Discretionary trusts (often called family trusts) have long been recommended by financial advisors as a way of protecting assets. Sometimes this is to protect the assets from business risk; sometimes to protect from relationship breakdown. Often, we find the asset protection qualities are misunderstood. Unfortunately, things just got more complicated.
A recent family law case has looked at a question we are constantly asked: Are the trust assets protected if we break up?
The case of Woodcock & Woodcock (No. 2)  FedCFamC1F 173 (“Woodcock”) considers when discretionary trusts are defined as property (and hence liable to asset division) in a divorce.
Previously, the 2008 decision of Kennon v Spry held that assets in discretionary trusts could be divided as property in family law only if one of the spouses had both effective control of the trust and were part of the beneficiary class. As a general position, where control of the trust was shared with third parties, ‘effective control’ of the trust was not met and therefore the assets of the trust weren’t liable for division. If the Court took the trust into consideration, it would consider it as a future financial resource of the spouse with part control or it may not factor the trust in at all. This had widespread implications for discretionary trusts held by more than one party, allowing these trusts to evade property division when marriages fell apart. It meant that joint control of a discretionary trust was a common asset protection strategy.
Woodcock has, however, seen the previous position overturned and the assets of discretionary trusts brought into the family property pool.
This decision revolved around the definition of ‘property’ according to section 79 of the Family Law Act 1975 and, also, what is capable of valuation.
The big picture:
- There were four discretionary trusts, built from intergenerational wealth from the husband’s family.
- The wife was arguing that the husband had an interest in the trusts, the assets were property and hence could be valued in the division of their assets.
- The husband argued his interests in the trusts were no more than rights to due administration of the relevant trust and rights with respect to due consideration. His argument was that, in both instances, such rights weren’t property and were incapable of being valued.
- In the end, the Trial Judge found that, given the husband’s level of influence and past distributions within the trusts, while the element of ‘effective control’ may not be met, his rights in relation to the trust could be considered property and capable of valuation; finding the trusts, although not under his effective control, were property and came into the division of assets between the husband and wife.
The definition of ‘property’ under Australian Family Law seems to be becoming broader and broader. Woodcock has made some far-reaching conclusions on effective control and the inclusion of discretionary trusts within the definition of property divisible amongst spouses.
This is the first case to pierce the veil of intergenerational family trust structures, allowing for the division of trust property, in the same vein as a house or bank account.
It’s unknown whether Woodcock will be contested in future decisions – we expect there are a lot of people with a vested interest in the outcome of any further decisions.
Existing asset protection structures and advice needs to be reconsidered in light of this decision. If you have concerns about the protection of wealth within a trust, from family law risk, we strongly recommend obtaining fresh advice about the structuring of your trust and your risk profile.
If you would like to discuss the above in more detail, please contact our Estate Planning team on (02) 4927 2900.