Many family law disputes involve issues relating to various trusts. Family lawyers are often approached by clients who are either trustees and/or beneficiaries of a trust. Often their children and other family members are beneficiaries as well.
The first relevant question to be answered with respect to trusts is: what are the client’s and the other party’s respective proprietary interests and rights in the trust assets. The answer to this question will determine whether the assets of the trust will be considered matrimonial property available for division between the parties by way of property settlement.
If the trust in question is a unit trust or a fixed trust, the interests of the parties in the trust property are easy to ascertain. It is not a straightforward answer in the case of discretionary trusts.
Often during their marriage the parties establish a discretionary family trust, where one or both of them are trustees and beneficiaries. Sometimes such a trust has a corporate trustee - a company where the parties are shareholders and directors. During the marriage, the parties receive distributions from the trust. The trust also pays for the family’s various expenses, including, for example, holidays and school fees. Normally the parties’ accountant determines income distributions, making sure the parties do not pay too much tax. What will happen to the assets of such trust when the parties separate?
How the Family Court will treat the trust’s assets in each particular case will depend the answers to the following questions:
- What are the terms of the Trust Deed?
- Who are the trustees of the trust?
- If the Trustee is a company, who are the shareholders and directors of the trustee company?
- Who is the appointor of the trust?
- Who are the beneficiaries?
- Who were the beneficiaries of the trust prior to separation?
- Have there been any changes to the trustees or beneficiaries during the course of the marriage or since separation?
- Are the income beneficiaries different from the capital beneficiaries?
- How were the distributions made in the past?
- What are the trust’s assets?
- Were there any changes to the structure of the trust or any amendments to the trust deed during the marriage and after separation?
Many of the answers to the above questions can be found through the client's disclosure of the Trust’s financial statements, as well as the Trust’s Deeds and tax returns, which the client has to provide to their solicitor and to the other party.
In most cases, if one of the parties has power and control over the trust to the extent that they can unilaterally make distributions from the trust to themselves or the other party (in their capacity of a trustee or a director and shareholder of the trustee company), they will be deemed to own the assets of the trust, even if they are e.g. only a discretionary beneficiary. Consequently, these assets might be considered property of the parties to the marriage available for the division. The Court will take such a view even if there are other beneficiaries of the trust (third parties) to whom the trustee owes certain duties with respect to the due administration of the trust. The Court will often rule that these duties are to be ignored if they stand in the way of bringing the property of the trust into the matrimonial pool.
For example, it has been held by the Court that the assets of the subject trust are to be considered the assets of the party in a situation where a party who is the trustee of a discretionary trust, or has the capacity to appoint himself/herself as trustee, and is also a beneficiary, or who has the capacity to become a beneficiary or become a majority shareholder in a company (who is or can become a beneficiary).
Also, it has been found that, in a situation where, for example, a wife is a beneficiary of a trust and the husband has power to appoint trust assets to her, the assets of the trust will be deemed to be part of the matrimonial pool. In the past, the Court would only make such a determination based on the present capacity of a party as the appointor of the trust. Since 2008, however, the Court has considered that a party's historic control of the trust is sufficient to access the assets of the trust for the purposes of property settlement in family law proceedings.
If the assets of the subject Trust are determined to be property of the matrimonial pool, the Court can make orders that the parties to the marriage deal with the trust assets the same way as if they are the assets of the pool or make orders against third party trustees, if necessary and appropriate. For example, the Court may order the trustee to do all or any of the following:
- to distribute either trust capital or income in a particular manner (either to a beneficiary or to a person who is not a beneficiary)
- to fix a vesting date;
- to convert a discretionary trust into a fixed trust;
- to add a beneficiary; or
- to make a distribution to a party who, upon divorce, ceased to be a beneficiary.
All such orders can be made even if the Trust instruments do not permit such actions. In other words, the Court orders will override the instruments of the trust and bind the trustees.
It has been held that an order may be made that enables a party to the marriage who is in control of the trust to satisfy his or her personal liability to the other party to the marriage who is an object of the trust from the assets of the trust. In most cases, however, where the Court rules that the trust assets belong to the pool, the Court will not make any actual orders with respect to those assets, but only take them into account when ascertaining the entitlements of the parties to the overall matrimonial assets. For example, the Court may leave the trust assets intact (as property to be retained by one of the parties), but, by way of 'compensation', allocate to the party a larger share of other assets (eg proceeds of sale of a family home) in order to arrive at a just and equitable property settlement.
In scenarios that involve third parties (for example, trustees), third parties often end up being joined in the proceedings. Sometimes it is one of the spouses who would seek such a joinder because the orders sought need to be carried out by the third party or the third party needs to be restrained from carrying out certain actions for the orders sought to be effective. In other instances, the third party may wish to join themselves in the proceedings, to be able to present their position to the Court in order to protect their interests in the assets of the Trust or to be able to fulfil their obligations to third party beneficiaries.
In summary, the Court has extensive powers to access the assets of a discretionary family trust and a person contemplating, or going through, a property settlement which will involve trust entities would benefit from a legal advice about the best way to structure their property settlement within the framework of established principles regarding the treatment of assets of discretionary trusts in family law.
This article is not to be taken by the reader as guidance in their specific legal issues as it is meant as general information only. It also needs to be noted that the article was written in June 2015 and the law discussed in the article may have since changed.