Family discretionary trusts are a common aspect of the financial affairs of numerous families. It is a frequently used vehicle for the purpose of conducting business and by which to hold property apart from the family home. So the question is ‘Does a family trust have protected assets in a marriage breakdown?
Despite the fact that tax legislation classifies a trust as an entity for tax purposes, it is not an entity in the same way as a company. A trust is fundamentally a relationship between three individuals: a settlor, a trustee, and a beneficiary. The trust is established by a settlor who transfers an asset (typically money) to the trust. The trustee (of the trust) is instructed by the settlor to retain the asset for the benefit of the beneficiaries.
The trustee is responsible for the management of the trust assets and the conduct of business on behalf of the trust. Additionally, the trustee distributes any income generated by the assets to the beneficiaries during the trust’s duration. The trustee has the authority to determine which beneficiaries will receive distributions from the trust. This is the rationale behind the classification of the typical family trust as a discretionary trust. Income tax must be paid by beneficiaries on any distributions they receive from the trust.
The operation of the trust and the ownership of its assets are not under the control of a beneficiary. The sole authority that such a beneficiary possesses is to request that the trustee take into account making a distribution to them. The beneficiary has no further recourse if the trustee declines to make the distribution.
In a trust arrangement, there are two additional significant parties. The “appointor” (also known as the principal) is the most significant individual, as they have the power to appoint a new trustee and remove the current one, thereby controlling the trust. Additionally, certain trusts have a “guardian.” The guardian’s responsibility is to authorise specific actions taken by a trustee or to ratify any modifications to the trust deed.
A trust deed is the primary method by which the majority of modern trusts, including family trusts, are intentionally established. Regulations regarding the trust’s operations are stipulated in this document.
The assets of a trust must be distributed to the beneficiaries who are entitled to receive the capital upon its termination.
There are numerous reasons for the popularity of these trusts. Asset protection is one of the reasons. Additional common reasons include the ability to capitalise on the substantial tax benefits that are available by dividing the income earned by a trust between spouses and, potentially, their children, contingent upon their age.
A family trust that possesses substantial assets or a substantial sum of money is frequently the subject of significant interest and dispute during the dissolution of a relationship. The question at hand is whether the trust’s assets are available for distribution among the parties.
In the event of a divorce, when should trust assets be included in the assets that are available for distribution between the parties?
The answer: It depends on the particular circumstances.
The common family circumstances that are likely to determine whether or not the trust assets should form part of the assets to be distributed between the parties are:
the extent to which a spouse `controls’ the trust (or the trustee in the case of a company) either directly or indirectly;
whether the assets of the trust have been created by the parties during the period of the marriage or relationship; and
whether or not a spouse has a history of receiving distributions from the trust;
whether or not a spouse is entitled to receive a share of the assets of the trust upon it coming to an end.
Trust assets may still be considered a “financial resource” of the party with the association with the trust, even if they are not held to be part of the assets to be divided between the parties.
For further information you should speak with your Accountant or professional tax specialist. Alternatively, you can find further information at:
The information in this website and the links has been prepared for general information purposes only by our office and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax, personal or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned on this website, consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances.
Principal Financial Planner at RP Wealth Management | Financial Planning l SMSF I Insurance l Property Advisory. Our purpose is to provide our clients with sound advice and direction to assist with their financial affairs and help them make the best choices in achieving what is important to them.
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