A quick guide to the family trust – Are its assets exposed in a marriage breakdown
Family discretionary trusts are a feature of the financial affairs of many families. They are a commonly used vehicle through which to operate a business and by which to hold property apart from the family home.
A trust is not an entity like a company (despite tax legislation classifying a trust as an entity for tax purposes). At its most basic, a trust is a relationship between 3 people: A settlor, a trustee and a beneficiary. A settlor creates the trust by gifting an asset (usually money) to the trust. The settlor directs the trustee (of the trust) to hold that asset for the benefit of other people (beneficiaries). The trustee manages the trust assets and does business on behalf of the trust and distributes any income that asset earns to beneficiaries during the life of the trust. The trustee has a discretion as to which beneficiaries will receive any distributions from the trust. This is the reason for the usual family trust being described as a discretionary trust. Beneficiaries must pay income tax on any distributions they receive from the trust.
A beneficiary has no control over how the trust operates or ownership of its assets. The only power such a beneficiary has is to require the trustee to consider making a distribution to that beneficiary. If the trustee refuses to make that distribution then there is nothing further the beneficiary can do.
There are two other important players in a trust arrangement. The `appointor’ (sometimes referred to as the principal) is the most important person as they control the trust by being able to remove the trustee and appoint another trustee. Some trusts also have a ‘guardian’. The guardian’s role is to approve certain activities by a trustee or to approve any variations to the trust deed.
A trust does not need to be created by a written document. However, almost all modern trusts (including a family trust) that are deliberately created are done so by way of a trust deed. This document sets out the rules for how the trust will operate.
When a trust comes to an end, the assets of the trust must go to those beneficiaries who are entitled to receive the capital.
There are a number of reasons why these trusts are popular. One reason is asset protection. Other common reasons are to take advantage of the considerable tax concessions available by enabling income earned by a trust to be split between spouses and perhaps their children depending on their age.
When a family trust holds significant assets or a large sum of money, it becomes a matter of great interest and often dispute in a relationship breakdown. The issue is whether or not the assets held by the trust are available for division between the parties.
When should trust assets form part of the assets available for distribution between the parties in a marriage breakdown?
The answer: It depends on the particular circumstances.
However, there common family circumstances that are likely to determine whether or not the trust assets should form part of the assets to be distributed between the parties are:
- the extent to which a spouse `controls’ the trust (or the trustee in the case of a company) either directly or indirectly;
- whether the assets of the trust have been created by the parties during the period of the marriage or relationship; and
- whether or not a spouse has a history of receiving distributions from the trust;
- whether or not a spouse is entitled to receive a share of the assets of the trust upon it coming to an end.
Even if trust assets are not held to form part of the assets to be divided between the parties, they may still be regarded as a `financial resource’ of the party who has the association with the trust.
For further information about the treatment of trusts in a family law context and advice that is specific to your circumstances please contact us to arrange a consultation.