Can Family Trusts override the Family Court?

Family Trust v's Family Court

As a tax lawyer, I structure clients' affairs to legally reduce tax burdens. I am also asked to:

  1. consider asset protection - in case the client or one of the structures goes bankrupt or insolventFamily trust divorce family court hide assets
  2. stop the Family Court taking assets if there is a break-up

Let's consider the omnipotent, omniscient and omnipresent Family Court. For indeed no Court in Australia has more power. It is free to do what it wishes with no rules of conduct.

A property settlement begins with the accountant identifying the assets, liabilities and financial resources of the parties. This is easy for a family home, superannuation and cash. It makes no difference if the family home is in her name. It makes no difference if the shares are in his name. Ownership is not relevant. All assets are 'pooled' together. The Court even considers your dead father's estate. The issue becomes problematic for the financial planner and accountant when their clients have investment and business structures. Australia's favourite business structure is the Family Trust.

Family Trusts

A Family Trust has 3 groups:

  1. Trustee (it holds the legal title of the assets. But it is a puppet. The Appointor hires and fires it at will. )
  2. Appointor (this is god. It controls everything, including the Trustee)
  3. Beneficiaries (this is not just mum, dad, children and in-laws. It includes all Australian charities. If you have a share in a public company, all the shareholders of that company. Therefore, most Family Trusts have 400,000 plus beneficiaries)

Free training course on Family Trust here.

Family Trusts allow you to distribute income to the persons paying the least amount of tax in that financial year.

Does the Family Court consider Family Trusts as assets of the relationship?

Do Family Trusts stop the Family Court? For example, you make your father the Appointor. You then tell the Court that the assets of the Family Trust are not yours - they don't belong to your marriage. This rarely works. The Court has the power to direct your father to hand over assets to your ex-wife.

Are family trust assets 'protected'? Or are they merely part of the pool of assets available for division between your ex-spouse or de facto?

Since I started practising in the 1980s, the Family Court has generally ignored any protection provided by the Family Trust structure. The Court merely puts all assets in the Family Trust into the 'pool'. What about if you remove your wife as a beneficiary - of course, this does not work.

For example, the Family Court 'pooled' the assets of a 1968 Family Trust: Kennon v Spry (High Court). The Family Court is comfortable including family trust as the property of the marriage or de facto relationship.

The Family Court takes into account three factors:
  1. your  'control' of the trust - directly or indirectly
  2. did you put the assets into the Family Trust - are they really your assets?
  3. who benefits from the Family Trust? Are distributions going to you or your new girlfriend?

Most family trusts hold your family business or investment assets. You are the Appointor. You distribute the income to yourself and your children. Obviously, the Family Trust assets are 'pooled', with no argument.

But in Harris v Harris (2004) the family trust assets were NOT pooled. This was because there was insufficient evidence to show the husband controlled the trust. The Appointor (god) was his mum. He was only the trustee (puppet). Mum could sack him anytime. The wife should have produced evidence that mum took her marching orders from her son. This is how the more modern cases go, Harris v Harris is rarely followed these days.

What can the Accountant & Adviser do?

If you are trying to include trust assets in a property settlement, compile relevant documents at an early stage for your client. Get the trust deed, variations to the trust deed, tax returns and financial statements. Seek all paperwork and emails regarding how the family trust operates. These documents may show who gives instructions and makes decisions over the trust’s assets.

Binding Financial Agreements

There are 3 ways to get the Family Court off your back.

  1. Stupid
    Get all your money and give it to your best friend. And then hope in years to come when the divorce is well and truly over your friend gives you back the wealth. However, your friend may die, get divorced, go bankrupt or forget who you are. You risk losing 100% of your assets - in a divorce settlement you only generally lost half your assets
  2. Stupid, expensive and illegal
    Liquidate all your assets and gift them to a banker in a tax haven. And then when the divorce is over ask the banker if you can have the money back. You suffer massive Capital Gains Tax and you pay stamp duty again when you buy back the assets in Australia. Also, it is illegal to tell the Court or the ATO, for that matter, that you don't have the assets. Since you are working in concert with the tax haven banker the assets are still yours.
  3. Binding Financial Agreements
    You come together with your spouse either before, during or after the marriage and decide how you want to divide up your assets if you separate. This is legal but expensive. For 'prenups', co-habitation agreements, binding financial agreements, superannuation splitting agreements, see here:
    http://www.legalconsolidated.com.au/bfa-pa/
    http://www.legalconsolidated.com.au/married-man-marries-lady-of-the-night/

Trustee Distribution Statements signed after 30 June

1. Your Family Trust has default beneficiaries. They are your two children Rob and Kevin.
2. Your son, Rob, is divorcing.
3. The evil family lawyer subpoenas your accountant, his secretary and an ex-employee of the accounting practice. And asks each of them individually in Court:

'Have you seen or heard of anyone in your office or a client backdating a Trust Distribution Minute and before you answer, if you lie under oath I will ask the Judge to issue a Bench Warrant so that you are arrested for perjury?'. 

4. Every year that the Trust Distribution Minute was signed after the 30 June means that the income, for that year, belongs to your divorcing son, Rob.
5. The evil family lawyer asks for half the assets in your Family Trust to go to your ex-daughter in law.

Summary

Your business clients often have complex structures to reduce tax and provide asset protection. This adds complexity in a divorce. Accountants and advisers are best placed to dissect and clarify where the assets are. They know the client. The accountant and adviser have the financial training and skills.

The assets held in a Family Trust are not automatically the property of the marriage. However, family law legislation can easily make the trust assets “property of the marriage” for a relationship breakdown. Is the trust’s assets part of the property of the marriage? It depends on whether the trust is the alter ego of the spouse - or someone outside the marriage.

See also:

Loans to children

Are Family Trusts replacing Self-Managed Superannuation Funds

Contractual Will agreements for 2nd marriages

Family Court looks at dead father' estate

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
National taxation partner
Legal Consolidated Barristers & Solicitors
Australia wide law firm
39 Stirling Highway, Nedlands, WA
Mobile: 0477 796 959
Direct: 08 6389 0400
National: 1800 141 612
Reception: 08 6389 0100

 

 

 

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