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Family Law Alert: Clarification on the treatment of discretionary trusts in property settlements - 8 Feb 2012

A recent Full Family Court decision has shed some light on the treatment of discretionary trusts in property settlements, clarifying that the way in which the trust has been controlled and its history of distributions will impact on the division of matrimonial assets.

In Harris and Harris [2011], the Full Family Court overturned a decision by Bell J, who had held that the property of a discretionary family trust should be included in the matrimonial assets of separating spouses. This is significant given the well documented case of Kennon v Spry, where the High Court held that property of a discretionary trust can be defined as property if the spouses are not the appointors or the trustees of the trust, but instead beneficiaries, if it can be shown that a spouse has 'indirect' control of the trust.

Here, partner Geoff Wilson and solicitor Helen Davison explain how Harris and Harris could impact on property settlements in Australia.

Key points

  • Since Kennon v Spry, it may be that courts are more likely to consider that the property of a discretionary trust is also the property of the parties or a particular spouse, while recognising the difficulty in valuing the interest. However, where it is claimed that one party indirectly controls the trust through a puppet trustee and/or appointor, this could be more difficult to establish - as Harris and Harris shows.
  • This case is of particular relevance to those who have a family trust which was established by a parent, or are a beneficiary of a trust which is controlled by a family member or friend.

The Harris Family Trust's beneficiaries and distributions

The Harris Family Trust was established by the husband's father. After the husband's father's death, the husband's mother became the appointor of the trust. There had been various trustees of the trust since its establishment, but at the time of separation, it was a company whose directors and shareholders were the husband's mother, the husband's son from a previous marriage and a long standing friend of the husband's.

The major asset of the trust was a business worth around $1.5 million, which was run jointly by the husband and wife.

The principal beneficiaries were the husband's parents and their children (the husband and his sister). During the marriage, the trust made distributions to the husband's mother, the husband, the wife and a company that the husband admitted was his alter ego, even though the wife and the husband's company were not beneficiaries and were therefore not entitled to distributions. The distributions to the wife stopped following their separation.

In the first instance, Bell J stated that the trust's assets ought to be included in the matrimonial assets on the basis that the husband 'was the trust', evidenced by the distributions made to the husband's company, and the fact that the distributions to the wife stopped after separation.

The appeal of Bell J's decision

The husband appealed this decision to the Full Family Court. The Court considered statements made by French CJ in Kennon v Spry that in order for property of a discretionary trust to be considered the property of a beneficiary, there must be 'direct' or 'indirect' control of the trust by that beneficiary. The Court assumed that the reference to indirect control by a beneficiary referred to a 'puppet situation'. It held that the husband did not directly control the trust, as he was not the appointor or trustee of the trust.

The wife argued that there was indirect control and that the husband's mother was a puppet of the husband. However, the Court held that because the wife did not point to any evidence to support this argument, and in particular did not call the husband's mother to give evidence, this finding could not be made even though it could indeed be true. The Court held that on the evidence, it could only determine that the trust was a very significant financial resource for the husband, and ordered that there be a retrial.

This case is significant because the Full Court has defined the concept of indirect control, as mentioned by French CJ in Kennon v Spry, as a puppet situation. It also establishes that in order to prove that there is indirect control of a trust, evidence must be provided to support a 'puppet' scenario, rather than relying on the Court to consider the history of trust distributions.

Those going through a family law settlement should receive advice from a family law solicitor regarding the treatment of any trusts that they or their partner have an interest in, even if only as a beneficiary, as it may be relevant to their property settlement. It is also important to obtain and keep copies of all trust deeds and variation deeds.

For more information about property settlements, trusts and asset protection, please contact HopgoodGanim.