Are Any Trusts Family Law Proof?

The recent decision of Woodcock & Woodcock (No 2) [2022] in the Federal Circuit and Family Court of Australia has left this door open. So, are discretionary trusts family law proof?

The 2008 High Court decision of Kennon v Spry established that in order for the assets of a discretionary trust to be included in the property pool available for division between separated parties, one of the parties to the relationship needed to have both:

1. effective control of the Trust (whether that be de facto or actual control); and
2. a right as a beneficiary of the Trust.

Without these two factors being apparent, at most depending on the circumstances, the Trust may be considered a financial resource.

The High Court also held that each beneficiary to a Trust had the right to compel the trustee to consider whether or not to make a distribution to him or her as well as the right to proper administration of the Trust.  Those rights were equitable choses in action (a right of proceeding in a court to obtain a sum of money or recover damages) which are a kind of property of a party to a relationship.

However, the High Court held that it is difficult to value the rights of a beneficiary when the beneficiary has no present entitlement and may never have any entitlement to any part of the income or capital of the Trust.

In the case of Woodcock & Woodcock (No 2) [2022], an interim decision in Division 1 of the Federal Circuit and Family Court of Australia, the wife argued that the husband’s interests in a collection of Trusts is property and therefore capable of valuation. The husband contended that his interest in the Trusts was purely discretionary as a trustee is not obliged to distribute income or capital and instead may, in each trustee’s discretion, choose to allow the income to accumulate in the Trust.  

The husband’s valuation expert took the position that it would be impossible to ascribe a value to the husband’s equitable chose in action as it could not be sold, and therefore could not be considered a tangible asset with a market value.

The wife’s valuation expert asserted the husband’s ongoing level of influence and past distributions provided a prima facie reasonable basis to incorporate various uncertainties into the valuation of the husband’s rights.

His Honour Justice Wilson found that notwithstanding:

1. the uncertainty and lack of control of husband over the discretionary trusts;
2. the uncertainty regarding the husband’s potential benefit arising from discretionary trusts

The husband’s rights as a beneficiary of the discretionary trusts (that is, his right to due consideration and proper administration of the Trusts which are equitable choses in action) may be capable of valuation.

Ultimately Justice Wilson deferred the determination of whether a value could be ascribed to the husband’s equitable chooses in action arising from his status as a beneficiary of the Trusts for Trial.

This matter remains on foot, and it may be sometime before that issue is finally determined.

In the meantime, there are steps that can be taken to address concerns regarding assets and/or income from a Trust from being drawn into a family law dispute.  

Should you require legal advice regarding this or any other family law matter, please contact us.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.

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