What happens to family trusts on divorce?
The courts in Australia have the power to include the assets within a trust in a matrimonial asset pool.
When the Court is deciding on whether or not a family trust is considered property they will the following into consideration:
- The trustee - who is it? (one or both parties);
- When was the trust formed?
- If the trustee is a company, who controls the company?
- Who are the beneficiaries, who is the settlor and who is the appointee?
- How did the trust acquire assets?
- What are the contributions from each party?
- How much income is distributed from the trust / who is currently receiving income from the trust?
- What are the terms of the trust?
It is essential to address family trusts when undergoing divorce proceedings, as family trusts may be included in a property settlement.
What is a Family Trust?
If you are a trustee or beneficiary of a family trust, you will want to know what happens to family trusts on divorce.
Family trusts are common legal structures used in Australia with a multitude of benefits.
Under the Family Law Act 1975 (Cth), Family Trusts could be considered property and are thus liable to be divided between parties to a divorce.
The 'legal owners' of the trust are known as trustees and are in charge of managing and administering assets for the benefit of the beneficiaries.
Certain assets can include money, investments, shares and property that can be held within a family trust.
To form a family trust, the settlor provides the trustee with the assets to be held for the beneficiaries.
The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee, and the appointor.
The appointor is the person who has the power to change the trustee and is responsible for appointing and replacing the trustee or trustees if need be.
The beneficiaries are usually family members who may benefit from the trust, such as parents, children and grandchildren.
In the event of bankruptcy, Family trusts can protect assets from creditors, reduce tax rates and protect vulnerable family members from poor spending decisions.
They can also provide long-term financial support to future generations, however, in the event of divorce things can get complicated.
Family Trusts in Property Settlement
In property settlement cases, a family trust could be considered as an asset/property or a financial resource. Under section 4 of the Family Law Act 1975 (Cth), property is defined as;
a) in relation to the parties to a marriage or either of
them-means property to which those parties are, or that party is,
as the case may be, entitled, whether in possession or reversion;
or
(b) in relation to the parties to a de facto relationship or
either of them-means property to which those parties are, or that
party is, as the case may be, entitled, whether in possession or
reversion.
A trust might be considered property if either party has control over the trust as the appointor or trustee.
So, what happens to family trusts on divorce?
If the Court finds that one party has influence over the trust, the trust will then become part of the asset pool of a marriage or de facto relationship and then can thus be distributed accordingly.
If one party is not listed as either the appointor or trustee but is indirectly controlling the trust, the trust could still form part of the asset pool.
A trust may also be referred to as a 'financial resource.'
This is because a financial resource is an asset that will generate income in the future, such as an inheritance or a beneficiary's interest in the trust.
Parties can not access this immediately but if there is intent to obtain distribution from the trust as income or capital then the trust will be considered a financial resource in Australia.
Once considered a financial resource, under section 75(2) of the Family Law Act 1975 (Cth), the Court will take the trust into account as a potential future necessity for one or both parties of divorce.
Justice Family Lawyers has extensive experience in family trust and divorce law, and are committed to safeguarding our client's rights and interests. In this article, we'll explain the role of family trusts in divorce, and discuss how best to factor them into any property settlement arrangement.
What Should be Done if a Family Trust is Included in the Divorced Couple's Property Settlement?
The court considers various factors when determining how to divide a family trust in the event of a divorce.
You may be seeking to exclude a family trust on divorce, and if so, you would need to convince a court that you are not in control of the trust.
The size of the trust, its assets, where it was established, and the expectation of the trustees in terms of the control each beneficiary is entitled to over the trust, are taken into consideration.
If the family trust has been determined to be included in the divorce property settlement, it's recommended that you seek legal advice.
There are numerous ways in which trust assets may be distributed between the parties, including by way of payment, loan or transfer of asset shares, and a lawyer experienced in family trust law can determine the best option in each case.
Quick Summary
- Family trusts fall under Family Law Act 1975 (Cth), meaning they could potentially be divided between parties in a divorce.
- It's essential to address family trusts when undergoing divorce proceedings, as they can be included in a property settlement.
- The court will take various factors into consideration when dividing a family trust in the event of a divorce, including the size of the trust, assets, establishment location, and the beneficiaries' entitlements.
- It is recommended that legal advice is sought when the family trust is due to be included in a divorce property settlement, as there are numerous ways in which trust assets may be distributed between the parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
