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    Are the assets of a Testamentary Trust included in a property settlement?

    Apr 4, 2019 4:53:16 PM

    It is an interesting scenario when considering if the assets of a testamentary trust should be treated as property in a divisible pool of assets in a family law dispute. More commonly these issues have been considered in relation to inter vivos Discretionary trusts.  There is however, a series of family law cases which help to establish key principles.

    Some observations* can be made from relevant decisions:

    • Holding the Appointment over a trust can be sufficient to have trust assets counted as property of a party to the marriage;
    • Trusteeship held by one spouse, with the other spouse being a beneficiary, may cause the trust to be considered property of the first spouse;
    • Holding the power of Appointment and Guardianship can be sufficient to cause the trust to be considered property of a party to the marriage;
    • Surrounding circumstances relating to the operation of the trust, e.g. a beneficiary receiving favourable benefits such as an interest free loan, where the party receiving the benefit is married, can on its own, cause the trust to be considered property of a party to the marriage.

    To assist the reader to understand the application of these principles I will briefly discuss two case studies.

    In Essex and Essex [2009] FAMCAFC 236 the court held that:

    • The parents of the husband and the brother of the husband established an inter vivos discretionary trust
    • The trust was for the husband and for his lineal descendants
    • The parents were concerned about the future of the husband’s marriage
    • The parents made the brother the sole director of the trustee of the husband’s trust and excluded the brother as beneficiary
    • The husband was one of the three income beneficiaries entitled to income of the trust
    • In the trial “the brother conceded that, but for a disqualifying factor (the property proceedings) the husband should have the benefit of the assets in the trust”

    In these circumstances the trial judge found that the trust was neither property nor a financial resource for the husband.

    On appeal to the Full Court the majority affirmed that the trust property was property of the husband, but that the trial judge erred in finding that the trust was not a financial resource.

    The finding that the trust assets were a financial resource was based on two facts:

    • The admission by the brother that but for the husband’s separation, the husband would have control of the trust assets;
    • Evidence from the accountant that written advice was given when the trust was established that upon the resolution of the husband’s Family Court property proceedings, control or benefit would go to the husband.

    In Lovine & Connor [2011] FamCA 432 the court held that:

    • The husband and wife were aged 50 and 40 respectively;
    • They commenced living together in late 1999, married in 2000 and separated in 2010;
    • There were two children of the marriage, born 2001 and 2003;
    • In 2001 the husband’s father died and created two testamentary trusts which were administered as one

    The husband argued that the assets of the testamentary trust should not be treated as his and included in the divisible pool. He argued that those assets constituted a financial resource.

    The wife argued that the husband exercised sole and absolute discretion to determine the distribution of the remaining balance of the residuary estate and therefore the assets should be included in the property pool.

    The trial judge concluded that in every sense the husband is the only real decision maker.

    Although this matter was appealed to the Full Court this issue was not argued.

    If this article prompts questions for you in relation to your estate planning needs, contact afrank@franklaw.com.au

    This article is not legal advice. 

    *Para 3.47 Testamentary Trusts Strategies and Precedents 2nd Ed Vik Sundar, Charles Rowland, Philip Bailey

    Andrew Frank

    Written by Andrew Frank