It is quite common to have a misunderstanding about Discretionary and Family Trusts documents and assume that they are essentially the same and therefore the cheaper the better.
This could be dangerous and sadly often expensive as it costs significantly more to seek to patch up documentation later that does not achieve the intentions of the maker at the time it was made.
Here are some matters to look out for:
1. The Trustees cannot be the same people as the Default Beneficiaries as they are then essentially declaring that they hold property on trust for themselves (which is not a trust);
2. The Principal / Appointor essentially controls the trust as he/she has power to hire and fire the trustee. Issues of the succession of the control of this power on death, bankruptcy or incapacity must be addressed for operation, succession and asset protection reasons;
3. Powers of amendment of the Deed need to be sufficiently broad (particularly when the Principal / Appointor clause is to be amended) especially in light of the recent decision of Jenkins v Ellett [2007] QSC 154;
4. Mechanisms for the adding of additional discretionary beneficiaries need to be administratively simple rather than a Deed of Amendment being necessary;
5. A broad class of discretionary beneficiaries to facilitate ease of giving to churches and missions is also included in our Deed (if desired) without the need for complying with each time the additional beneficiary appointment mechanisms in the Trust Deed;
6. Careful consideration needs to be given to who are Default Beneficiaries as they usually cannot be changed without triggering a resettlement of the trust on which transfer (stamp) duty and Capital Gains tax will be payable;
7. Careful consideration needs to be given to the succession of the control of the trust and its assets to the next generation as trust assets are not the personal assets of a Will maker.
If you unsure as to how a discretionary family Trust will work, it is advisable to see us before putting a discretionary family Trust in place to ensure that the documentation is right from the outset.
Family Trust as a matrimonial asset
The law regarding trusts in family law matters continues to be developed by the Family Law Courts, particularly following the seminal decision of Kennon v Spry [2008] HCA 56 which represented the first consideration by the High Court of the treatment of trust property pursuant to Section 79 of the Family Law Act 1975 in over 20 years.
We look at family law trusts and the Courts treatment of them as in a most recent case which further addressed the treatment of trust property: Harris & Harris [2011] FamCAFC 245.
In this case the Wife made a claim for the assets of a family trust to be regarded as “matrimonial assets” before Family Court proceedings. She claimed that a family trust which a business had operated through for several decades was the Husband’s “alter-ego”.
The Family Court initially agreed with the Wife’s position.
The Husband subsequently appealed that decision to the Full Court of the Family Court.
It was undisputed that the Husband had managed the business for a long period of time (initially with his Father, and then in his own right).
It was also undisputed that the Husband had caused the trust to make various distributions over time, however as a consequence of:
- The Husband simply being a beneficiary of the trust;
- The Husband not being the appointor of the trust;
- The Husband not holding any position in the current trustee company; and
- The Wife being unable to bring any evidence before the Court that there was indirect control and that the Husband’s mother (who was the director of the trustee company) was simply the Husband’s “puppet.”
The Full Court found that the assets of the trust could not be regarded as “matrimonial assets.”
In forming this view, the Full Court stated, “On the evidence to which we have referred, the best that we could do would be to determine that the Trust is a very significant financial resource for the husband.”
Practical considerations
This decision is the latest in a line of case authorities dealing with the treatment of trusts in family law. In particular, this decision has:
- defined the concept of “indirect control” as a “puppet” situation; and
- established that in order to prove that there is indirect control of a trust, supporting evidence must be brought before a Court to properly support a “puppet” scenario, rather than merely relying on the Court to consider the history of trust distributions alone.
Have a question about Discretionary Family Trusts?
If you have separated and you have made or intend to make any changes to a trust and/or a trustee company (which you have or your ex-partner has an interest in, even if only as a beneficiary), please contact our office for a free initial consultation with one of our family lawyers.