Rights of Beneficiaries in Discretionary Trusts – Protected from Family Law… or Not? – Family law

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Are discretionary trusts compliant with family law?

In the 2008 decision of Kennon vs. Spry, the High Court of Australia has clarified the approach to including assets held in discretionary trusts as assets available for division in family law property settlements. To be included, one of the spouses must have both:

  • Effective control of the trust (whether by control of a person or an entity); and

  • A right as a beneficiary of the trust.

Without “control and benefit”, a party’s position as a beneficiary of a discretionary trust may still be relevant, but only as a potential “financial resource” when considering the future financial condition of a party, usually involving a review of the historical benefit received by that party from the trust.

Generally, where control of a discretionary trust is shared with third parties, the requirement for the “effective control” element will not be satisfied and the assets will be excluded from the assets available for division in a property settlement.

The 2022 decision of the Federal Circuit and Family Court of Australia (Division 1) of Woodcock & Woodcock (No 2)
[2022] FedCFamC1F 173, could change this long-standing approach.

In this case, the husband was one of many beneficiaries of four discretionary trusts. He was also a director of the corporate trustees of three of these trusts, as well as third parties.

The court was asked to determine, on a preliminary basis, whether the rights of the husband as beneficiary of the trusts (i.e. the right to proper administration and consideration) were:

  • “property” for the purposes of a property settlement under section 79 of the Family Law Act 1975; and

  • subject to valuation, therefore included in the pool of assets available for distribution between the parties.

His Honor Wilson J. found, on a preliminary basis, that notwithstanding the uncertainty and lack of control over the husband’s potential benefit from the trusts, his rights as beneficiary of the discretionary trusts were “property” to the purposes of section 79, and that these rights could be assessed, taking into account mainly:

  • The husband’s ongoing level of influence over the trusts, stemming both from the trust deeds and his influential role within the group;

  • Husband’s significant past distributions.

Subject to any appeal of this decision, the extent of the value of the husband’s rights as a beneficiary of discretionary trusts remains to be determined and will potentially involve an actuarial exercise.

The potential implications of this ruling on family law property settlements involving discretionary trusts are significant and could bring trust structures previously considered “family law evidence” within reach of a ex-spouse in the context of a family law property settlement.

It may take some time before the matter is finally decided by the courts. In the meantime, it is prudent for individuals and their professional advisers to review and consider the potential impact of this decision.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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