Family discretionary trusts are a common 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.
There are a number of reasons why these trusts are so popular. One reason is asset protection. Other common reasons are to take advantage of the considerable tax concessions available and to enable 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 family assets?
The answer: It depends on the particular circumstances.
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 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 asset and distributes any income that asset earns to beneficiaries during the life of the trust. When a trust comes to an end, the assets of the trust must go to the beneficiaries.
There are two other important players in a trust arrangement. The `appointor’ is the most important person as this person controls the trust by being able to remove the 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.
Three common family circumstances that determine whether or not the trust assets should form part of the family assets are:
- The extent to which a spouse `controls’ the trust (or the trustee);
- 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.
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.