Family trusts are a structure frequently used to arrange the financial affairs of a family. They provide many benefits, particularly in tax planning and estate planning. A trust has an appointed trustee, who is a legal owner of any assets held in the trust and who holds and manages assets on behalf of the beneficiaries. Trusts often involve various family members who make decisions regarding the assets held on trust or who are beneficiaries of the trust.
Do family trusts protect assets?
It is common for family members to believe that family trusts are the best way of ensuring that assets are protected in the event family law proceedings are initiated. However, although it has often been argued in the family courts that a trust is not property of a relationship, this argument is usually unsuccessful. This often comes as a surprise to clients, who often have arranged family trusts in relation to various assets to secure inter-generational wealth.
Case law on family trusts
Case law surrounding family trusts dates as far back as the late-1980s, when the Family Court repeatedly held that the trusts were part of the asset pool available for division between parties upon separation. The hallmark case is the 2008 High Court decision of Kennon v Spry. In that case, the court took the opportunity to highlight the law in this area, in particular that trusts can be included in the asset pool of separating parties. The court held that the test here is one of control. In other words, in deciding if the trust should be part of the assets pool, the court will look at the extent to which the parties of the relationship had control of the trust and any benefit from it. This means the court will look past the surface of the structure and examine how it operates to determine whether it is to be included in the asset pool.
Burden of proof
There is no easy rule to decide whether family trusts will be included in the asset pool. Each case will turn on its own facts. A party alleging that a trust is a “puppet” of the other party will have the burden of proving this to the court. It is therefore important that a party seeking to have a trust included in the asset pool compile the relevant documentation supporting the claim early on in the proceedings. Various types of documents can be used as evidence including trust deeds, tax returns, financial statements, documents held by the accountant and any lawyer who assist with the ongoing operation of the trust.
The law surrounding family trusts is far from simple and clear. There is no absolute certainty that family trusts will not be included in the asset pool following a relationship breakdown. If you are involved in a property dispute where a family trust is involved, you should consider seeking legal advice from a family lawyer about how best to protect your assets in this situation.
If you require advice in a family law matter or in any other legal matter, please contact Go To Court Lawyers.
By Romana Simic, Senior Associate