Beneficiary rights in discretionary trusts – protected from Family Law … or not?

May 27, 2022

Are discretionary trusts family law proof?

In the 2008 decision of Kennon v Spry, the High Court of Australia clarified the approach for including assets held in discretionary trusts as property available for division in family law property settlements.  To be included, one of the spouse parties need to have both:

  • Effective control of the trust (whether by control over a person or entity); and
  • A right as beneficiary of the trust.

Without “control and benefit”, a party’s position as beneficiary of a discretionary trust may still be relevant, but only as a potential “financial resource” when considering a party’s future financial circumstances, usually involving an examination of the historical benefit received by that party from the trust.

Generally, where control of a discretionary trust is shared with third parties, the “effective control” element requirement will not be met, and the assets will be excluded from the property available for division in a property settlement.

The 2022 Federal Circuit and Family Court of Australia (Division 1) decision of Woodcock & Woodcock (No 2) [2022] FedCFamC1F 173, could change this longstanding approach.

In that case, the husband was one of a number of beneficiaries of four discretionary trusts.  He was also a director of the corporate trustees of three of those trusts, along with third parties.

The court was asked to determine, on a preliminary basis, whether the rights of the husband as a beneficiary of the trusts (being the right to due administration and due consideration) were:

  • “property” for the purposes of a property settlement pursuant to section 79 of the Family Law Act 1975; and
  • capable of valuation, therefore being included in the asset pool available for division between parties.

His Honour Justice Wilson found, on a preliminary basis, that notwithstanding the uncertainty and lack of control in relation to the husband’s potential benefit from the trusts, his rights as beneficiary of the discretionary trusts were “property” for the purposes of section 79, and that such rights were capable of valuation, primarily considering:

  • The husband’s ongoing level of influence in relation to the trusts, arising both from the trust deeds and his influential role within the group;
  • The husband’s significant past distributions.

Subject to any appeal of this decision, the extent of the value of the husband’s rights as a beneficiary of discretionary trusts is yet to be determined, and will potentially involve an actuarial exercise.

The potential implications of this decision on family law property settlements involving discretionary trusts is significant and could result in trust structures previously considered “family law proof” to come within the reach of a former spouse in the context of a family law property settlement.

It may be some time before the question is ultimately resolved through the courts.  In the meantime, it is prudent for individuals and their professional advisers to consider and take into account the potential impact of this decision.