Pursuant to section 79 of the Family Law Act 1975 the Court may make Orders with respect to the property of parties to a marriage altering their interests in such property.
The Family Law Act 1975 defines property in relation to a marriage or de facto relationship, as property to which both parties or either party is entitled to, whether in possession or reversion. That means for assets to be treated as property under the Family Law Act 1975, the parties to the relationship must have control of the asset and have the power to distribute to himself/ herself or the other spouse.
Where a family trust is established for the immediate family and is controlled by one or both of the parties to the relationship, then there is no difficulty in determining that the assets of a family trust in those circumstances would be considered and included in the property pool to be distributed.
The difficulty arises where the source of a trust asset is from someone other than a party to the relationship and there are third party beneficiaries who are to be considered. The circumstances where the Court can look at assets of a trust, which is controlled by a third party, is when a party to the relationship has an equitable proprietary interest or has the power to appoint or remove the trustee.
Kennon v Spry has provided a precedent for the Courts when determining whether it has the power to make Orders in relation to a discretionary trust. It has been held that the Court will make an Order in the following circumstances:-
- Where a party to a relationship is either the trustee, controls the trustee or has the power to appoint and remove the trustee;
- Where the trustee may distribute funds to a party to the marriage, directly or indirectly; and
- Where the trust assets would belong to a party to the marriage, either wholly or in part, but for the existence of a trust structure.
In Kennon v Spry, the Husband was the trustee and settlor of the trust. Prior to separation, the Husband as settlor executed a deed of variation excluding the Wife as a beneficiary. After separation, the Husband created four separate trusts for each of the four children of the marriage and then distributed the assets of the original trust to the four newly created trusts. The Wife made an application to the Court that the variation of the trust and the distributions be reversed so that the assets of the trust be included in the property pool. The Court ordered in the Wife’s favour revoking the variation and distributions made to the four trusts. The Court ordered that the Husband pay the Wife $2,182,302.00, representing a 52/48 division of the property pool in the Husband’s favour. The Order was not made against the Husband as trustee of the trust but the Court had taken into consideration that the Husband had the ability to pay the monetary sum given his control of the trust assets.
In the circumstances where property is under the control of third party trustees, and neither party has any legal or equitable entitlement to any part of the trust fund, nor a power of appointment of the trustee, the trust is at most a financial resource to that party. A financial resource is a section 75(2) factor considered by the Court when making Orders in relation to property settlement and spousal maintenance. If a party was a beneficiary to a discretionary trust, which was controlled by a third party trustee, the Court may consider the potential distribution to be received by that party as a financial resource. If the Court held that the trust was a financial resource to that party, then an adjustment would be made to the division of the property pool, decreasing that party’s entitlement.
