ability to distribute the assets of the trust to themselves and to others
- Ownership of the Trust – Does the party named in the trust have rights and access that lends itself to that party being the owner of the trust
- Beneficiary of the Trust – Does the party claiming the trust have the right to take loans from the trust, accumulate benefits from the trust, or receive a salary from the trust
- History of the Trust- Was the trust implemented significantly before the marriage, during the marriage, or contemporaneously with the divorce proceedings
- Use of the Trust – Have the parties previously used the trust together
The answer to each of these factors is pertinent to the final determination of the court. It is unlikely that a positive answer to just one or two of these factors will be enough to turn the contents of a trust into a marital asset. However, an accumulation of factors that characterise the monies to be more a marital asset than a sole asset, including showing that both spouses had control over the trust and reaped benefits from the trust, could lead the court to determine that the trust is a divisible marital asset.
There are circumstances where families will create a trust at the ninth hour to protect a family member they know will be facing marital dissolution. However, the Family Court Act in section 106B, specifically prohibits the creation of a discretionary trust in anticipation of thwarting an expected order by the family court. The determination of whether a trust has been created to end run a court decision is based upon the timing of the creation of the trust and the origin of the type of assets placed in the trust. The language was created to specifically prohibit the setting up of a trust to prevent legitimate family assets from being distributed to a spouse during dissolution of a marriage.
The case law has also weighed in on this issue. The foundation case of Kennon v. Spry found that if the party to the proceeding had direct or indirect control of the trust, then the trust was the property of the marriage. However, in a later decision, Harris v. Harris, the court found that the trust was not the property of the marriage, as the husband did not have direct control over the trust. Obviously, these two conflicting findings turn on the specifics of each case and do not reflect certain outcomes for others who might be similarly situated.
There are many issues to be taken into consideration upon the creation of a discretionary trust. For families who have significant assets that they wish to protect for their own family members, it is a viable pre-marital option. And, if the trust is set up properly, with no mal-intent, then it is more likely the trust will withstand the scrutiny of a family court review.
In the event that you have questions regarding this issue please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.