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RECENT CASE: The handling of trust assets in Family Court proceedings – who has ultimate control?

Historically trusts have been misused in property proceedings to conceal the assets of one party from the other party as well as from the court. It is commonly thought that property held in trust is not subject to division between separating parties during property settlement because trust property of a discretionary trust is the property of that entity not of the beneficiaries of the trust.  However, this is not the case when a trust is deemed to act as an ‘alter ego’ for one of the parties. The recent decision of Harris & Dewell Anor [2018] FamCAFC 94 discussed this point in more detail.

In this case the parties, Mr Harris and Ms Dewell had been married for 24 years. At issue during trial was an assertion by the wife that under the Family Law Act, the property of her husband should be held to include units in a trust called the E unit Trust. The husband did not control or hold interest in the E unit trust. However, the wife contended that the trust should be deemed a puppet or alter ego of the husbands because of the history of the husband making decisions affecting the trust. The husband argued that the trust was a third party to the litigation and the court did not have the power to deal with its substantive rights.  At trial orders for settlement of property were made that reflected a rejection of the wife’s contention.

Further details on the trust

The trust was established by deed in mid-1981, the trust had a corporate trustee from inception and at the date of trial. The establishment of the trust occurred before the parties’ relationship began. The beneficial interest in the trust was divided into 60 units. The husband’s father was the only unit holder; the husband was never a unit holder. The husband and his father were the sole shareholders in the corporate trustee. The husband ceased acting as a director of the corporate trustee in 2011.

In light of the above circumstances, the primary judge found that ultimate control was vested in the husband’s father by reason of his sole unit holding and his control of the voting rights in the trustee. On consideration of the evidence the Judge found that since 2002 the husband had treated the trust assets as his own. Further, the husband will, on the death of his father, inherit the trust units. The trial judge found that while the husband controlled the trust, the units themselves were not property, but rather a financial resource of the husband. It was held that while the husband’s father remained the owner of the trust, the husband did not have a lawful right to benefit from the assets of the trust. Despite the control exhibited by the husband in respect of the dealings of the trust, the primary judge was not satisfied that the trust was an alter ego or device used by the husband for his sole benefit. On appeal to the Full court of the Family Court the appeal was dismissed and the primary judge’s reasoning was endorsed.

Accordingly, the trust assets were not held to be property in this particular case.

By Nicholes Family Lawyers

 

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