You are an accountant who has just set up a family trust for a trusted and longstanding client.
- The trust is discretionary in nature
- Your client is the trustee
- The trustee’s son and that son’s wife are beneficiaries of the trust
Your client also tells you that his son is helping him out. Specifically, the son is going to be responsible for purchasing a residential property on behalf of the trust. Your client doesn’t know where or when the house is being purchased, but he says that it should happen soon because when it is purchased the son will collect the net rent once any outgoings have been paid…
If the son and his wife separate, the assets of the trust will be brought into their matrimonial settlement
Assets belonging to a trust have also been included in a property settlement in circumstances where:
- A husband was trustee of the trust but resigned as trustee after separation, and had no connection with the trust at the time the property settlement was decided
- A wife was one of 5 directors of a corporate trustee, although she was the sole appointor
- A husband was trustee, but neither the husband or the wife were beneficiaries, and the husband distributed the assets of that trust to four separate trusts of which he apparently had no connection to.
So when is the property of the trust actually property of a party in a family law settlement?
The key factor determining whether the assets of a trust will be included in a property settlement is that of control.
If the Court believes that a party, whether they be trustee, appointor, beneficiary or none of the above, has effective control:
- over how assets in the trust are controlled
- over how, when, if distributions are made
- over which office holders are appointed to what office, then:
it is open for the Courts to say that the assets of the trust are actually assets of the controlling party. And if they are assets of the controlling party, they are assets available for matrimonial division.
What does this mean?
- It doesn’t matter how the trust is structured.
- It doesn’t matter what positions any involved party occupies
- It doesn’t even matter if those parties whom your client specifically doesn’t want to benefit in the event of a separation, typically the sons or daughters in law, sign a piece of paper disavowing any interest in the trust.
How do I protect my clients when they instruct me to set up a family trust?
You can assist your clients in the following ways:
- If a party is to be merely a discretionary beneficiary, advise your client that that party is not to have any control over any aspect of the administration of the trust
- Expressly include in the trust deed that the property of the trust is not to be included in any future property settlement.
By far the best protection is to have the beneficiary’s engage a lawyer to draft binding financial agreements. Binding Financial Agreements are legally binding documents in which parties can define their interest in property that might otherwise be classed as matrimonial property, and they may draft these documents before separation.