Can you trust a Trust?

Date: Sep 02, 2009
Document Type: Newsletter

When a family is blessed with some wealth, it is not uncommon to find a family trust involved. A trust is an arrangement where assets are held in the name of a trustee on behalf of named beneficiaries. The trustee is not in fact the `real' or beneficial owner. A family trust is usually what is known as a discretionary trust.

With a discretionary trust, the trustee holds on behalf of listed beneficiaries. These can be specifically named, or may be described as a class, such as "the children of Bill Bloggs". The person who puts in the initial funds, usually nominal, is known as the Settlor, and there is someone known as the Appointor, who can remove and appoint trustees, and often amend the terms of the trust.

The word "discretionary" is used because the trustee can decide which of the beneficiaries receives money from the trust and when. Until that discretion is exercised a beneficiary has no legal right to any distribution from the trust.

The existence of a family trust has caused difficulties in Family Law property disputes, because if, say, the husband is a beneficiary under a trust, he does not actually own anything until a distribution is decided upon. The Family Court's power is to deal with "property", and so there were real doubts about the court's ability to make orders about a possible entitlement under a trust.

Fortunately a recent decision of Australia's top court, the High Court of Australia, has given judges and lawyers useful guidance as to how these situations are to be dealt with.

The case, Kennon v Spry, involved a senior Melbourne QC. Before he was married he had set up a trust, and he was the trustee and was entitled to vary the terms of the trust. The beneficiaries were himself, his siblings, their children and their spouses. By two amendments, both the husband and the wife were excluded from the list of beneficiaries. The last amendment was effected at a time when the marriage was in trouble. The husband as trustee subsequently moved several million dollars from the trust to their children and to trusts for the children.

A beneficiary has the right to have due consideration given to their position when a distribution is to be made, and in the absence of any decision to distribute, the husband controlled the trust's assets. In ordinary legal terms neither of these entitlements would constitute "property", but the court found that in the Family Law scenario, the court would not look at her rights or his rights separately, but rather at their rights together. The combined rights amounted to "Property" for Family Law purposes, and the wife was therefore successful in having the transfers to the children set aside, and getting a share of the trust's assets.

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