When trusts & family law collide

How the court approached the trusts

In the initial judgement, it was held that the trusts weren’t property of the Husband. The Wife appealed that and the question for the appeal court was whether the trusts (and therefore their assets) should be included as property of the Husband or whether they should be seen to be not property but rather a financial resource.  

The decision on appeal was a majority one, with 2 of the 3 judges finding the trusts were property of the Husband. The third dissenting judge considered that the trust were not such property.

The successful argument of the Wife was that the trusts should be regarded as property of the parties because the husband (who was the appointor of the trust) could exercise his power of appointment to control each of the trusts for his benefit.

The court commented that whether trust assets are property of a party in family law proceedings within the meaning of the Family Law Act depends on the circumstances of the case, in particular depending upon:

• The terms of any trust deed
• The purpose of the trust
• The origin of the trust assets
• Whether a party has control of the trust
• Whether that party has the power to distribute capital to one or both parties
• The history of dealings involving trust property
• Whether but for the trust, the property would unquestionably be the property of a party or the parties.

In this case, the Husband’s control came about by way of inheritance of shares and transition provisions in the trust deeds. The majority judges considered that the Husband had control of the trust as he was able to remove other co-appointors and be the sole appointor.

Why this decision matters

The judgement does emphasise that in different circumstances, a trust may not be considered to be property of a party which reinforces where the court had previously got to regarding trusts in family law matters – there is no one rule regarding whether a trust is property in a family law matter and it will depend on the individual circumstances. It shall also be interesting to see how the court applies this decision in future cases.

With that said, Caldwell serves is a stark reminder that:

• Very specific advice and considerations are needed when considering a family law settlement if there is a relevant trust
• In establishing or restructuring intergenerational assets like a family business or a farm, consider carefully the structures of ownership and how they may be interpreted in any future family law proceedings
• When undertaking succession planning for intergenerational assets like a family business or a farm, a trust may not be the best structure, the outcome in Caldwell might have been quite different if the Husband’s interests were simply shares in a company or an inherited interest in a Discretionary Testamentary Trust.
• As part of succession planning, always consider, even if relationships appear robust whether a Binding Financial Agreement (which can occur during a relationship) is a wise part of such succession planning.

A significant decision for family businesses and farming families

The approach taken by the court in this appeal judgement could have significant ramifications for family businesses, especially farming families. Such families and their advisors should consider the potential impact of this decision and take appropriate steps – it has the potential to be much more costly than the proposed tax changes!