This article delves into Trusts and how they are dealt with in a property settlement. Learn how to determine whether a Trust is an asset or a financial resource.
Trusts and Property Settlement
If parties hold assets in a trust, issues and questions always arise with respect to how the Trust will be dealt with in a Property Settlement.
It may be decided that the assets held in the Trust are to be treated as property to be divided between the parties. If neither party has control over the Trust and they are only beneficiaries receiving distributions from the Trust, it may be decided that the Trust is treated as a financial resource rather than an asset.
There is sometimes a misconception that because assets are held in a Trust, they are to be excluded from a property settlement. This may or may not be the case depending on each individual situation and the structure of the Trust.
How are Trust treated in a property settlement?
Deciding on how a Trust is dealt with in a property settlement comes down to two questions, is the Trust an asset or a financial resource.
If one or both parties have control over the Trust, and the lawful right to benefit from the income/assets of the trust, the likely outcome will be that the Trust is considered as an asset and will form part of the property pool to be divided between the parties.
Control of a trust is insufficient for the trust to be declared ‘property’ of the parties, for family law purposes, and included in the pool as an asset to be distributed between the parties. For a trust to be the property of the party who controls it, what is required is control over a person or entity where by reason of the powers contained in the trust deed, they can obtain or affect the obtaining of a beneficial interest in the property of the trust. In other words, the Trust must be the alter ego/puppet of the person used by him/her for his sole benefit. See our article on the Alter Ego principle as it relates to trusts for more information on this topic.
There are other factors that will come into play, such as when a party gained control of the Trust and who contributed to the Trust and how it came to own the assets it owns.
If one or both parties have no control over the Trust and are only a beneficiary of the Trust, it is more likely that the Trust and its assets will not be included in the property pool and that the Trust is to be treated as a financial resource.
Where a trust is controlled by one party, but that person does not have the lawful right to benefit from the income/assets of the trust, by reason of the powers of the trust deed the trust will not be an asset but a financial resource. The exception to this would be where there was sufficient evidence produced to satisfy the Court that the directors of the company that owned the trust assets, did everything that the person controlling the trust told them to do (i.e. the company has no existence separate from that of the person controlling the trust i.e. the trust is their alter ego, used by them for their sole benefit).
When only one of the parties are receiving distributions from the Trust, if it is decided that the Trust is a financial resource, the other party not receiving distributions from the Trust is likely to receive an adjustment in their favor of the property pool, on account of their greater future needs, namely the disparity in income/financial resources between the parties.
How do the courts consider Trusts
The Courts will consider a number of factors when considering if a Trust should be considered as part of a property settlement, including as follows:
- The terms of the Trust;
- Who is the trustee;
- If the trustee is a company, who controls the trustee company;
- Who are the beneficiaries of the Trust;
- Who receives distributions from the Trust;
- Who is the appointee of the Trust;
- How did the Trust acquire the assets
- What is the relationship between all of the parties to the Trust;
- How much income is distributed from the Trust;
- How has the income been distributed since separation.
Who is controlling the Trust?
When the Court determines if a Trust is an asset of a relationship, they will look at who ultimately controls of the Trust.
The Trust deed will disclose:
- Who is the trustee – which may be one of the parties to the relationship or a third party. It may be the case that a company is the trustee in which case the Court will need to delve in to the structure of the trustee company & who the Directors and shareholders are;
- The beneficiaries of the Trust – this may be the parties or other family members;
- The appointor/principal of the Trust -this person has the power to remove and appoint the trustee.
It is important to also consider who is receiving income from the Trust by reviewing the current and historic financial statements of the Trust. This will shed light on who is currently receiving income from the trust and who has received income in the past.
It is not unusual for a party to try and hide their control in a trust by having a third party listed as the trustee. If this becomes evident, arguments may arise that the Trust is in fact an asset of the relationship and you will need to provide evidence that the third party listed as a trustee is simply a paper exercise and they are not in fact the party controlling the trust.
If you would like more information on similar topics, check out the following information and articles:
- Why you should formalise your property settlement
- When can future inheritances be taken into account
- How do I apply for property and financial orders
If you would like to know more information about property settlement, contact us to book in a reduced rate initial consultation with one of our experienced Brisbane family lawyers.