This article was written with the assistance of Greg Parker, Partner at Swaab Attorneys.
In Australia, it’s common for family-run businesses to operate under a trust, primarily for asset protection benefits and the ability to effectively distribute income to family member beneficiaries.
Unfortunately, it’s also rather common for marriages and relationships to breakdown. When this occurs, and the Family Court is required to determine how assets are distributed, assets held in a trust may not be afforded the same level of protection as they would in a commercial context.
The intersection of Family Law and Trust Law is complex, and we’ve aimed to provide some clarity below around practical issues that might arise when the two meet. The following advice is general in nature and is not intended to be legal advice. It is important you seek appropriate legal and business advice that takes into account your particular circumstances.
When are the assets of a trust considered part of the relationship asset pool?
When parties cannot resolve their dispute outside of court, they may apply to the Family Court for a property settlement. It’s the Court’s role to determine a just and equitable split.
Where assets are held in a trust, the Court needs to decide whether the trust is effectively ‘looked through’ and the assets treated as property of one of the spouses and hence part of the relationship asset pool.
Generally speaking, the amount of control that a spouse exerts over the trust and the assets held in the trust will determine whether the assets are considered part of the relationship asset pool.
If one of the parties is able to distribute income of trust assets to themselves, is the Appointer or controls the Trustee, then the trust assets are more likely to be considered part of the relationship asset pool.
If someone other than one of the spouses acts as Appointer or Trustee but the spouse is the true controller (a so called ‘puppet’ arrangement) then the Court will look through the formal arrangements to determine whether the trust assets form part of the relationship asset pool.
When is a trust considered a financial resource?
If a trust is not considered part of the relationship asset pool, the Court might still determine that it is a financial resource for one or both parties involved in the settlement.
This tends to occur when one party is a Beneficiary of a family trust and is reasonably expected to receive distributions of income or capital.
In this instance, the parties will likely have their property settlement adjusted by the Family Court to ensure a fair settlement.
Multi-generation family trusts and their treatment by the Family Court
Although the full asset protection benefits of a family trust may not be maintained in a Family Court proceeding, the trust can still provide some significant benefits. A practical example is found in multi-generation family businesses that are held in a trust.
Where a family business is held in a trust that is genuinely managed by multiple members of the family, that trust is unlikely to be considered part of the relationship asset pool of any particular family member. As such, ownership of the family business can be retained by the family in the event of a marriage breakdown of one of the family members.
However, it is also likely that the property settlement for that family member will consider the family business as a financial resource. This will reduce the other assets that the family member may be able to retain, but would preserve family ownership of the business, something which is usually considered critical in a multi-generation family businesses.
For trusts to be an effective vehicle for asset protection, it’s important to consider how they are treated under Family Law.
You should speak with your lawyer about family law and associated issues.
For assistance structuring or restructuring your business, contact your local William Buck Advisor.