Be Careful When Structuring Discretionary Trusts8-May-2012 Family Law By Mark Streeter
A judgment of the Full Family Court (Harris & Harris  FamCAFC 245) delivered 22 December 2011 illustrates the treatment of discretionary trusts in Family Law.
The judgment of the Appeal was from a single Judge who had assessed the net value of the parties’ assets at $4,269,180.00. This figure included an agreed figure of $1,500,000.00 for the net value of a discretionary trust known as the Harris Family Trust. The Trial Judge split the property 45:55 in favour of the Wife.
A significant issue at trial was whether or not the Family Trust was ‘property’ of the Husband and therefore available for division by the Family Court. The Husband appealed to the Full Court on the ground that he did not have control of the Trust and it was not his property. The Wife argued that the Husband had indirect control over the Trust through his mother who acted as a “puppet” for his interests. The Wife received distributions from the Trust during the marriage.
Historically, the Family Trust had been established by the Husband’s father in 1978. The Husband’s father was the first appointer until his death on 21 August 1995. On his death, his widow (the Husband’s mother) became and continued to be the appointer.
The principal beneficiaries of the trust were the Husband’s parents, their children, that is the Husband and his sister, and the “lineal issue” of the Husband’s father. The following persons were the directors and also the shareholders in the trustee company – the Husband’s mother: 2 shares; the Husband’s son (A) from a previous marriage: 1 share; and a person known as MB (who is apparently a long standing friend of the Husband): 1 share.
In the High Court decision of Kennon v Spry the Court held that in order for the assets of a discretionary trust to be considered the property of a beneficiary for Family Law property settlement purposes, there must be ‘direct’ or ‘indirect’ control of the trust by that beneficiary. In the first instance the court held that the trust’s assets should be treated as the Husband’s property because they were indirectly controlled by him. The assets of the trust were therefore held to form part of the pool available for division between the parties.
The Full Court in Harris affirmed the principle of law that the beneficiary of a non-exhaustive discretionary trust who does not control the trustee directly or indirectly has a right to due consideration and to due administration of the trust but it is difficult to value those rights when the beneficiary has no present entitlement and may never have any entitlement to any part of the income or capital of the trust.
The Full Court in Harris overturned the Trial Judge in respect of the Family trust and held:
“In the present case and on the basis of the material before us the Husband appears to be no more than such a beneficiary of such a trust. He is not the appointer of the Trust nor does he hold any position in the current trustee company. On the assumption that by the use of the word “directly”, the Chief Justice was referring to the strict legal position, it therefore cannot be said that the Husband “directly” controls the current trustee. Nor could it be said that he “directly” controlled the previous trustee.”
Accordingly, the Trust was not to be considered an asset of the Husband and thus should not be included in the property pool available for division by the Family Court.
Comment from Mark Streeter – Sydney Lawyer
Harris is significant because it explains the concept of indirect control in the High Court Decision of Kennon v Spry. It establishes that in order to prove that there is indirect control of a Trust, evidence must be provided to support allegations of indirect control or a ‘puppet’ scenario.
It is important when considering estate planning or business planning that careful consideration is given to the structure of the Trust.
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