31 Jul What Happens to the Family Trust in a Divorce? It Could Be Part of the Property Pool.
There are more than 800,000 family trusts in Australia, and those trusts manage more than $3 trillion in assets. So understanding what happens to a family trust in a divorce is an important consideration – particularly for high-net worth individuals.
That’s because when it comes to high-net-worth divorce cases, the shared property pool can be incredibly complicated. There may be international assets, luxury cars, business interests, cryptocurrency – you name it. And because of the significant level of assets involved, they’re also common in high-net-worth property settlements.
So what happens to a family trust in a divorce? Is it protected from property settlement claims? Or is the whole lot included in the shared asset pool? Do you have any rights to protect what you believed was rightfully yours?
Here’s what happens to a family trust in a divorce in Australia.
What is a family trust?
There are many different types of trusts in Australia. A family trust – also referred to as a discretionary trust – is the most common type used by families.
Family trusts can be used to distribute assets, run a family business, manage investments and protect family or business wealth. It’s unique in that its aim is to benefit the family group. And, unlike some other types of trusts, there’s no fixed entitlement for trust beneficiaries.
In other words, beneficiaries of the trust don’t typically ‘own’ any of the trust assets. Instead, they have access to the benefits from the trust which are managed and administered by the trustee at their ‘discretion’.
Families often choose to set up a family trust because it has a lot of benefits, including tax advantages, wealth protection and confidence in your estate planning. But it can add complexity to your property settlement.
What happens to a family trust in a divorce?
There is a common misconception that family trusts protect assets and funds in a divorce. But even if the trust is only in one partner’s name, it could still be included in the property settlement.
Income from a family trust
Income from a family trust, that is income that has been paid out by the trustee to one partner or the other, is treated just like other income. It will be divided according to the typical factors that are applicable to income generally.
Assets in the family trust
The assets, on the other hand, are treated differently. The Family Court has the power to decide whether the assets in a family trust should be included in the property pool during settlement. They will typically examine the family trust deed first and then apply a set of factors to see whether a spouse benefited from the trust during the marriage or has control over it.
To determine this, the Court considers some factors, including:
- When the trust was established
- Who is the appointer of the family trust
- Who is the trustee of the trust
- The terms of the trust deed
- Whether the trust assets are separate from personal property
- Whether there’s a possibility the trust is being used to hide assets
- The signatories on any bank accounts related to the family trust
- Whether the trust benefits one or both spouses in the marriage
- If the income is typically distributed to one of the parties
- Whether the trust benefits any other beneficiaries
- Whether the trust was used to manage family assets
- Who signs the written resolutions
If the factors combined to show that one of the parties shows that they have control of the family trust, then it’s likely that the value of the assets of the trust will be included in the property pool.
If the Court decides that the parties to the divorce don’t have control of the trust, it’s still possible that the assets (or even a portion of the assets) will be included in the property pool. For example, if income is distributed to the beneficiaries and the amounts are substantial, and the trust will be in existence for a long time, then these assets could also be included.
Assets in the family trust
How a family trust is divided
If the court deems that the trust assets should be included in the shared property pool, then what?
Asset division
The assets could be subject to division during the divorce. If the assets are real property, for example, they might need to be sold (or otherwise ‘bought out’ by one party) in order to free up cash to divide the pool.
Beneficiary changes
If both spouses are beneficiaries, and the terms of the trust deed allow the trustee to make changes to beneficiaries, then one spouse might be ‘bought out’ and removed from the trust. It will then largely go on as before with only one spouse as the beneficiary.
Dissolution of the trust
In some cases, though it’s rare, the Court might order the dissolution of the trust. This will only be done if it’s necessary to ensure a fair distribution of the assets and the trust is viewed as a sham or as a way to get around property settlement claims.
If you’re going through a divorce, and a family trust is involved, get in touch
Family trusts can add a layer of complexity to property settlement – especially in high-net-worth separations. It can be extremely helpful to seek out legal advice early as the right guidance can protect your interests, make your options clear and help you get a fair and legally sound outcome.
If you have a family trust, are a high-net-worth individual and are starting a new relationship, it’s a great idea to speak to our team. We can help you protect your assets through binding financial agreements (prenups), which can also help you avoid high family law costs in the future and ensure that everyone feels confident about their financial futures.
Do you need support creating a family trust, managing a property settlement or protecting your rights during divorce? As family law and divorce specialists, Toomey Family Law can help. Get in touch today.