Many people hold the misconception that a family trust can protect assets from divorce and property settlement proceedings. This article explains the following: What is a family trust? In the event of a divorce, can a family trust protect property from being divided by the other spouse?
What is a family trust?
In Australia, a family trust is a commonly used financial structure. It operates at the discretion of one or more trustees, who legally own the assets and control any commercial interests. A trustee may be an individual or a company, but a family trust is typically controlled by one or both parents. The trustee has the power to distribute the income or capital gains of the trust to nominated beneficiaries. Beneficiaries of a family trust are usually family members, such as the trustee’s children and grandchildren. A family trust is a discretionary trust used to protect assets and limit liabilities. In this context, “discretionary” means that the person managing the trust has the authority to decide who should benefit from the trust and how much each person should receive.
What are the benefits of a family trust?
A family trust can effectively protect assets from bankruptcy. Generally speaking, if a trustee becomes bankrupt, it is difficult for creditors to access the trust assets held by the trustee. It can also reduce tax liabilities and protect beneficiaries from poor spending habits. Family trusts are typically established to provide long-term financial support to future generations.
In a divorce, can a family trust protect my property from being divided by my spouse?
Where spouses separate or divorce and one of them is a beneficiary of a family trust, many people ask whether the trust assets should be included in the asset pool for division. Many people who establish a family trust believe that property held by the trust is untouchable during a divorce. However, this is not always the case. Whether a family trust forms part of the asset pool in a property settlement depends on the interests the spouses hold in the trust. The spouse must have some degree of control over the trust. The court determines whether a spouse has control over the trust fund based on several factors, including:
- the terms of the Trust Deed;
- the identity of the Appointor and the trustee;
- the degree of influence the spouse has over the trustee or Appointor;
- the identity of the Beneficiaries;
- the history of distributions from the trust fund;
- how the trust assets were acquired;
- any contribution made by one spouse to the trust assets; and
- benefits received from the trust, such as vehicles, loans, or payment of expenses.
Where a spouse has no control over the trust and is merely a beneficiary, the trust may not be treated as an asset within the asset pool. By contrast, where a spouse expects to receive future distributions from the family trust and there is a history of distributions from the trust, it is most likely to be treated as a “financial resource”. As a financial resource, a family trust is not property like a car or a house, but rather something that may generate income in the future. This means that although the trust may be excluded from the asset pool, the court will consider the likelihood of distributions when determining the future needs of a spouse in a divorce matter. Of course, in reality, in many divorce cases one party will attempt to conceal assets that should form part of the asset pool. Under section 106B of the Family Law Act, the Federal Circuit and Family Court of Australia has the power to set aside trusts established to defeat a spouse’s claim on matrimonial assets. This legislation empowers the court to ensure that property that should be included in the asset pool is not concealed through the establishment of a family trust.
Conclusion
If you would like advice on whether your or your spouse’s interests in a family discretionary trust form part of the property pool, please contact us. Our professional team of lawyers will provide tailored advice based on your specific circumstances.</sp
