The Family Court of Australia has recently examined whether assets held in a testamentary trust should be considered as matrimonial property and therefore available for distribution in the event of a relationship breakdown. For those who are seeking to gain additional protection via a testamentary trust, it was a favourable result.
A testamentary trust is a trust created by a valid will, and is a common element of a modern estate plan. Often a Willmaker wishes to incorporate a testamentary trust to provide their beneficiary with improved asset protection, either from a potential bankruptcy or a relationship breakdown.
In considering the property division in a relationship breakdown, the Family Court will take a number of factors into account. Amongst other things, this typically includes what the matrimonial pool consists of and what financial resources the parties have access to.
The matrimonial pool generally consist of assets held in the parties’ individual or joint names, businesses, inheritances received in their personal names, superannuation and possibly assets held within certain trust structures. Financial resources typically include trust income or capital that the parties may have access to.
No testamentary trust is bullet proof against the powers of the Family Court and the Court has a wide degree of power afforded to it by the legislation including:
- power to make orders against trustees of trusts;
- power to make orders which direct or alter the rights, liabilities or property interests of a third party; and
- power to attribute a trust as a financial resource of a party to the marriage and adjust the matrimonial pool available for distribution accordingly.
Previous case law suggests that assets held in a testamentary trust, or any other trust, are more likely to be considered as part of the matrimonial pool if the control and benefit of the trust lies with one of the parties to the relationship. However, this was not considered to be the case in the recent decision of Bernard & Bernard  FamCA 421 (5 July 2019 per Henderson J) (“Bernard”).
Bernard & Bernard  FamCA 421
In the case of Bernard, the Wife brought an Application under Section 79 of the Family Law Act for a property settlement and contended that the Husband’s interests in a testamentary trust formed a part of their matrimonial pool available for division. The Husband did not agree submitting that the testamentary trust should be excluded from the matrimonial pool and considered a financial resource as he had no control over the assets or income earnt as he was not a trustee.
The relevant facts of Bernard are as follows:
- The parties’ married in 1998 and separated in September 2015. At the time of separation there were two adult children of the marriage.
- The Husband’s Father made a will in 2012 and subsequently passed away that same year. The will provided, amongst other things for the creation of two testamentary trusts. The first trust was for the Husband and named the Mr Bernard Family Will Trust. The second trust was for his daughter, the Husband’s sister and named the Ms C Bernard Family Will Trust. The Husband’s late Father’s estate comprised of approximately $3,500,000 of assets.
- The Husband was a primary beneficiary of his trust. His sister was the trustee. The sister’s trust mirrored the provisions of the Husband’s trust being the sister was the primary beneficiary however, the Husband was the trustee. It should be noted the sister was joined as a third party to the proceedings.
- In 2012, the Husband and sister began to conduct business together in partnership through the Bernard Family Will Partnership (“the Q Partnership”). The Husband and sister generated income through the Q Partnership.
The Wife’s primary argument was that the two testamentary trusts were mirror trusts and that the assets of the Husband’s trust were effectively his and the assets of the sister’s trust were effectively hers despite this being contrary to the trust deeds.
The Husband submitted he had no control over the income or capital of the trust and that control and ownership was with the trustee, his sister, therefore excluding the assets from the matrimonial pool.
Justice Henderson considered the Wife’s argument, however, ultimately found that the testamentary trust should be excluded from the property pool. In reaching her decision, Her Honour considered the following factors and relied heavily on the applicable trust deeds.
- The Husband was not the settlor of the trust.
- The Husband is entirely dependent on his sister, the trustee, to distribute income and accumulate income.
- The trustee has complete discretion in determining any distributions.
- The Husband has no power to apply any of the assets and income of the trust of which he is a beneficiary. The Husband had that power in his sister’s trust of which he was not a beneficiary;
- The Husband is a discretionary beneficiary and does not hold any other entitlement. There were many classes of beneficiaries including the Wife their children, grandchildren and great grandchildren of the Husband.
- The assets in the Husband’s trust were never matrimonial property.
The Court ultimately held that the Wife must deal with the assets the Husband holds as they are. Importantly in this case, the Husband was only a primary beneficiary under a trust, not the controller or trustee, with that power being vested in his sister.
Of note, the Court considered that if the sister provided the Husband with all the assets of the trust of which she was trustee, it would be a significant breach of her obligations as trustee to the other beneficiaries.
It is clear from Bernard, that from an estate planning perspective, one way to provide additional asset protection in the Family Court is to take away or limit the control of the beneficiary within the terms of the testamentary trust. Having the flexibility for beneficiaries to self-impose these restrictions after the testator’s death is a major benefit, even if when they sign their will, the restrictions do not appear necessary.
It is also important to ensure that if you are separating, you are aware of your assets and the matrimonial pool available for division whether it is by virtue of a trust, property or inheritance and the way they may be treated by the Family Court.