We are commonly asked the question – can a discretionary trust protect my assets in a divorce? It has long been thought that one way to shield your business or other assets from a creditor, or from your partner in a divorce, is to set up a discretionary trust.
A discretionary trust is the most common form of asset protection recommended by accountants because unlike individuals and companies, who can sue and get sued in law, a trust is not an entity in its own right and assets held in the trust are held in the name of the trustee.
What does the High Court say – can a discretionary trust protect my assets in a divorce?
In 2008, the High Court held in Kennon & Spry that for assets held in a discretionary trust to be included as property available for division under section 4 and section 79 of the Family Law Act, one of the parties need to have both:
- Effective control of the trust (whether by control over a person or entity);
- A right as beneficiary of the Trust.
In Harris & Dewell, in line with the High Court decision of Kennon & Spry, the Court held that the evidence must establish that the person/entity in whom the trust deed vests control is the puppet and does nothing without the party (the puppet master) controlling that person/entity. The Court held that control is not sufficient. What is required is control over a person/entity who by reason of powers contained in the trust deed, can obtain a beneficial interest in the property of the trust.
If a party does not have control of the trust and a right to benefit as beneficiary, a party’s position as beneficiary of a discretionary trust is relevant only as a financial resource under section 75(2) when considering the party’s future financial circumstances as a potential resource for the future financial benefit of the beneficiary. The relevance of this resource to the Court’s decision will commonly involve the Court examining the historical benefit received by the relevant party from the trust.
Where a person is a beneficiary of a discretionary trust and otherwise has no control over it, as control of the discretionary trust is shared with third parties, the control element is not usually satisfied and the Court will ordinarily characterise the beneficiary’s interest as a financial resource and not an asset that forms part of the property pool available for distribution.
Woodcock & Woodcock – Court held an interest in a discretionary trust was an asset and added into the matrimonial pool
In Woodcock & Woodcock (No. 2)  FedCFamC1F 173, there was a trial in relation to a preliminary issue – whether the Husband’s rights as a beneficiary of the trusts, being the right to due administration and due consideration, were property and if so whether such rights were property capable of valuation.
In this case, the Husband was one of a number of beneficiaries of 4 discretionary trusts (F Trust, E Trust, B Trust and Mr G Family Trust) and director of the corporate trustees of three of those trusts, along with other third parties. He was the sole director of C Pty Ltd, the corporate trustee of the Mr G Family Trust.
The Wife argued that the right to due consideration/administration of trust is property and that it could be put into the balance sheet.
The Husband argued that trustee is not obliged to distribute income/capital and may choose to allow income to accumulate. He argued that the trustee does not have a duty to distribute, it is a mere power.
The Trial Judge made the following findings:
- The High Court in Kennon & Spry resolved the debate that the right to due consideration and administration of a trust can be property. It is an equitable right;
- Each beneficiary has a right to compel the trustee to consider whether or not to make a distribution as well as right to proper administration of the trust.
- It is difficult to value those rights but that does not mean they are incapable of valuation;
- He referred to Harris & Dewell where it was held that property of a trust can only be treated as property under section 79 where a person has complete legal/de facto control over assets of the trusts and can appoint them to their benefit or to benefit a party to the marriage. I.e. where evidence establishes that the person/entity in whom the trust deed vests effective control is the ‘puppet’ of that party and does nothing without the party (puppet master) controlling/directing that person/entity. Control is not sufficient. What is required is control over a person/entity who by reason of powers contained in the trust deed can obtain a beneficial interest in the property of the trust.
- His Honour noted the case of Rigby & Kingston (No. 4) where it was held by Justice Carew that a mere right to consideration as an object of a benefaction and due administration is not in general law recognised as property. His Honour declined to follow this case to the extent that it makes comments in contradiction to the High Court about the metes & bounds of property. From His Honour’s perspective, Rigby ignored previous decisions before it e.g. Yanner v Eaton (No. 2) 1999, Telstra corporation & Cth, Hocking v D General.
- The Husband’s equitable choses in action of due consideration/administration under a discretionary trust being the B, F, E trust and G family trust are in law property within meaning of s4 and s79 given in each of the 4 trusts the husband retained power permissibly exercised over a certain thing, within the contemplation of Yanner v Eaton.
- The Husband holds a bundle of rights in that he enjoys a position of considerable influence in relation to the trusts both from the trust deed and his influential role within the family council and furthermore, historically the husband had received distributions of approximately $15,000,000.
- The Husband enjoys a legally endorsed concentration of power over things/resources.
In summary, the Trial Judge found that despite a lack of control in relation to the Husband’s potential benefit from the trust, his rights as beneficiary of the discretionary trusts were ‘property’ for the purposes of section 79 and such rights were capable of valuation and formed part of the property pool, given the Husband’s ongoing level of influence in relation to the trusts, arising from the trust deeds and his influential role within the group, and the husband’s significant past distributions.
What is the current status of the law ? Can a discretionary trust protect my assets or not?
It is still unknown whether Woodcock will be the subject of appeal. This case represents a significant shift in how the Court considers interests in a discretionary trust.
Notably, this case is in contrast to the decision in Rigby & Kingston (No. 4) which has introduced some uncertainty about how a party’s interest in a trust should be treated and whether the interest should be classified as an asset or a financial resource. For more information on the case of Rigby & Kingston (No.4) check out our article: What is just and equitable?
Rigby is authority for the fact that the right to due administration and consideration of a trust is at best a chose in action and has little practical value in the absence of control.
Woodcock is authority for the fact that the right to due administration and consideration of a trust may be considered property and such rights are capable of valuation and form part of the property pool.
The Family Law community awaits with baited breathe as to an appeal of this decision (should one be filed) to give clarity as to how a party’s interest in a trust should be treated so as to answer once and for all the question – can a discretionary trust protect my assets in a divorce?
If the interest in a trust has significant value and subject to what else is in the property pool, this shift to including the interest in the trust in the pool as an asset, could significantly impact the division of the other non-trust assets in a way that may result in the party that is not a beneficiary of the trust, receiving a much greater share of the non-trust assets.
Still unsure – can a discretionary trust protect my assets in a divorce?
If you have separated and are wanting advice in relation to whether your/your ex partner’s interest in a discretionary trust forms part of the property pool, contact us to book a reduced rate consultation with one of our experienced Brisbane Family Lawyers and we will provide you with tailored advice having regard to the specific circumstances of your case.
For more information on this topic, check out the following articles:
- How trusts are dealt with in a property settlement
- The Alter Ego Principle – when a spouse uses a trust to hide assets of the parties, will it be considered property?
- Can a discretionary trust protect my assets in a divorce?
- Difference between property and financial resources (Trust, alter ego & puppet master cases)
- Why you should formalise your property settlement
- When can future inheritances be taken into account
- How do I apply for property and financial orders