Family Trust v Family Court

As tax lawyers, Legal Consolidated structures clients’ affairs to legally reduce tax burdens. We are also asked to:

1. consider asset protection if you or your business goes bankrupt or insolvent
2. draft 3-Generation Testamentary Trust Wills to reduce the four Australian death duties and the 32% tax on super
3. put Divorce Protection Trusts in Wills
4. put Bankruptcy Trusts in Wills
5. Bankruptcy when divorcing (we are not family lawyers, we help family lawyers)
   
6. stop the Family Court taking assets if you are a break-up

Family Court v Australian Family Trust

Consider the omnipotent, omniscient and omnipresent Family Court. For indeed no Court in Australia has more power. It is free to do what ‘feels right’ with few rules of engagement.

A family law property settlement begins with the accountant identifying the assets, liabilities and financial resources of you and your ex-partner. This is easy for a family home, superannuation and cash. It makes no difference if the family home is in her name. It makes no difference if the shares are in his name. Ownership is not relevant. All assets are ‘pooled’ together.

But what about assets in a Family Trust?

Family Court considers a Family Trust matrimonial property

The Family Court identifies all property interests. This is for both of you. Often a Family Trust is property of the marriage. Especially if:

• one of you is the Appointor (or you ‘control’ the appointor) in a Family Trust.
• one of you is a trustee of a Family Trust, Unit Trust or Bare Trust
• one of you is a director of a corporate trustee
• one of you gave money to the family trust
• one of you lent money to the family trust
• your mum and dad regularly distribute income from the family trust to you (and it is not yet forgiven)
• there are Unpaid Present Entitlements (UPEs and loans) owing from the Family Trust to you
• you forgive an Unpaid Present Entitlement

The Court even considers your dead father’s estate. (If your dead Dad put a Divorce Protection Trust in his Will then his assets are  protected from your family court proceedings.)

The 4 business structures the family court attacks

The issue is complicated further for the financial planner and accountant. This is when their clients have these 4 types of investment and business structures:

1. Company – trading in its own right, or as trustee of Family Trust
2. Unit Trust – or more usually a Unit Trust with a corporate trustee
3. Partnership
4. Service Trust Agreement

But Australia’s favourite business structure is the Family Trust. In the eyes of the Family Court a Family Trust is also called a:

• Discretionary Trusts; or
• Family Discretionary Trust.

3. Morton v Morton –
Family Trust NOT in the pool of matrimonial assets

In Morton v Morton [2012] FamCA 30 the brother is a co-Appointor. Therefore, the Family Court did not include the assets in the Family Trust in the pool of matrimonial assets.

So how you structure the control of your Family Trust is important. It may stop the Family Court from considering them as part of the matrimonial property on a relationship breakdown.

Wife argues: Husband and his brother ‘control’ the Trust together

1. Mr and Mrs Morton from Sydney have been married for 10 years.
2. There were no children of the marriage.
3. Mr Morton is a beneficiary of a discretionary trust: the Morton Trust.
4. Beneficiaries: Mr Morton, his brother, parents, children, distant relatives, charities and companies.
5. Trustee: J Pty Ltd. The two ordinary shares are respectively owned by each brother
6. Corporate trustee directors: yes, you guessed it, the two brothers.
7. Appointors: the two brothers.
8. Bucket Company: T Pty Ltd, which was owned by the Trust.

The wife claims that her husband and his brother each hold a 50% share in the Trust assets and the Bucket Company. Accordingly, she wants 50% of the trust assets to be added to his pool of assets. This is for the division under the property settlement.

Husband argues to the Family Court: neither of us controls the Family Court

The husband argues:

1. that as both he and his brother act in the same capacity as a director, neither of them the trust.
2. As their rights were equal neither brother had effective ‘control’.
3. The brothers are joint Appointors with the power to remove and appoint a trustee – but only together.

The Court declares: trust assets NOT matrimonial property

The court noted:

1. a “warm and loving relationship” between the brothers.
2. an inter-mixing of funds – not only their own personal funds but funds from other entities.
3. insufficient evidence that the Husband had sufficient control over the Trust and Bucket Co to simply treat those assets as his.
4. The Trust assets and Unpaid President Entitlements accruing in the Bucket Company are excluded from his asset pool.
5. Of course, the Trust was still considered a “financial resource”.

4. Beeson v Spence [2007] FamCA 200

A different result is reached in Beeson v Spence [2007] FamCA 200. But the same ‘control test’ is used in Morton v Morton. In Beeson, the court “looked through” the family trust. But only because the wife:

• had control of the assets; and
• determined where the income and capital are distributed.

Beeson v Spence shows how exposed the assets of a family trust are.

The wife and husband met in 1996. They married in 1997. They had two children. They divorced in 2004. In 2001 the wife started a trust. She called it the “S Trust”.

How the Beeson v Spence trust is set up:

• Trustee
  The wife’s father and her solicitor are the trustees. This is a waste of time, as the controller of the family trust is the Appointor.
• Appointor
  The wife held the God position of Appointor.
• Default Beneficiaries
  The specified beneficiaries are the two children of the marriage.
• General Beneficiaries
  But the wife (and her husband for that matter) are within the class of general beneficiaries.

In 2003 the husband’s financial position is precarious. And with financial despair often comes a separation. And this is the case here. They break up. Quickly the wife does a Deed of Variation:

• She removes herself and her estranged husband as general beneficiaries.
  This is always a waste of time. It never works against the family court or bankruptcy court.
  And besides, they are still beneficiaries because the ‘children’s parents’ are beneficiaries.
• More importantly, she resigns from the god position of Appointor. Her sister is made the Appointor.

What is argued in Beeson v Spence:

• Husband – the trust is established for the benefit of the family as a whole. And not just the children.
• Wife – the trust is established for the children. And therefore the assets are not property of the marriage. And besides, I no longer hold any ‘power’ in the Family Trust. I am no longer the Appointor.

The Court in Beeson v Spence decided:

• The court ignores the change of Appointor.
• The wife retains ‘defacto’ control of the trust.
• Therefore, the family trust assets are the property of the marriage.

5. Balken v Vyner

Balken v Vyner [2020] FamCA 955 is another example of Family Court interference to your and your parent’s family trust.

Facts of Balken v Vyner

The couple are previously married. They then lived together as a de facto for a few years. They then marry.

The marriage ends after 6 years.

Most of their assets are in a Family Trust. The family trust assets are from the husband’s dad who died just before the couple married.

The wife claims the Family Trust assets are $63m. The husband, of course, argues a lesser figure – $31m.

The Family Court asks the ‘level of control’ the husband has over the family trust

What level of control does the husband have over the family trust? With control, the family court is more likely to apportion family trust assets to the wife.

But the husband is not the sole Appointor nor the sole director or shareholder of the trustee companies

The husband’s father left a letter. It set out dead Dad’s hopes and wishes for the family trust. It is addressed to the directors and shareholders of the Family Trust trustee company.

Interestingly, there are independent directors of the trustee companies. These persons are also Appointors. The directors hold regular meetings. The directors exercise their discretion on paying trust income and capital. They fetter their discretion by following dead Dad’s written wishes. It looks like they intended to keep doing so.

The Court accepted that the directors had always acted and are likely to continue to follow dead Dad’s written wishes.

Based on the dead Dad’s wishes the husband gets a present entitlement to 40% of the income and 40% of the capital. The wife claims he is entitled to 100%. She is greedy and wrong.

Family Court considers Family Trust’s letter of wishes

The letter of wishes states:

“Income

After the death of the father of the husband, the net income of the Trusts for each accounting period shall be:

Distributed and paid as to:

1. 40% to the husband (or as he may direct)

2. 20% to the father’s daughter (or as she may direct); and

Distributed and set aside to:

3. 30% to the children of the father’s daughter as tenants-in-common in equal shares; and

4. 10% to the husband’s children as tenants-in-common in equal shares

Until each of father’s grandchildren attain the age of 24 years, sufficient funds shall be made available from their respective entitlements above to pay for their education expenses.

Capital

After the death of the father and upon vesting of the Trusts, the balance of the capital, assets, income and other entitlements arising in respect of the Trusts, if any, after taking into account all liabilities of the Trusts will be held and applied as to:

(i) 40% to the husband (or as he may direct);

(ii) 20% to the father’s daughter (or as she may direct);

(iii) 30% to the children of the father’s daughter as tenants in common in equal shares; and

(iv) 10% to the husband’s children as tenants in common in equal shares.

Notwithstanding any of the provisions in this Letter of Wishes, the Trustees may at any time make funds available to any of the beneficiaries named in this Letter of Wishes either by way of distribution of net income or advance of capital or loan to the relevant beneficiary if, in the majority opinion of the directors of the Trustees, the relevant beneficiary has reasonable cause to require assistance.

 

Any such payment shall be treated as a payment on account of (and not in addition to) the beneficiary’s entitlements under the above paragraphs (as the case may require).

 

In the event that any of the beneficiaries named in this Letter of Wishes predecease the father or survive the father but do not reach their full entitlements hereunder leaving a child or children then such of those children as shall attain the age of 21 years (and if more than one as tenants-in-common in equal shares) will take the entitlement which his or her or their parent would otherwise have taken.

 

This letter merely reflects the wishes of the father. It does not seek to impose any legal or binding obligations upon the Trustees except insofar as it is within the discretion of the Trustees to comply with such wishes and insofar as the Trustees as prepared to do so.

 

The Letter of Wishes is to be taken into account by all of the shareholders and directors from time to time of the Trustees and any successors in the offices of trustees or of Appointors and Guardians of the Trusts, in the administration of the Trusts and the exercise of the Trustees’ discretions in applying any income or capital of the Trusts after the death of the father.

 

If at any time any difference of opinion of exists in relation to the commission or omission or any act or any decisions, determination or consent to be made or given by the Executors under this Letter of Wishes, then unless otherwise indicated the majority opinion of the Executor shall prevail.”

As to fettering a trustee discretion. This is often a naughty thing to do. See Dagenmont Pty Ltd v Lugton [2007] QSC 272. There is a general prohibition on a trustee fettering his discretion. The “trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power”.

Family Court finds that the husband does not control the Family Trust

The Court confirms that the husband does not control the trusts. Further, the husband cannot use the family trust assets for his own purposes.

At the regular meetings of the directors, the husband reported to those meetings. The husband is required to account to the other trustees. The husband had to justify his actions.

Family Court finds the husband is responsible for day-to-day management of the family trust

Sure the husband is responsible for the day-to-day management. However, an independent director reviews the accounts. This consultant to the group queries the husband about transactions. The husband is required to justify his actions to the other directors. One of the directors is a professional.

At times the husband got more than 40%. But under the terms of the letter of wishes, such amounts are debited against his loan account. He is either required to repay those amounts or pay interest on the loan accounts.

The matrimonial asset pool is held to be $35m. This is reduced because of the dead Dad’s letter of wishes and the directors of the corporate trustees following those wishes.

The final allocation 75% is to the husband. And 25% in favour of the wife.

Conclusion of Balken v Vyner

Ultimately the decision in Balken v Vyner [2020] FamCA 955 provides a further reminder that appropriately structured and administered trusts achieve asset protection objectives. This is from a family law perspective.

6. MacDowell v Williams –
Can Family Court look at Mum’s Will?

Want to look at the ex-spouse’s Mum’s Will? Consider MacDowell v William [2012] FamCA 479. In that case, the Court said no. The disclosure of the tax effective Wills and trust structures of the wife’s parents is private.

The wife and the husband married in 2004. They separated in 2010. The husband tells the Family Court he wants to see his parents-in-law’s Wills and Family Trust. He claims the documents are relevant to the marital property pool. He needs the information to work out the financial resources available to his wife.

The wife’s parents objected. They argued the documents:

• are personal to them
• are not relevant as they maintained testamentary capacity and can make new Wills and amend the Family Trust
• are not relevant as neither their daughter nor her ex-husband had any proprietary interest in the Wills and Family Trust

The Family Court agreed. Trying to look at the Wills was just a ‘fishing expedition’ by the husband:

Parents-in-law can change their Wills

However, the situation may be different if the parents lose mental capacity. While they have mental capacity Mum and Dad can alter their Wills and the Appointor in their Family Trust. But both parents are alive, in good health and possess full testamentary capacity.

The daughter has no control over her parent’s Family Trust

Further, the Family Court agreed that the daughter had no control over her parent’s family trust or the corporate trustee of the family trust.

(Compare this to Keach v Keach [2011] FamCA 192 where at paras 172.21 -172.22 the wife failed to prove to Strickland J that a family trust established and controlled by the husband’s father to “keep the assets in the ‘family’ and to ensure that his four children benefited through the trusts”, was a sham to conceal the husband’s true ownership of trust assets.)

What about previous Family Trust distributions to the daughter? Is that a ‘pattern of distribution’?

The Family Court looked at Family Trust distributions to the daughter. Also, as is usually the case, the daughter is a default beneficiary. But, the daughter only got 28,000 over ten years. Further, other beneficiaries also got distributions. The Court said the Family Trust is clearly discretionary. The daughter had no express or implied rights.

The husband argued Kennon v Spry [2008] HCA 56. Using that case he submits that the wife’s interest in the trust is ‘property’. This is based on her ‘right to consideration’ and ‘due administration’. This is a pretty weak argument as most family trusts have over 400,000 beneficiaries. And all of them have these very minimal ‘rights’, if you can call them rights at all.

Further, in Spry’s case, Dr Spry had put the wealth into the Family Trusts, to begin with, and probably had total de facto control of the family trust as well.

7. Rigby v Kingston (No 4) [2021]

Consider Rigby v Kingston (No 4) [2021] FamCA 501:

• Dad is rich. Dad dies.
• In Dad’s Will control of the testamentary trust is with his 3 adult children.
• Sadly, it is an old-fashioned testamentary trust and the same trust is controlled by the 3 adult children together.
• The testamentary trust assets are locked away until the youngest turns 60 – this is silly for tax planning, transfer (stamp) and asset protection.
• The executor/trustees are the 3 adult children. A daughter and two sons.
• The trustee of the testamentary trust has the discretion to make interim capital distributions. This is to any beneficiary before the vesting date. So there may be nothing left in the trust by the time the youngest turns 60!
• Usually, the trustees must act unanimously. Strangely the will set out that decisions of the trustees (being the 3 adult children) are by majority. Dad puts in the Will:

“desire that the benefit of my estate should pass to my children and/or grandchildren and that it is my express desire that no entitlement should accrue to any present or future spouse of my children or grandchildren particularly if such entitlement were to disadvantage my children or grandchildren or the continuity of any of the businesses which are conducted by the group of companies controlled by me”.

• One of the adult children, the daughter, after over 15 years of marriage, suffers a relationship breakdown.
• The ‘prenup’, as usual, does not work.
• The wife contributed $10 million to the relationship. The layabout husband contributed less than $1.2 million:
  • The wife returned to work after each child in the relationship.
  • The husband is unemployed or unemployable. Yet still do not contribute much with raising their children.
• The husband wants assets in the various trusts the wife was in joint control.
• The husband argues the value of assets in the trusts is $100 million. The wife argues $50 million.
• The combined legal fees at the date of the trial (including those of the wife’s 2 brothers who were co-trustees of many trusts with the wife) were $2,301,196 and the wife had to sell her main personal asset (a home) to fund the legal costs.

Decision of Rigby v Kingston

The husband loses. The Trust’s assets are not the property of the marriage. But why:

1. A Beneficiary of a Family Trust is of no value

The answer is dependent upon the facts and circumstances of each particular case. This includes the terms of the trust deed. A long marriage is not of itself determinative. See In the Marriage of Goodwin and Goodwin Alpe [1990] FamCA 147.

A beneficiary of a discretionary trust does not control the trustee directly or indirectly. A beneficiary merely has the lowly right to due consideration and the due administration of the trust. That has generally little ‘value’. See Spry above.

The right of due administration is property (chose in action) but it has no value. See Gartside v Inland Revenue Commissioners [1967] UKHL 6).

2. A Trustee in a Family Trust also has no value

The only property that a trustee has in the assets of a discretionary trust is the bare legal title. This also has no value.

Being a trustee or potential beneficiary in a discretionary trust has no practical value. This is for a matrimonial property adjustment. They are not an interest in a trust asset. See Karllson v Karllson [2014] FamCA 571.

Compare this to Spry. In Spry, there is control, legal title, powers of distribution and the source of the trust fund.  In Rigby v Kingston there is none of these:

• the wife did not control the trust. The legal title is:
  • with her and her two brothers; or
  • by corporate trustees (where the wife was one of 3 directors)
• the wife alone does not make decisions to distribute trust funds to herself.
• the source of the funds in the testamentary trust is from dead Dad. Dead Dad is a stranger to the marriage.
• The trust was not from the efforts of the wife or the husband.

The wife’s rights in the discretionary trusts are of no worth. There is no control. And, therefore, is not a proprietary interest in the assets of the trusts.

Further, all of the testamentary trust assets could be distributed by the wife’s brothers to beneficiaries other than the wife. This is before the vesting date. Any such decision is entirely consistent with the stated purpose in Dad’s Will. And note Dad is a stranger to the marriage. Dad did not want a spouse of his children to get one cent.

Discretionary powers in Rigby v Kingston

In light of the above conclusions, the husband also asked the Court to instead exercise its powers to access assets of the trusts based on the powers under s 79 of the Family Law Act to “make such order as it considers appropriate” as long as the court “‘is satisfied in all the circumstances, it is just and equitable to” do so.

After a careful analysis of the issues, the Court also rejected this aspect of the husband’s claim.  The Court confirmed that if the husband was unable to maintain himself adequately, then he had the right to claim spousal maintenance from the wife.

Rigby v Kingston – what does it teach us

While properly crafted trusts (including testamentary trusts) can withstand attack in family law proceedings, tax issues must still be considered.

In this case, the tax (and presumably stamp duty) consequences of a mandated early vesting date do not appear to have been considered. Cleave to the bosom of your accountant for help with taxation and (stamp) duty issues.

8. Schweitzer v Schweitzer [2012] FamCA 445

Do I always have to show trust documents to the Family Court?

“Tell the Family Court I want to see that lying cheating husband’s family trust deeds” barks the ex-wife seeing her ex-husband’s new girlfriend for the first time.

In Schweitzer v Schweitzer [2012] FamCA 445 the wife demands to see the trust documents. How else can the court see what needs to come to her?

The husband’s two Family Trusts, for asset protection, have corporate trustees. But the husband is not the sole director:

• Family Trust one: the directors are the husband and his dad
• Family Trust two: the directors are the husband and his mum and dad

Cleverly, the husband is not a shareholder of either of the trustee companies. But, of course, he is a beneficiary of both Family Trusts.

And to top, it off, the Appointor (controller) of both Family Trusts is the husband’s Dad.

The wife demands that the family court orders the husband to provide the Family Trust’s financial statements, tax returns, bank statements, trust deed, variations of the Family Trust Deed and the annual distribution minutes.

The wife fails.

The Family Court says no:

• This is because the husband has a fiduciary obligation. This is to protect the corporate trustee documents. This Family Trust is not some fiefdom under the control of the husband. The god-like figure is the Appointor. And the Appointor is NOT the husband. It is his dad.
• The court holds that the documents and Deeds are not under the husband’s ‘control‘. This is under the Family Court rules. (The position may be different if you were fighting this out with the ATO or state stamp duty office.)
• As we all know, the Trustee of the Family Trust (whether a human or a company) is just a squashed cabbage leaf. It is the Appointor that bosses the Trustee around. Therefore, the directors of corporate ‘servant’ trustees have no right to ‘possession’ or ‘control’. Corporate trustees (and their directors) only ‘access’ trust documents to fulfil the Trustee’s duty. This is to look after the Family Trust.

Questions never asked in Schweitzer v Schweitzer

Why did not the wife join the husband’s mum and dad in the Family Court proceedings? I would have tried this. Possibly the Family Court would not do so with this set of facts. There needs to be some nexus between the husband’s mum and dad and the matrimonial assets, perhaps?

Another question is where did the Family Trust money come from? Did the husband put in money? Did the husband put in hard work and toil to the Family Trust?

9. Barrett v Winnie (2022)

Family Trust property is excluded from the asset pool. Despite her role as appointor, the wife never had control of the trust and third parties contributed to the Family trust property

The Family Court of Australia agrees to exclude family trust assets from the property pool. See Barrett v Winnie [2022] FedCFamC1A 99, 1 July 2022.

The dispute is over the assets of a discretionary trust. The wife is a beneficiary. The wife had previously been the appointor of this trust. However, her appointment is removed by a deed signed after the separation.

Before their separation, the parties’ only child lived with the wife. There is an informal settlement where:

• the husband demanded and received the wife’s interest in a jointly owned property; and
• the wife is removed as Appointor to the Winnie Family Trust.

As to the Winnie Family Trust:

• It is a family discretionary trust;
• It is established during the parties’ marriage;
• The Wife is always one of two or more directors of the corporate trustee company;
• The Wife had always had a 50% shareholding in the corporate trustee company (the other 50% is held by her adult son from a previous relationship);
• The Wife is the appointor of the trust until 3 years after her separation from the Husband when she is replaced by the other director of the trustee company;
• The Wife fell within the class of beneficiaries in her capacity as a parent of another child from a previous relationship; and
• The Husband had fallen within the class of beneficiaries until he ceased being the Wife’s spouse.

However, the primary judge still excludes the family trust assets from the property pool.

This is because of:

• the long delay before the bringing of proceedings by the husband, and
• an informal property settlement some 15 years earlier.

The primary judge found it is not just and equitable to make property settlement orders that included the assets in the Family Trust.

The husband is angry. He appeals. He argues that the primary judge erred in failing to make an order under section 106B Family Law Act 1975. This is to set aside the Deed of Family Trust to update the Appointor. This is the Deed that replaced the wife as Appointor.

The husband’s appeal is dismissed.

The court finds no error in the decision. This is to exclude the family trust assets from the pool. The case is distinguished from the above Kennon v Spry (2008) [2008] HCA 56. Even if the wife remained Appointor she did not have the power of distribution over, or legal title to, the trust assets.

This is further evidence as to why Divorce Protection Trusts in Wills work so well:

“In declining to make the order pursuant to s106B of the Act, the primary judge found … that the [husband] made no contribution of any significance to the property of the Winnie Family Trust and overwhelmingly, contributions had been made by the [wife] and, significantly, third parties to the marriage’.

This factual finding distinguishes the case from Kennon v Spry [2008] HCA 56. [Why is Spry different?] In Spry, the court finds that both parties to the marriage contributed to the property of the family trust throughout the course of their marriage …”

10. Gutteridge v Commissioner of Taxation (2013) – ‘you have got to keep control’

This is a case against the ATO. Not the Family Court.: Gutteridge v Commissioner of Taxation [2013] AATA 947

However, the case shows how ‘control’ of a Family Trust is viewed by the courts.

The Family Trust wanted a capital gains tax small business concession. The Family Trust is selling some assets. And wants to pay a lower rate of tax. But this depends on who ‘controls’ the Family Trust.

In a classic asset protection play, the Family Trust has a Corporate trustee. The daughter, Miss McKenzie is both the only director and shareholder of that Corporate trustee.

The controller of the Family Trust is apparently Ms McKenzie’s father: Mr Gutteridge.

But Mr Gutteridge is neither the Trustee nor the Appointor. And, therefore, on the face of it, he misses out on the lower tax rate. This is for the assets his Family Trust is selling.

But, the Appointor (called a Principal in this Family Trust deed) is a professional adviser: Mr Coffey.

Mr Coffey tells the court that:

• he always follows the instructions of Miss McKenzie’s father, Mr Gutteridge.
• if Mr Gutteridge told him to do so, he would sack the Corporate trustee. (In Family Trusts The Appointor can remove Trustees at any time.)
• he ignores any directions from Miss McKenzie if they conflict with the direction of her father.

Even after hearing this the ATO still refused to allow the small business concession. This is because it believes that the daughter controls the Family Trust.

Thankfully, as is often the case in the Australian courts, the court held that the Discretionary Trust ultimately acted according to the directions of Mr Gutteridge. Therefore, the daughter did not control the Family Trust.

Mr Gutteridge’s Family Trust gets the small business concession.

So you can see, working out ‘control’ in a Family Trust depends a lot on the facts.

11. Thorne v Kennedy

In Thorne v Kennedy [2017] HCA 49, the High Court held that where a party has a beneficial entitlement to trust income, it is more likely that the trust assets will be considered as part of the overall Family Law property pool available for division.

12. Parker v Parker [2019] FamCAFC 186

In the case of Parker v Parker [2019] FamCAFC 186, the Full Court of the Family Court of Australia, held that the assets of a trust may be taken into account in property settlement proceedings, where they are held by one of the parties to the marriage and the income from the trust is used to support them.

Family Trust vs Divorce Protection Trust in a Will

What is the difference between a Family Trust and a Divorce Protection Trust:

• A Family Trust is something you set up while you are living. (inter vivos)
• A Divorce Protection Trust is a trust that is put in your parent’s Wills. (testamentary)
  When your parents die you get their assets but they are protected from attacks on you by the Family Court. Your spouse cannot touch those assets from your parents.

Spry’s case v’s all the other cases

These cases set precedent but each case is different. The court looks at the specific circumstances of each case when deciding whether to include trust assets in the property settlement.

In Spry’s case, the trust is just an “alter ego” of the husband. Under those circumstances, the Court merely directs the Appointor, whoever that is, to hand over the trust assets to the wife.

But for the other cases, if the judge believes the spouse is no more than a potential beneficiary the trust assets are protected.

When establishing trusts and related entities, give thought to:

• relinquishing some control at a shareholder level in the Corporate Trustee.
• appointing multiple directors of any trustee company.
• appointing more than one Appointor and requiring that they act jointly.
• the second Appointor is independent, such as a trusted adviser or accountant

How to beat the Family Court

There are four other ways to try and get the Family Court off your back. None of them work, but here they are:

1. Stupid – hand your money to your best mate
   Get all your money and give it to your best friend. Firstly, you lose a lot of that money in Capital Gains Tax and stamp duty. You then hope in years to come when the divorce is well and truly over your friend will give you back the wealth. However, your friend may die, get divorced, go bankrupt or forget who you are. You risk losing 100% of your assets. However, in a divorce settlement you often only lose half your assets
2. Stupid, expensive and illegal – hand money to an overseas banker
   Liquidate all your assets and gift them to a banker in a tax haven. And then when the divorce is over ask the banker if you can have the money back. You suffer massive Capital Gains Tax and you pay stamp duty again when you buy back the assets in Australia. Also, it is illegal to tell the Court or the ATO, for that matter, that you do not have the assets. This is because, the truth is, you are working in concert with the tax haven banker. Therefore, the asset always remains yours. And under your control.
3. Binding Financial Agreements – no longer work
   You come together with your spouse either before, during or after the marriage and decide how you want to divide up your assets if you separate. This is expensive. Legal Consolidated also believes that BFAs no longer work. Our law firm no longer prepares BFAs for that reason. For ‘prenups’, cohabitation agreements, binding financial agreements, and superannuation splitting agreements, see here:
   • https://legalconsolidated.com.au/bfa-pa/
   • https://legalconsolidated.com.au/married-man-marries-lady-of-the-night/
4. Gift and Loan Back

To save Capital Gains Tax and stamp duty you merely mortgage all your assets to a friend or Family Trust. We have never known this to work.

Trustee Distribution Statements signed after 30 June

1. Your Family Trust has “default beneficiaries”. (Watch this free training course to learn about Family Trusts.) They are your two children Rob and Kevin.
2. Your son, Rob, is divorcing.
3. The diligent family lawyer subpoenas your accountant, his secretary and an ex-employee of the accounting practice. And asks each of them individually in Court:

‘Have you seen or heard of anyone in your office or a client backdating a Trust Distribution Minute and before you answer, if you lie under oath I will ask the Judge to issue a Bench Warrant so that you are arrested for perjury?’

4. Every year that the Trust Distribution Minute was signed after 30 June means that the income, for that year, belongs to your divorcing son, Rob. Well, half at least.
5. The family lawyer asks for half the assets in your Family Trust to go to your ex-daughter-in-law.
6. Your own lawyer generally recommends you write a cheque.

The moral of this story is to build your Trust Distribution each year here. Sign it before 30 June. Email a copy of the signed Trust Distribution Minute to your accountant.

Can a girlfriend challenge my Family Trust?

Q: I understand that Beneficiaries and children (whether beneficiaries or not) cannot attack Family Trust assets. Beneficiaries only have, at best, a right to be considered. The exception is a spouse or defactos. Would a girlfriend at the time of establishment fall into this category? This is even if no distributions were ever made to her.

A: I do not know what you mean by the word ‘girlfriend’. You can have a wife, mistress and gay partner. (If you had the energy.) All 3 may be deeded to be a spouse at the same time. And all three may have a claim to challenge your Will and attack your Family Trust.

Whether the ‘girlfriend’ is elevated to a ‘spouse’ is a question of fact. It is to be considered in each set of facts. In this court case, a married Melbourne man is deemed, by the Judge, to have his sex worker elevated to the position of a spouse.

You mention ‘at the time of establishment’ of a family trust. That is often not relevant. The ‘girlfriend’ may become your spouse at any time, either before or after you start your family trust.

Summary of whether the Family Trust overrides the Family Court

Business clients often have complex structures to reduce taxes and provide asset protection. This adds complexity to a divorce. Accountants and advisers are best placed to dissect and clarify where the assets are. They know the client. The accountant and adviser have financial training and skills.

The assets held in a Family Trust are not automatically the property of the marriage. However, family law legislation can easily make the trust assets “property of the marriage” for a relationship breakdown. Is the trust’s assets part of the property of the marriage? It depends on whether the trust is the alter ego of the spouse – or someone outside the marriage.

Further, the assets and income of a trust may be considered as part of the overall property pool available for division in a marriage breakdown, depending on the specific circumstances of the case. The court considers factors such as the nature and extent of the assets and income of the trust, the parties’ contributions to the trust, and the parties’ future needs in determining whether to include trust assets in the property settlement.

Family Trust
Family Trust Deed – over 18,000 sold
Family Trust Updates:
1. Everything – Deed, Appointor and Trustee (recommended) – includes succession planning
2. Upgrade the Family Trust Deed only – streaming, Bamford, trust law & tax
3. Change the Appointor – includes succession planning
4. Replace the trustee only
5. Change the Name of the Family Trust
6. Exclude a Beneficiary in the Family Trust
Company – Trustee of a Family Trust – corporate trustee for asset protection & business
Company – Bucket Company – beneficiary of a Family Trust
Annual Distribution Minutes for Family Trust – sign minutes before 30 June
Forgive Family Trusts’ UPEs – human forgives money the Family Trust owes (UPEs & loans)
Deed of Gift – to prove the money you put into your Family Trust was a gift (not a loan)
Division 7A Loan Deed – company lends trust money to Family Trust (UPEs & loans)
Loan Agreement – lend money to your Family Trust
Vesting Deed – wind up your old Family Trust (Centrelink compliant)
Training Course on Family Trusts – includes the Family Trust Deed