It is a fundamental trust law principle that `control’ of a discretionary trust rests with the `Appointor.’ However, the notion of `control’ extends far beyond this or other trust law concepts in a Family Law context.
The state of play now is that the definition of `control’ is very, wide. It includes `indirect’ control and varies according to the particular circumstances of each case. It is fair to say that `indirect’ control will always be the subject of a Court’s examination.
While family law cases are useful for guidance on what conduct constitutes control of a discretionary trust, it is by no means prudent to rely solely on such case law in determining the width of the concept of control.
The Australian Taxation Office view on what constitutes control of a discretionary trust is useful as further guidance. The Explanatory Memorandum (EM)to the introduction of the current s328-125 states that whether a trustee is accustomed or might reasonably be expected to act in accordance with the directions or wishes of another is to be determined having regard to the particular circumstances of the case. According to the EM, some factors which might be considered as evidencing control are:
The trustee’s conduct in the past;
The relationship between the entities and the trustee;
The amount of any property or services transferred to the trust by the entities;
Any arrangement or understanding between the entities and any person who has benefitted under the trust.
The ATO has given examples of the circumstances that would support a finding that a person has acted or could reasonably be expected to act in accordance with the wishes of the subject spouse (i.e. indirect control). They are:
The existence of a close family relationship;
The lack of any formal agreement or formal relationship between the parties that sets out how the parties are to act in relation to each other;
The likelihood that the way the parties act or could reasonably be expected to act in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations; and
The actions of the parties.
The above criteria are very relevant to a family law situation where a spouse is part of a family owned business. On the above analysis, the spouse’s interest (even if not a legal interest) in the family run business could be exposed to being added into the matrimonial pool. The longer the spouse’s marriage, the more likely it is that the family owned business itself will be exposed to the spouse’s matrimonial property proceedings and or settlement.
Steps can be taken to limit the exposure of the family run business but it requires careful and early planning, detailed documentation and record keeping.
If you have clients to whom the above is relevant, we can assess your client’s circumstances with a view to providing advice on the extent of their exposure to a family law claim. We can also offer solutions to address their exposure if possible, as part of the assessment process.
1S328-125 Income Tax Assessment Act 1997 sets out the control tests that apply to discretionary trusts involved in the conduct of small business.