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    Why a traditional Will can be a bad idea

    Sep 30, 2020 12:47:48 PM

    One of the major benefits of setting up a Testamentary Trust in your Will, along with the significant tax benefits, is the protection afforded to the assets of the Testamentary Trust in a Family Law property settlement.

    The Family Court of Australia has been of the view that assets of a Testamentary Trust are not property divisible under s 79 of the Family law Act. Rather they are financial resources that are to be taken into consideration when determining the alteration to property interests of the parties.

    The court’s five-step process to a Family Law property settlement is to answer the following questions and undertake the following tasks:

    • What are the parties legal and equitable interests in property?
    • Is it just and equitable to make an order adjusting the parties’ legal and equitable interests in that property?
    • Identify and assess the contributions of the parties and determine a contribution-based entitlement of each party as a percentage of the net value of the property pool.
    • Identify and assess other relevant matters and determine if an adjustment needs to be made.
    • Determine what orders, if any, altering property interests are to be made.

    This article explores some recent cases and how the Family Court has treated Testamentary Trusts in property settlements in light of the above process.

    Case Study 1 - MANTEL v MANTEL [2020] FAMCA 157; BC202050664

    In this case the relevant circumstances included a husband and a wife who separated, and just following separation the husband received an inheritance from his father’s Estate in the form of a Testamentary Trust. It was the question of the Court as to whether the Trust was to be characterised as property divisible between the parties for the purposes of s 79 of the Family Law Act.

    Justice McEvoy found that the Testamentary Trust was not a divisible asset, rather a financial resource available to the husband. It was then a matter for the Court to determine what impact the financial resource had in relation to the just and equitable division of property of the parties.

    The Court considered the fact that, although the husband was the sole Trustee of the Testamentary Trust and the Primary Beneficiary, it has other objects and beneficiaries that may benefit from the funds. The court, in considering the value attributed to the husband of the Testamentary Trust, rejected the wife’s claim that the husband is the beneficial owner of 100% of the Testamentary Trust.

    The Court did, however, contend that an adjustment would need to be made in the wife’s favour in recognition of the Testamentary Trust as a financial resource of the husband. This resulted in a lump sum payment being made to the wife from the husband as an adjustment in recognition of the ongoing financial resource of the Testamentary Trust.

    Although the above case is an example of how a Testamentary Trust can be useful in a Family Law property settlement, it is important to be aware of the potential abuse and misuse of the Testamentary Trust as a vehicle to take assets out of the family pool for division or treatment as a resource.

    Case Study 2 - KEHOE v SEDEN [2019] FAMCA 989; BC201951124

    In this case, the husband and wife separated in 2017. In 2014 the husband received an inheritance from his father’s estate by way of a Testamentary Trust. The Testamentary Trust was controlled by a corporation of which he and his mother were directors. The beneficiaries of the trust were himself, his mother, and his children. In 2019 at a meeting of the directors of the trustee company, it was resolved that 100% of the income of the trust be distributed to the husband’s mother to the exclusion of the husband. This contrasted the distributions that had occurred in 2015, 2016 and 2017 which saw 100% of the income go to the husband. The court drew an inference from this that the financial benefits of the trust that traditionally went to the husband, stopped after separation, however this did not negate the indication that the trust was a financial resource of the husbands.

    In this case it was important through the analysis of tax returns and the exchange of disclosure documents that it was apparent that the testamentary trust was a financial resource of the husbands to be considered when making a property alteration despite the more recent appearance of the trust as not beneficial for the husband.

    While in this case again it is clear that the assets of a Testamentary Trust are seen as resources and therefore protected in a family law property settlement, it is also clear that attempts can be made to utilise the trust and the beneficiaries of the trust in a way to mislead or make unclear who is really receiving a benefit.

    Conclusion 

    Establishing a Traditional Will that gives assets directly and outright to beneficiaries places those assets at risk of being split in a property settlement. To provide more protection for assets in a property settlement it is recommended to leave assets to beneficiaries by way of a Testamentary Trust. Although the court may treat the assets of the Testamentary Trust as a financial resource, those resources will not be split, rather kept intact.

    Where there is a Testamentary Trust involved, the court is more likely to use an ‘asset by asset’ approach to the division of property, rather than a ‘global approach’ whereby all assets are pooled together and treated the same.

    The more control a beneficiary has in relation to the trust (such as being the Trustee and Appointor of the Trust) the more likely the Trust will be an asset of that individual. However, the court has expressly said in the matter of Ascot Investments Proprietary Ltd v Harper (1981) 148 CLR 337 and subsequently quoted in Harris & Dewell [2018] FamCAFC 94, that it cannot ignore third parties interests (such as in a widely drafted discretionary Trust) and thus is more likely to see the asset as a resource rather than an asset to be split in a property settlement.

    If you have further questions please contact us at frank@franklaw.com.au.

    This is not legal advice. 

    Kaitlyn Sheridan

    Written by Kaitlyn Sheridan