WOUNDED DISCRETIONARY TRUSTS

29/05/2009

Once upon a time there was a renowned expert in tax and equity law named Dr Ian Spry.  Everyone who studied law read his textbooks. In 1968 he started a family trust by parol (ie orally).  He wrote out nine clauses but never signed the paper, simply conducting himself as if bound to it.  The beneficiaries were written to be the descendants of his father together with their spouses.

 

In 1978 Dr Spry married.  Dr Spry and his wife Helen had four daughters.  In 1981 he signed the paper on which the trust rules had been written thereby creating a ‘document’.  In 1983 Dr Spry who was the sole trustee of the trust excluded himself as trustee and appointed Helen as trustee.  Dr Spry retained the power of appointment over the trustee.

 

In 1998 when the marriage was in difficulty Dr Spry varied the trust again to exclude both himself and Helen as capital beneficiaries.  In 2001 the parties separated.  Within three months Dr Spry divided the property of the trust in four – dividing it equally among the four trusts he set up for his four daughters.  Both Dr Spry and each daughter respectively were responsible for the appointment and removal of trustees of each trust.

 

In 2003 the parties divorced.  The effect of divorce was that Mrs Spry was no longer a beneficiary of the trust having ceased to be the spouse of a descendant of Dr Spry’s father.

 

Mrs Spry sought to include the property of each of the trusts as part of the matrimonial pool of property capable of division between her and Dr Spry.  She sought to set aside the variation of the trust deed that prevented her and Dr Spry being capital beneficiaries and the transfers from the trust to the daughters’ trusts.

 

The High Court held that the property of the marriage or of either of the parties to the marriage may (depending on the circumstances) now extend to the family trust of the parties where one was a trustee and the other a beneficiary even though neither had, under normal trust law principles, neither party had a right to what we traditionally think of as ‘property’.

 

This is new and has not been the law to date.  It has taken the law to the next level, albeit for only family law purposes at this stage.  Any trust set up by mum and dad during their marriage and controlled by them will likely fall within the matrimonial pool.

 

This decision follows on from a case called Richstar No.6 where the Federal Court held that a person’s interest in a family trust could be property under s.1323 of the Corporations Act because the trust was 'controlled by a (corporate) trustee who is in truth the alter ego of a beneficiary (ie a company that the beneficiary controlled) and because it is as 'good as certain' that the beneficiary will receive benefits from the trust. Where a discretionary beneficiary is also the trustee or the director and shareholder of a corporate trustee and/or the appointor then that beneficiary has 'effective control' of the trust.

 

The common feature of Richstar and Spry is control.  The less control the person has over the trust the less likely the trust assets will be included in a broad legislative definition of ‘property’.

 

Assets held in discretionary trusts are within the reach of the Family Court if one or other of the parties

 

  • control the trust
  • contribute to the assets to the trust, or
  • benefit from the trust. 

It is not necessary to have all of these features.  Any of them may suffice in the circumstances.  The greatest however is control. The absence of control, on the other hand, gives greater weight to the interest of a beneficiary being a mere expectancy that has less likelihood of being interpreted as ‘property’ by the Court.

 

What to do?  Well, if control is the issue then reduce it:

 

  • appoint independent trustees to the family trust and take steps to evidence their independence (acknowledged to be easier said than done)
  • appoint additional independent appointors to the family trust and take steps to evidence their independence
  • focus on single trusts for all children, rather than separate trusts for individual children. 
  • be clear on the dominant purpose of setting up the discretionary trust (asset protection? tax planning? child support? estate planning?) and depending on the purpose then design the trust and use it differently. 
  • send the discretionary trust deed along for its 200,000 kilometre service - does it need to be amended in order to make use of some of the ideas that might possibly strengthen it? 

Townsends Business & Corporate Lawyers can provide you with all the advice and services necessary to protect your assets and use your discretionary trust to its maximum potential. Please contact our office on 8296 6222, if you require further information.