Tips and Traps – Protection of assets in a Family Trust – Separation

It is not uncommon for people who are married or in de facto relationships, including same sex relationship to create trust structures or corporate structures, with the aim of protecting their assets from any liability claims or financial risk.

The point of creating separate business structures, is to quarantine the business owner from the business risk and as such accountants and financial advisors will encourage people to create businesses which are separate to them as individuals. Business advisors will commonly advise that the business owner at risk transfer assets into the name of the non-risk partner or spouse or if the aim is to reduce the payment of tax that the family be involved in the establishment of discretionary trusts that can allocate income to the beneficiaries.

It is the creation of Family (Discretionary Trusts) for either protecting business assets or reducing the burden of payment of tax by the individual, that creates difficulties if people separate.

The Family Law Court is empowered to go behind the trust structure and unpack it to find out who in fact and practically makes the decisions, and controls it. The leading High Court Case of Kennon v Spry [2008] established that where the trust is controlled by a party to the marriage or de facto relationship, then the trust will be considered as property and will be included in the pool of assets or will be regarded as a financial resource.

Tips and Traps for protecting assets in Family (Discretionary Trust) in separation or divorce

1. If you have established a Discretionary Trust, then make sure you are not the sole appointer of the trust, it is better that there is a joint appointment;

2. Ensure that you are not the person who has direct control of the trust or that you and other person is the trustee;

3. Ensure that you do not have  indirect control of the trust, that is, do not appoint a trustee whom you effectively control, because in those circumstances if it established that you are in fact making the decision and controlling the trust, then protection is not offered to you;

4. The difficulty of course with not being the appointer, trustee/controller is that you do not have the power to control the trust and you transfer this power to another individual or corporate trustee;

5. The above scenarios usually arise from trusts that have been established by parents and the original control was in their hands. Cases that can prove that this continues in the present circumstances will be far more successful, than those who cannot prove this;
6. If your marriage or de facto relationship is failing and you want to create trust structure to move matrimonial assets around, such transaction will be scrutinised carefully by the court and it may be that they will be set aside if the purpose of the transaction was to defeat the interests or claim of the former spouse or partner.

Finally, even if the assets in the trust are not considered as property, it may be that they are characterised as a financial resource and this will be taken into account in any property adjustments.

The information provided here, does not constitute legal advice and is simply to provide information to the general community. We are able to assist you in your specific and individual needs. Please contact us.