Estate Planning Referral , TRUSTS & DEBT DEFENCE

Legal Referral Services, TRUSTS & DEBT DEFENCE

Observations Comment on Family Asset Protection

Protecting the Estate Against Predators & Creditors, Family Breakdown in the Next Generation  ?!

IMPORTANT

This is not advice.  Readers should not act solely on the basis of the material contained in this commentary.  Items are general comments only and do not constitute or convey advice.  Also changes in legislation may occur quickly.  We therefore recommend that  formal advice be sought before acting in any of the areas covered in this presentation.

1.  Introduction

What happens when the tide goes out on the relationship of children and grandchildren?  Is the wealth accumulated by decades of effort of the family likely to be exposed and vulnerable at low tide?

Here we look at:

·         Binding Financial Agreements

How these agreements can quarantine the family’s wealth against the Family Court?

·         Family Trust Structures

In modern day Australia discretionary or family trusts are widely used to structure personal and business assets to reduce exposure to risk.  Are there any rules which we can follow to prevent the Family Court from taking account of the assets held in family trusts?

Future proofing – Asset & Property Protection ?

There can be significant cost involved in structuring assets to deal with what is, after all, just a risk in the minds of parents that their children’s relationships will fail.  Civilised and open, communication during the parents lifetime (and involving the partners of children) can be a means of avoiding collateral damage of relationship failure.8

3.  Binding Financial Agreements -Effective structuring against relationship breakdown

3.1  Introduction

It is possible for parties to a relationship to enter into an agreement setting out how their assets will be divided in the event of a break down of their relationship.

If effective, the agreements provide a useful means of avoiding the costs, time, expense and angst associated protracted litigation regarding the distribution of parties’ property.  There is also the advantage to the broader family by giving certainty that the family silver will not be dissipated by the breakdown of the relationship of their children or grandchildren.

Here we look at the operation and effect of binding financial agreements.  Binding financial agreements are not without traps and these are also considered.

3.2  Binding financial agreements

a.     Operation

The Family Law Act (FLA) allows parties to a marriage and de facto relationship to enter into binding financial agreements (BFA).

Amendments to the FLA in 2009 allow couples in de facto relationships to enter into a BFA. 

De facto couples (both Heterosexual and Same Sex Partnerships) are now governed by the Family Court Act Australia Wide

A BFA is an agreement which deals with how their assets are to be divided if a  relationship breaks down.  A BFA can also include matters relating to superannuation and maintenance.

The FLA prescribes four types of BFAs, which can be entered into by parties to relationship:

      i.        before the relationship;

     ii.        during a marriage but before separation;

    iii.        during a marriage but after separation; and

    iv.        after divorce or breakdown of the de facto relationship.

A BFA is an agreement which has strict legal requirements in order to be binding.  Both parties must obtain independent legal advice as to the meaning and the effect of the agreement before signing the agreement. 

This legal advice importantly does not have to endorse the agreement, that is to say that advice can be that the party should not enter into the agreement because its terms are unfair and not likely to be replicated if the matter was to go before the Court.

b.     Flexibility

BFAs are particularly useful for parties if they have significant assets or an expectation of significant assets by way of inheritance or gift.  The agreements can be flexible, for example agreements:

      i.        can quarantine one asset such as an inheritance that one party may bring to the relationship;

     ii.        can prescribe a formula for what happens when the parties break down based upon the years of relationship.

c.     Too good to be true?

A BFA can be set aside by a Family Court under the Act, 'if and only if, the Court is satisfied:

      i.        the agreement was obtained by fraud (including non-disclosure of a material matter); or

     ii.        either party to the agreement entered into the agreement:

    iii.        for the purpose or purposes of that included the purpose of defrauding or defeating a creditor or creditors of the party; or

    iv.        with reckless disregard for the interests of a creditors of the party; or

     v.        the agreement is void, voidable or unenforceable; or

    vi.        in circumstances that have arisen since the agreement was made it is impracticable for the agreement or part of it to be carried out; or

   vii.        since making the agreement, a material change of circumstances has occurred (being circumstances relating to the care, welfare and development of a child of the marriage) and as a result of the change, the child or, if the applicant has the care and responsibility of the child, a party to the agreement will suffer hardship if the Court does not set aside the agreement; or

  viii.        a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable.

To date the only BFAs which have been struck down by the Court have been because they were technically deficient, not because the terms were unfair or oppressive.  Until recent changes to the Family Law Act in relation to BFAs, strict compliance was required. 

The FLA previously included a requirement that the agreement signed by the parties included a certificate stating that each party has received legal advice regarding the terms and effect of the BFA prior to executing the agreement.  Amendments to the section now require the advice to be provided before the agreement is signed. 

There has also been a change to the requirements for exchange of original documents.  These changes have retrospective effect and will apply to all agreements signed on or after 27 December 2000. 

The case of Black and Black9 clearly illustrated how damaging failure to comply with the formal requirements for BFA’s prior to the changes in the legislation.  The Family Court now has a discretion to uphold agreements where there has been a breach of the requirements in the FLA if the Court considers that it would be unjust or inequitable if the agreement was not binding on the parties.

Since this case the law has been relaxed to a degree with respect to formalities but detailed advice should be sought in the event of strict non compliance with Statutory requirements in each case !

Case- Best made plans…10

In this case, the parties entered into a BFA during their marriage pursuant to section 90C of the Act.  Under the terms of the BFA the parties agreed to sell the husband's house and pool their money in a joint deposit account.  The parties agreed to use the funds to purchase a house in joint names.

The wife was to receive a personal injury payout which she was to contribute towards the deposit for the new house.  It was set out in the terms of the BFA that if the marriage broke down the house was to be sold with the proceeds divided equally between the parties'.  The parties purchased a house prior to the wife receiving her personal injury payout.  The parties had expected the wife would receive $200,000.  The wife's payout was less than anticipated and she received only $41,000.

When the marriage broke down the husband sought to set aside the BFA.  He wanted 80% of the value of the house, based on his contributions.  The husband argued that the BFA was unfair because he had contributed more money than the wife towards the purchase of the house, yet she was to receive half of the sale proceeds of the house.  The wife sought to enforce her 50% entitlement to the sale proceeds pursuant to the BFA.

The trial judge found that the BFA was binding pursuant to Part VIII of the Act and that the Court had no jurisdiction to make the adjustment sought by the husband.  The husband appealed to the Full Court of the Family Court.  The husband argued that the BFA was not enforceable because it failed to strictly comply with the requirements of s 90G of the Act.  The Act requires each party to receive a certificate which states that they have received independent legal advice regarding the terms and effect of the BFA prior to executing the agreement.

The BFA was amended three days after it was executed by the parties.  The husband's solicitors failed to re-certify the certificate of independent legal advice on the date the agreement was amended.  The husband argued this rendered the BFA invalid.

The Full Court held that strict compliance with s 90G of the Act is required in relation to BFA's.  The Full Court held that the certificate given to the parties by their legal representatives is required at the time of execution and the failure by the husband's lawyers to re-certify the certificate meant that the BFA did not comply with the specific requirements of the Act.   The BFA was therefore not binding not because it was unfair but because if was technically defective.

d.    Effect of death on a BFA

An issue to consider when using a BFA for the purposes of asset protection of the estate or assets of the parents and grandparents is the affect of death on a BFA.  Usually BFAs include a provision that it is binding upon each party’s heirs, executors and administrators. This is based on s90H of the Family Law Act, which provides:

A financial Agreement that is binding on the parties to the agreement continues to operate despite the death a party to the agreement and operates in favour of, and is binding on, the legal representative of that party.

It is arguable that death without separation means this provision will be of no effect.  If the death of one of the parties occurs before the BFA has taken affect (i.e. parties have not separated), s90H will not make the agreement operate in favour of, and be binding upon, the legal personal representative of the deceased estate.  A BFA is only enforced against the estate if the BFA was binding on the deceased party before their death (i.e. parties had already separated).

A potential conflict may arise between a BFA and the terms of a testamentary trust or will.  To properly safeguard family assets, it is important that the terms of Wills and testamentary trusts properly reflect the provisions in a BFA.

The best advice in the event of a Family law dispute/break up or settlement is to gte a Family law settlement agreed or ruled for n the Courts and registered in Courts having Family jurisdiction – Private pre/post natal agreements may not necessarily bar claims against estates after death !

e.     Effect of having children

The FLA provides that changed circumstances in relation to a child may be a ground to set aside a BFA. The sections require that:

Since the making of the Agreement, a material change in circumstances relating to the care, welfare and development of a child of the marriage or relationship that has arisen and that a party to the Agreement would suffer hardship if the Court does not set aside the Agreement.

For example, if the parties do not have any children at the time of entering into the BFA, but subsequently do have a child, this may be a ground by which the BFA could be set aside provided it could be shown that the child or the person caring for the child would suffer hardship if the BFA was not aside. 

The fact they have a child is not enough, it must be shown that either the child or the person caring for the child would suffer hardship if the BFA was not set aside, so it’s quite a narrow ground.

Although there is no requirement that a BFA is just and equitable, the more equitable the division of assets is in the event of separation, the less likely it could be shown that a child or carer would suffer hardship if the BFA was not set aside.

It will be important, as is the case with Wills and all other succession planning arrangements, to keep the BFA under review.  It may have to be revisited, updated and replaced overtime to take account of new circumstances such as children or changes in the assets of the couple or their respective parents.

3.3  Loans between family members

Increasingly, parents want to see their children benefit from their ‘inheritance’ during the parents’ lifetimes.

The following structure could be utilised:

·         A loan can be made by the generous parents directly to their child.

·         The funds are used by the child to purchase property and the child is registered on title as the proprietor of the property.

·         The loan is secured by the parents by way of a registered mortgage (first or second to a lending bank) over the property.

·         The terms of the loan can be stipulated by the parents (preferably in writing).

A loan of this kind could be a useful tool to protect family money from division by the Family Court. To this end, a clause could be included in the loan agreement that the loan is repayable on demand.  This clause could be enforced by the parents if family law proceedings are looming.

The Family Court has power however, under section 90AE of the Family Law Act to make orders against third parties (ie: the parents) including the ability to direct the liability for the loan rests on one party. 

For this reason, if a loan of this kind is made, it should be clearly documented, the terms of the agreement should be fully implemented by the parties and each of the parties to the agreement should receive independent legal advice regarding the nature and effect of the loan.

4.  Protecting Discretionary Trusts - An impossible task?

4.1  Introduction

“The authors’ view that apart from exceptional cases, it is beyond the trust drafter to safeguard assets from Family Court orders.”11

Is this really the case?  Where does this leave families who have established trusts to hold family wealth accumulated over decades?  These trust structures have been utilised extensively in Australia to enable family wealth to pass through the generations with ease and protection.  A driving factor in choosing to hold assets in trust for many families is the protection element.  In the absence of a BFA is there any certainty that can be given to families’ regarding assets held in trust?

The authors referred to above do also state that the day to day operation and management of trusts have as much a hand as drafting to play in decisions where the Family Court has decided to take account of assets held in discretionary trusts. 

Here we look at:

·         a summary of the Family Court’s starting point in determining financial matters between separating partners.

·         when discretionary trust assets be ‘property’ or a ‘resource’

·         traditional family trust structures and determine if there are any rules or ideal structure and plan for day to day operation

4.2  Summary  - What is at risk from the breakdown of a marriage?

Pursuant to section 79 of the Family Law Act 1975 (FLA), the Court is entitled to make such orders it considers appropriate with respect to the “property” of the parties to a marriage and of de facto partners (as of 1 March 2009).

The powers of the Family Court are construed broadly and entitle the Court to make such orders as are necessary to ensure the division of the parties’ property is just and equitable.

a.    Four step approach

In determining how the property of the parties to the marriage will be divided, the Court adopts the following approach:

·         the Court identifies and values the parties’ property;

·         the Court assesses the parties’ relative contribution to the property of the marriage and makes a preliminary determination as to how the property should be divided;

·         the Court considers whether an adjustment to the preliminary determination is necessary based on ‘section 75(2) factors.  These factors include the age, health and income of the parties and whether either party has access to any financial resources; and

·         the Court determines whether the order it proposes to make is just and equitable in all of the circumstances.

b.    What is property?

Property is broadly defined in section 4(1) of the FLA as:

“property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion”.

This section has been interpreted broadly by the Court and includes real property, personal property and rights of action to recover a debt.

The Court does not draw a distinction between “business” and “personal” property. Rather, it takes account of all property owned by the parties either jointly or individually.  The nature and value of the parties’ property is ordinarily considered at the date of the hearing.

Examples of common forms of property include the matrimonial home, motor vehicles, boats, caravans, jewellery and shares.

c.     What is a financial resource?

The term “financial resource” is not defined in the FLA.

Case - Sufficient control = resource

In the case of Kelly (No. 2)12, the Court held that a financial resource is:

“a stock or reserve over which a party has sufficient control as a matter of fact to draw upon when necessary towards supplying some financial want or deficiency”.

The Full Court found control to be key in establishing that the assets were a resource of the husband.  The husband is that case was not an appointor or a beneficiary of the trust in question. 

He was a director of the trustee company along with his brother and accountant.  On the facts the Court found that he controlled the trustee company despite the existence of the other directors. 

This was established by considering the day to day operation of the trust, and in particular where the money went.  He did receive some benefit from the trust in the form of discounted rent.  The wife did receive distributions from the trust which the Court found would allow both parties to benefit by assisting with payment of their expenses. 

Importantly, under section 79 of the FLA, the Court is only empowered to make orders to adjust or redistribute the property of the parties to the marriage.  The Court does not have the power to make orders adjusting the parties’ interests in financial resources.  This principle applies regardless of the value and nature of the financial resource.

However, if one of the parties to the marriage has an interest in a financial resource, this interest will be taken into account by the Court when determining how the parties’ property will be divided between them.  The effect of this is that the party with access to the financial resource may receive a reduced percentage of the property pool.

d.     An inheritance by way of a gift in a Will or a share of the residuary estate is likely to be ‘property’ of a party to a relationship.  The inheritance may be considered as a contribution by that party to the relationship and as such will result in adjustments being made to remove its effect from the division of the property of the parties to the relationship.

e.     What about an interest in a discretionary trust? Is this property or a resource?

It is a well established principle of trust law that a beneficiary of a discretionary trust does not have ownership of the trust property, and that they are not regarded as the legal owner of that property.  A beneficiary has the right to be considered as a potential recipient of benefit and has a right to have this interest protected by a court of equity.13

However, the fact that a beneficiary of a discretionary trust is not the legal owner of trust assets does not preclude the Family Court from taking account of those assets when adjusting the interests of the parties to a property dispute.

An interest in a discretionary trust may be treated by the Family Court in one of three ways:

      i.        Property - alter ego or sham

First, the interest of a party in a discretionary trust may be regarded as the property of one of the parties to the marriage.

If the trust is regarded as a “sham” or if the trust is controlled by one of the parties to the marriage so that it is effectively regarded as a ‘puppet’ of that party, the assets held in the trust may be regarded as property of that party. This means that those assets will be available for distribution between the parties to the marriage.

To determine the nature of the interest of a party in a discretionary trust, the Court looks at all relevant circumstances including who controls the trust, the terms of the trust deed and the pattern of past distributions.

If the interest in the trust is regarded as property, that property will be available to be distributed between the parties to the marriage.

     ii.        Financial Resource

Second, the interest of a party in a discretionary trust may be treated as a financial resource available to one or both of the parties.

If the interest is regarded as a financial resource, it will not be available to be directly distributed between the parties but it may be taken into account in determining what the parties respective needs will be and how they should be taken into account.

    iii.        Mere expectancy

Third, the interest of a party in a discretionary trust may be regarded as a mere expectancy. If the interest is regarded as a mere expectancy, the interest in the trust will not be taken into account for the purpose of the property proceedings.

4.3  Kennon v Spry14 -

What did the Court decide?

In relation to trust property generally, Chief Justice French held that the following rights should be regarded as property of the parties to a marriage:

·         a beneficiary’s right to due administration of the trust;

·         a beneficiary’s right to due consideration as an object of the trust; and

·         the trustee’s power to apply the income or assets of the trust.

There is also a requirement that the assets of the trust have some connection to one or both of the parties.

“Where property is held under such a trust by a party to a marriage and the property as been acquired by or though the efforts of that party or his or her spouse, whether before or during the marriage, it does not , in my opinion, necessarily lose its character as “property of the parties to the marriage” because the party has declared a trust of which he or she is trustee and can, under the terms of that trust, give the property away to other family or extended family members at his or her discretion.”15

Once a particular asset is regarded as property of the parties to the marriage, the next task of the Court is to ascribe a particular value to that asset.

Chief Justice French specifically noted that it may be difficult to place a numerical value on a beneficiary’s right to due administration of the trust, a beneficiary’s right to due consideration as an object of the trust and the trustee’s power to apply the income or assets of the trust.  This, however, did not deter Chief Justice French from determining that these rights are proprietary in nature.  In this case the total value of the trust assets was included in the asset pool.  Gummow and Hayne JJ determined that:

‘And because during the marriage, the husband could have appointed the whole of the trust fund to the wife, the potential enjoyment of the whole of the trust fund by the wife was property of the parties to the marriage or either of them.’16

What does this mean?

Assets held in discretionary trusts may be within the reach of the Family Court unless the parties to the marriage:

·         do not have and never have had a position of control within the trust (ie. as trustee or appointor); and

·         have never been a beneficiary of the trust.

In essence, this requires the relevant parties to forfeit all control of the relevant assets and to have no ownership or interest (legal or beneficial ) of the assets.  If an independent trustee is appointed, but the parties remain as beneficiaries of income or capital, the assets may still be available as ‘property’ to be divided by the Family Court.

4.4  What can be done?

Keep the distance

The decision in Kennon v Spry confirms the requirement that it is necessary for the parties to a marriage to establish a nexus between the assets held in the relevant discretionary trust and their marriage in order for those assets to be considered property for the purposes of family law.

Is it therefore unlikely that an aggrieved daughter-in-law could claim that the assets held in the family trust of her parents-in-law (in respect of which neither she nor her husband have made any financial contribution), are assets of the parties to the marriage merely because the daughter- in-law is one of the potential general beneficiaries of the trust? 

While the daughter- in-law, as a potential beneficiary of that trust, would be entitled to due administration of the trust and to due consideration as a beneficiary of the trust, the daughter-in-law would not be able to establish that the assets were acquired “by or through” the efforts of either of the parties to the marriage.  The assets may not be able to be classified as ‘property’ for Family Court purposes.

If the son and daughter-in-law receive no benefit from the trust before the relationship breaks down the trust assets are likely to be disregarded in determining the financial matters. 

So no involvement in the control of the trust, no benefit and no nexus to the marriage will mean the family trust is safe.  However the reality in most family cases will not allow for the distance to be perfectly maintained between the children and grandchildren and their families and the trust. 

What if the family wishes to benefit their children and their families during their lifetime?  It may be that there are tax advantages to be gained from sharing the trust income.  What about succession planning?  How can control pass to the next generation without risk of the assets being caught up in a family law dispute?

4.5  Rules to ensure protection?

Are there rules which we can follow to ensure protection?  It is difficult to establish clear rules because as stated in many of the cases - the court determines matters by reference to the actual facts and a connection to the marriage is a matter of weight and degree.  So, the following are more guidance than rules.  The rule may prevent the trust assets being considered property of the child or grandchild facing the family court, but may never successfully avoid being a resource.

Rule one - No Nexus

Kennon v Spry confirmed you need a connection between the trust and the parties to a relationship for trust assets to be considered to be property of one or both of the parties.  The Simmons decision heard very soon after Kennon v Spry in 2008 has followed this reasoning.  The decision is an application for summary dismissal and therefore did not involve a full consideration of the matter.  Further decisions in this case will be interesting.

Case - Doomed to fail or one loan too far17

The application for summary dismissal was made by L Pty Ltd the trustee of the F Trust.  The company was seeking dismissal of the wife’s application for relief against the trustee under Part VIIIAA of the FLA.  The relief sought was designed to protect the husband’s interest in the trust and included requirements to ensure continued distributions to the husband from the F Trust and to require payment of part of any distributions to the wife.  The orders were sought on the basis that the husband had a proprietary interest in the trust.

The F Trust was established by the husband’s father and held the family business.  All members of the husbands family were members of the class of general beneficiaries.  it was conceded by the husband that the trust was a traditional family discretionary trust. 

The husband was a director of L Pty Ltd but had resigned in accordance with an agreed practice requiring that three out of the six directors of the trustee be family members and for those family members to rotate to allow all members to have the opportunity to serve. 

The husband received regular income distributions from the trust and a salary in relation to his activities within the family business.  There was also sophisticated and established family governance mechanisms which included a family council and constitution.  The council made recommendations to the trustee regarding the business management.

The husband had made a substantial loan to the trust on preferential terms being interest free and long term. 

There was some argument regarding the test for determining the chances of success of the wife, but the Court considered the application for summary dismissal would succeed only if the wife’s claim was doomed to fail.

L Pty Ltd argued that the facts were distinguishable from Kennon v Spry because in the present case the husband had no control over the family trust and the assets were not accumulated by the parties to the marriage, but by the husband’s father.  The trustee also argued that the husband’s interest in the trust (his right as a discretionary beneficiary to be considered and for this right to be protected in equity) had no value by reason of it being incapable of being valued.

The application for summary dismissal was unsuccessful the Court found that the loan made by the husband to the trust represented sufficient nexus for it to be arguable that the husband had a proprietary interest in the trust.  The wife had established a nexus so her case was not ‘doomed to fail.’

The Court in the Simmons case referred to the decisions in Davidson and R and R18 stating that the Court must not only look at the facts of each case in making its decision, but also consider the reality and purpose family trusts serve today.

For the purposes of the summary dismissal application, the loan arrangement was enough to be nexus between the trust and a party to the marriage.  A party did not have to have control over the trust as appointor or as trustee or controller of a trustee company.

In an earlier decision in Spellson19 the Court considered the husband’s appeal against the trial judge’s decision that a trust was not a settlement ‘in relation to the marriage of the parties.’  the husband’s appeal failed with the Court finding that there needed to be a real and relevant association between the marriage and the settlement.  The Court went on to state that where there are objects of the settlement other than the husband and wife whose interests are not remote or contingent, the nexus is ‘diminished’ and may be ‘fatally severed’ dependant on the facts. 

The Simmons case did have a broad class of beneficiaries other than the husband yet a nexus was found because of the fact of the loan. 

It may be possible going forward that the Family Court will continue take a ‘modern view’ of what is meant by assets of the trust being ‘acquired by or through the efforts of a party.’  Could these efforts include being actively employed in the family business owned by the trust?  Could the provision of advice to parents or controllers of the trust establish a nexus? 

Establishing testamentary trusts is likely to be a preferred option for parents when considering how to make provision for their families from personally held assets.  The asset protection (creditor) and tax advantages of testamentary trusts are attractive to the parents.

The assets pass to the testamentary trust not as a result of the efforts of either party to the relationship, but as a result of the death of a relative.  Therefore the starting point would be that there is no nexus between the inheritance and the relationship taking the assets held in the trust outside of the ‘property’ definition. 

However, could nexus be established by looking at when the testamentary trust was established ie at point in the marriage?  If the trust was established many years prior to the breakdown of the relationship could a nexus be established.  The structure of control and the identity of beneficiaries who have actually received benefit will also be factors.  It should not be assumed that testamentary trust assets will have absolute protection from the Family Court.  The trust assets may be property of a party to the relationship, and will very likely fall to be considered as a resource.

Rule 2 - Control

If children or grandchildren have a position of control in family trusts established by parents of grandparents the trust will be of interest to the Family Court if the child or grandchild’ relationship breaks down. 

In the Coventry20 case the Court considered the control exercised by the husband in relation to a trust sufficient for the trust assets to be property. 

Case - Get the records straight.21

The husband’s father established four trusts in the 1970s.  Each trust held interests in the family grazing business operated through a company.  The husband was a director of that company.  The husband and his sisters were each nominated as primary beneficiaries of one of the trusts The husbands parents were joint trustees of the trusts and after the husband’s death the mother became sole trustee.  After the husband became appointor of the trust of which he was the primary beneficiary.  The husband would the sole beneficiary on the trust vesting date in 2020.

The husband and his mother did make attempts to both remove the wife as a beneficiary of the trust and move assets out of the hands of the trustee of the trust.  However, errors were made in the documentation with the result that the aim was not achieved. 

The appeal failed upholding the decision of the trial judge that the assets of the trust were property of the husband.  His position as appointor and the fact he had a vested interest provided he survived to the vesting date meant the assets were his property.

In this case the husband held the appointor role during his lifetime which together with the other terms of the trust meant the assets of the trust were considered to be his property.  The interests of the husbands sisters as failsafe beneficiaries was not considered to be relevant.

The Family Court places particular significance on the role of appointor.  It ignores the accepted understanding22 that an appointor is a fiduciary and therefore must exercise its power in the best interests of the beneficiaries of the trust and in the context in which the power was given.  The Family Court considers if you are an appointor it is a sure thing you will use this power for your own benefit. 

The husband’s father in Coventry established four trusts one for each of his four children.  In doing this he may have been trying to divided his assets to allow for ease of equal division between his children after his death.  In doing so he carved out a clear fund intended to be for the benefit and controlled by his son.  This made the wife’s task relatively simple.  If he had established just one trust with all of the children in control would it have been unlikely the Court would have been able to find the trust assets to be property of the husband?

Quarantine or mix it up?

Questions commonly asked in relation to structuring of family trusts and testamentary trusts are as follows:

·         is it better if I/my children are not the sole trustee and appointor?

·         should we establish a separate trust for each of our children?

Other issues to consider are the nomination of trustees and appointors in family trusts and testamentary trusts.  Is it more appropriate to have one testamentary trust to be established for the benefit of all the children and grandchildren?  It may be in that circumstance that the Family Court would have difficulty in establishing the quantum of the interest of a particular beneficiary in the event of a breakdown in the relationship of that beneficiary.  A divorcing beneficiary could be said to have the potential to receive the whole of the trust assets.  However, each of the beneficiaries of the trust have the same potential to receive.23  It will be then be necessary for the Family Court to determine ‘how much’ of the assets held in the trust are property of the parties to the marriage.  The obvious danger is all of the assets will be considered to be ‘property.’

It may be preferable to have joint trustees and appointors.  It is also often suggested that an independent joint trustee or joint appointor should be appointed.24  In order for this structure to have any advantage the independent trustee must have real involvement in the day to day management of the trust.  The independent must not find themselves being a mere ‘alter ego’ of the other trustee.  The trustee must conduct themselves in accordance with the fiduciary requirements of the office making decisions in good faith for the benefit of the beneficiaries in the context for which the trust was established. 

Professional trustees are an option.  It seems unlikely in the current climate that the use of professional trustees will become commonly used for family trusts in Australia.  The cost and impact on administration would make the trust unworkable in most cases.  There is also the question as to whether Australian families are willing to place assets in a structure controlled by someone outside of the family group. 

Facts must match

The control structure of a trust must be supported by the facts.  The recent Essex25 decision highlights the need for the day to day operation and the structure of the trust to be carefully managed to avoid assets being brought in to the fold by the Family Court.

Case - “wishing and hoping, thinking and praying”

This was a successful appeal by the wife on the grounds that a finding that the husband did not have a financial resource in two trusts was against the weight of evidence. 

Two trusts were established; the S Trust and the N Trust.  Assets were gifted to the trusts by the husband’s mother.  The husband’s brother was the sole director of the trustee company and was the appointor of both trusts.  The husband had ‘looked after’ the trusts for a period of 18 months when the brother was overseas.

The husband was not a beneficiary of the N trust.  He was named as a primary beneficiary of the S trust.  However the husband and his brother submitted that this was an error which they tried to deal with through an unsuccessful attempt to remove him as beneficiary.  The husband was not a capital beneficiary of either trust.  The children of the husband were capital beneficiaries.  The husband had not received any benefit from either trust.  The husband, his brother and mother submitted that the trusts were established to provide income for his mother and to protect her assets from poor decisions which may be made in future as she aged.

The Court considered the evidence including evidence of the husband his brother and the family accountant Mr RO.  Mr RO had an email on his file which referred to the fact that the husband would get control of ‘his’ trust once his matrimonial issues were resolved.  There was an attempt to remove

The trial judge found that it was possible but unlikely that the husband would receive any income from the S Trust as the trust was set up for the benefit of the children. 

The Court considered Kennon v Spry and concluded that the case was not relevant as the parties had not divested any property into the trusts.  The assets were not to be considered property.

The appeal was successful and the Court considered that the evidence demonstrated an intention for the husband to take control of the S Trust and receive income benefits from that trust once his matrimonial issues were behind him.  Why have two trusts if the intention was to provide for the mother?  Why did the brother borrow from the N Trust and not the S Trust?

The S Trust was found to be a resource of the husband

Faulks J dissenting was persuaded by the evidence of the family members and considered the prospects of the husband ever receiving any benefit were remote.  Faulks cited Dusty Springfield in relation to the wife’s prospects of receiving any benefit would be “wishing and hoping, thinking and praying.”26

If we compare the Essex decision with the older Milankov27 decision, in Milankov the facts showed a clear intention that the husband would control the trust after his father’s death.

Case - Inherited Resource

The husband’s father ran his business through a number of trusts.  The husband and the father had jointly controlled the trusts.  The husband and his wife received no benefit from the trusts.  The husband had been removed as a trustee and had been removed as a successor appointor and guardian. 

The Court did not accept the parents contention that they intended the trust to benefit all of their children after their deaths.  The Court considered that on the facts control was always going to pass to the husband.  The Court considered the future control not to make the trust a resource but an adjustment factor giving the husband an assumed inheritance of $2.8 million.  

Rule 3 - Intention

Can the intention of the parties in establishing a trust make any difference to the way in which the family court treats the assets?

Case - For the children…

In the Webster28 case assets of a trust were treated as resource of the wife when they could have been ‘property.’

This was an appeal by the husband on the grounds the assets of the Q Trust should be treated as property of the wife and not a resource.  The Q Trust was established using funds received by the wife from an inherited family business in the form of a $5 million receivable from a family company.  The wife was the sole shareholder and director in the trustee and was the appointor of the trust.  The beneficiaries were the wife and the usual broad class of relatives and related entities.  The wife submitted that it was her intention and that of the husband that the fund be for the benefit of their children.  The wife also gave an undertaking that she would not access the income or capital for her own benefit. 

This undertaking was accepted by the trial judge and on appeal finding the trust assets to be a resource despite the fact the assets satisfied the test to be property.  The undertaking and the husband’s agreement were deciding factors.

This decision may be helpful where families wish to skip a generation and establish trusts for grandchildren.  Clearly expressed wishes regarding the intended beneficiaries and the use of funds in letters of wishes may be appropriate to assist in establishing intention. 

This would mean that control of the trust could be given to the children’s parents without fear of the assets being considered property of child if their relationship fails.  The facts must support the expressed intention otherwise the court is likely to ignore those wishes29

More or other problems created by the above…?

These structuring measures are designed to protect the family’s wealth from the ‘in-law’ factor.  The desire to ensure wealth is not dissipated through divorce comes at a price.  The family must understand that there are potential issues which must be balanced against the protection they hope to achieve.  Administrative issues may arise as a result of the family members being appointed to act jointly as trustees and appointors.  The children will not have ‘their own fund’ to operate in accordance with their particular needs this may lead to conflict, and at worse a family breakdown leading to costly litigation. 

5.  Conclusion

Despite of the global financial crisis, the current generation control an unprecedented amount of wealth.  The wish of this generation is to ensure that their assets pass into the hands and for the benefit of their children and grandchildren.

Binding financial agreements represent a real opportunity to give certainty to the family and both parties to the relationship by giving the ability to quarantine inheritance and family assets held in trust against relationship breakdown.

Trusts remain as important vehicles for effective, measured planning for families.  Structured following certain rules can mean that the assets accumulated in one generation.

Families and Individuals may also wish to consider taking a more “in globo” approach to their estate and asset protection plans.  Communication and understanding may be key to secure assets for future generations. Finally beware of large law and accounting firms marketing Estate Planning Portfolios/Packages for large fees ………………………

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