PRIVATE CLIENT NEWS, AUGUST 2009

What will happen to your family trust if you separate?

When a couple establish a joint trust, they intend the trust to benefit their family long term. Sadly, relationships can break down, leaving the thorny question: what happens now? In this article we explore some recent judicial decisions that provide some insight as to how these situations may be handled by the courts when the trustees can’t agree.

Years ago, you and your spouse set up a joint family trust to protect your assets. Trusts seemed to be the ‘in’ thing – all your friends had them. You, your spouse, your children and grandchildren could benefit from the trust. When it was set up you were under the impression that it was a fortress, impenetrable against any kind of claim or interference. Then the unthinkable happens, your relationship breaks down. Now what happens to the trust assets?

You and your spouse are trustees and you have one, or maybe two, independent trustees. According to the trust deed, your decisions have to be unanimous. Your separation has not been pleasant and you and your partner disagree as to what should happen with the trust. After many failed discussions, the matter ends up in court.

What is the judge likely to decide?

Judges do have the power to make orders for the trustees to restructure the trust IF the parties were married or in a civil union (not in a de facto relationship) AND the couple are now divorced (not just separated). This provision is enshrined in section 182 of the Family Proceedings Act 1980. Section 182 has not, up until recently, been widely used and it has been unknown when and how it will be applied. However, some recent cases provide some insight into how judges will use section 182 to manage trusts on the breakdown of a marriage or civil union.

Take a look at Mr and Mrs X, married for 21 years. As newlyweds they were both highly qualified in commerce and, in the early years of their marriage, they lived in the United States (where Mr X studied for an MBA at Harvard and Mrs X worked) and then in London (where they both worked in top-tier firms). After 9 years overseas the couple moved back to the southern hemisphere and Mrs X gave birth to their first child. From then on Mrs X remained a full-time mother and, later, gave birth to their second child. During the marriage the couple built up assets worth over $9 million and some of these assets were transferred to a trust. Mr and Mrs X were initially trustees of the trust but resigned, as they were living in Australia, leaving two independent trustees to manage the trust. Importantly, the family home was owned by the trust.

The couple separated in 2003 and spent 5 years fighting over their property in court. During that time Mrs X occupied the family home with the children. After separation, the independent trustees decided to:

1. sell the family home to Mrs X;
2. repay debts owed to Mr and Mrs X by the trust;
3. distribute to each of Mr and Mrs X, or resettle on a trust at their discretion, 25% each of the remaining trust fund; and
4. retain the remaining 50% of the trust fund in a further trust for the benefit of the two children. The children’s education expenses would be paid from this fund and $70,000 per annum would be paid to Mrs X as long as she was the children’s primary caregiver.

Both parties opposed the trustees’ decision for different reasons and asked the court to restructure the arrangements under section 182. However, the court saw no reason to intervene to change this arrangement and refused to exercise its discretion under section 182. There was plenty of relationship property to divide equally between the parties (over $7 million) and it was not necessary to intervene in the trust in order to be fair to both parties.

Now look at Mr and Mrs Ward. They were married in 1991 and lived on a family farm which was owned by a company. At the beginning of the marriage Mr Ward owned 100% of the shares in the company. In 2000 they established a trust and also signed a relationship property agreement. This agreement recorded that they each owned 50% of the shares in the company. They then transferred the shares to the trust. The beneficiaries of the trust were the husband and wife and their children. There was very little relationship property apart from the assets owned by the trust.

The Wards separated in 2003 and Mr Ward continued to live on the farm. Mrs Ward moved out and did not receive any benefit from the trust after separation. Mr and Mrs Ward were both trustees of the trust, along with an independent trustee. After separation the trustees could not agree on how to deal with the trust assets. The trust was deadlocked.

The Court of Appeal ruled – using its power under section 182 – that the 50% of the shares that were transferred to the trust by Mrs Ward were to be re-settled onto a new trust established by Mrs Ward. The beneficiaries of the trust were to be the same as the original trust (minus Mr Ward) and Mrs Ward was to resign as trustee of the original trust and give up all rights as a beneficiary of that trust.

Section 182 is an interesting section with wide application because of the judicial discretion it evokes. We will keep you informed of new decisions.