How does the Family Court treat property owned by a discretionary trust? Is the property owned by a discretionary trust considered property available for distribution between parties to a family law property settlement?
As solicitors, we will be asking ourselves: Do the assets of a discretionary trust fall within the definition of property under the Family Law Act and empower the Court to alter the interests of parties to a marriage or a de facto relationship?
What is a discretionary trust?
Discretionary trusts are legal entities commonly used by parties with family businesses as they enable income to be split and distributed to beneficiaries in order to reduce tax payable on that income. A typical discretionary trust has a trustee, which may be a corporate trustee of which one or both of the parties are directors and/or shareholders. Potential discretionary beneficiaries may include spouses, children and grandchildren of the person who controls the trust. Discretionary trusts typically own property such as real property, shares and cash.
The trust deed will set out, amongst other things, the name of the trustee of the trust, the beneficiaries and the appointor. The appointor controls the trust and has the power to appoint and remove the trustee. When a party to a marriage or de facto relationship is the appointor, who controls the trust, the Family Court generally has the power to make orders with respect to the property owned by that trust.
How does the Family Court treat property owned by a discretionary trust?
The difficulty with the property owned by a discretionary trust lies with the fact that it is, strictly speaking, not the property of the party to a marriage or a de facto relationship. It is owned by a separate legal entity, being the discretionary trust. If the Family Court makes a finding that one of the parties to a marriage or de facto relationship does in fact control a trust, the Court may treat the property of the trust as property of the marriage or de facto relationship and make orders altering the interest of the parties in that property. This is notwithstanding the fact that the property is not strictly owned by a party to a marriage or de facto relationship.
Property owned by a discretionary trust – when is it considered to be a financial resource?
Alternatively, the Court may make a finding that the property owned by the trust is a financial resource of the party who controls the trust. If the Court does find that the property of the trust is a financial resource, it will not generally make orders altering the interest of the property of the trust. Rather, it will divide the non-trust property, taking into account the fact that one of the parties has, as a financial resource, the property of the trust. Consequently, the party who controls the trust will generally retain as a financial resource the trust property but will receive less of the non-trust property than they would otherwise receive if the trust property did not exist.
It is important to review the trust deed as well as the financial statements of the trust to help to determine whether a party to a marriage or de facto relationship controls the discretionary trust and therefore whether the property owned by that trust forms part of the property to be divided between the parties.
Our lawyers have extensive experience in advising separated parties with trusts who are going through separation and divorce. Call our office on (03) 8393 0144 if you would like to make an appointment with one of our experienced family lawyers to discuss your circumstances.