Often during a relationship, the parties establish a discretionary family trust, where one or both of them are trustees and beneficiaries. Sometimes, this sort of trust has a corporate trustee – a company where the parties are shareholders and directors. So, what will happen to the assets of such a trust when the parties separate?
If the trust is a unit trust or a fixed trust, the interests of the parties in the trust property are easy to decide. But it is not a straightforward answer in the case of discretionary trusts.
In most cases, if one of the parties has power and control over the trust and can independently make payments from the trust to themselves or the other party (in their capacity as trustee or a director and shareholder of the trustee company), they may be considered by the Court to own the assets of the trust. These assets might be considered property of the parties to the relationship and can be divided.
Also, it has been found that, for example, where a wife is a beneficiary of a trust and the husband has power to appoint trust assets to her, the assets of the trust will be considered part of the relationship assets. Since 2008, the Court has considered that a party’s historic control of the trust is sufficient to access the assets of the trust for the purposes of property settlement in family law proceedings.
Where trust assets are considered part of the relationship assets, the Court has the power to make orders with respect to the distribution of trust assets. In making those orders, the Court can ignore the trust instrument and any duties a trustee might owe to the beneficiaries. In most cases, however, the Court will only take the trust assets into account when apportioning the relationship’s asset pool, rather than making orders actually distributing the trust assets.
In situations that involve third parties (for example, an independent trustee), third parties often end up joining the proceedings. A third party may wish to join themselves in the proceedings, to be able to present their position to the Court in order to protect their interests in the assets of the Trust or to be able to fulfil their obligations to third party beneficiaries. Third parties may also be joined by a spouse party to restrain them from dealing with the trust until property settlement has occurred.
If you are a person going through, or contemplating going through a property settlement involving trust entities, give the lawyers at Craddock Murry Neumann a call for expert legal advice.
The law is complex and it changes frequently. The law may have changed since this article was published.