In this article, we’ll explore whether family trusts are truly protected in family law cases, whether one spouse can claim an entitlement to the other’s family trust, the advantages and disadvantages of having a family trust in family law negotiations, and how to structure a trust for optimal protection.
Am I entitled to my partner’s family trust?
Whether you are entitled to your partner’s family trust in the event of a property settlement depends on several factors, including the structure of the trust, the assets held within it, and the level of control that either partner has over the trust.
A family trust also called a discretionary trust is a legal structure where a trustee holds and manages assets on behalf of beneficiaries. The trustee has the discretion to distribute the income or capital of the trust to beneficiaries according to the trust’s terms. Family trusts are often used for wealth preservation, tax planning, and asset protection.
In the context of family law, the main question is whether assets held in a family trust should be considered part of the marital asset pool. The court has wide discretion to include or exclude assets from the settlement, even those held in a family trust.
- If you are a beneficiary of the trust: In many cases, a spouse who is a beneficiary of the family trust may not automatically gain access to its assets unless the trust specifies otherwise. However, this doesn’t mean that the court will ignore the trust assets or the benefit to the beneficiary of having an interest in the trust when dividing marital property. The court will likely consider the trust’s value, how much control the settlor/appointor (the person who created the trust) and trustee has over it, the history of distributions and whether the trust has been used to shield assets from property division.
- If your partner is the trustee or has significant control: The level of control that your spouse has over the trust can also influence whether it is considered part of the property pool. If your partner is the trustee, or if they have significant influence over the distribution of trust assets, the court may include the trust’s assets in the settlement, especially if the trust has been used to hide assets or avoid a fair division of property.
Will a family trust protect my assets?
Family trusts can provide some level of protection for assets, but they are not a guarantee of full protection, especially in the context of a relationship breakdown:
Potential benefits for asset protection:
- Separation of assets: A family trust can keep assets separate from personal ownership. By transferring assets into the trust, they are no longer technically owned by the individual spouse but are instead held by the trustee for the benefit of the beneficiaries. This can provide protection against personal creditors or lawsuits.
- Discretionary distribution: As the trustee controls the distribution of income and capital, a family trust may provide some flexibility in terms of what each beneficiary receives. The court may be less inclined to consider trust assets if distributions are not made to the beneficiary in question.
- Tax and succession planning: Family trusts are often used as a tool for tax efficiency and estate planning. They can help reduce overall taxation by distributing income across multiple beneficiaries. Additionally, trusts are useful for preserving wealth across generations.
Limitations on protection in family law proceedings: However, a family trust is not an ironclad shield against property division in family law proceedings. Several factors can undermine the trust’s protection:
- Asset concealment: If the trust is set up during the marriage or shortly before separation, and it appears to be a deliberate attempt to hide assets from a spouse, the court is likely to examine the trust more closely. If the court believes that the trust was created to avoid a fair property division, it may include the trust’s assets in the settlement.
- Control of the trust: If the person who created the trust (the settlor) or their spouse has significant control over the trust’s administration or decisions, the trust may not be fully protected. Courts will scrutinize whether the trust is genuinely independent or whether one spouse has the power to direct its actions.
- Beneficiaries’ rights: If the family trust is structured in a way that provides a spouse with significant benefits—whether through income distribution, asset access, or control—the court may decide that those benefits should be considered part of the property settlement.
Are there advantages and disadvantages of having a family trust in family law negotiations?
When going through family law proceedings, having a family trust in place can present both advantages and disadvantages, especially if the trust is involved in the property settlement discussions.
Advantages:
- Asset protection: A well-structured family trust can help protect assets from personal creditors and may provide some protection if the trust is set up long before marriage or separation. It can also allow you to manage how your assets are distributed among beneficiaries, potentially shielding them from claims by your spouse.
- Flexibility in distribution: A discretionary trust allows the trustee to decide how and when assets are distributed. This can prevent one spouse from gaining immediate access to large sums or assets and offers more control over the division of assets.
- Tax benefits: Family trusts can provide tax efficiencies through income splitting and can help reduce the overall tax burden of a family or business.
Disadvantages:
- Complexity in family law proceedings: If the family trust is involved in the family law proceedings, it can significantly complicate the settlement process. The court may need to review the trust’s structure, purpose, and history to determine whether assets should be included in the property division.
- Potential scrutiny by the court: If the trust is seen as a vehicle to shield assets from the other spouse, the court may scrutinize the trust’s validity and include its assets in the settlement. This can lead to costly legal battles and delays.
- Limited control over trust assets: If you are a beneficiary but not the trustee, you may have limited control over trust assets, which can complicate the division of assets if the trust is considered part of the property pool.
- Equity concerns: The court may decide that a fair property settlement requires considering the family trust assets, particularly if there is evidence that the trust was set up to disadvantage one spouse.
How should I set up a family trust to protect myself?
If you want to set up a family trust to protect your assets in the event of a divorce, it is important to do so correctly. You need to obtain specialist legal advice from a lawyer who specialises in establishing trusts. Here are some tips to ensure the trust serves its purpose:
- Establish the trust early: The earlier you set up the trust, the less likely it will be seen as a method to avoid property division. Ideally, establish the trust before marriage or well before any marital problems arise.
- Independent trustee: Ensure that the trustee of the family trust is an independent party, not a close family member or your spouse. This helps to demonstrate that the trust is being administered without bias or undue influence.
- Clearly define the purpose of the trust: Ensure that the trust is set up with a clear, legitimate purpose, such as asset protection, estate planning, or tax purposes. This will make it harder for a court to claim that it was created with the sole intent of hiding assets.
- Maintain records and transparency: Keep comprehensive records of how the trust is administered, including any distributions made and the reasoning behind them. This can help show that the trust is being managed according to its intended purpose and not to avoid property division if a relationship breaks down.
- Consult legal and financial professionals: Work with legal and financial experts to structure the trust in a way that provides maximum protection and complies with relevant laws. They can also help you navigate any potential issues during a family law dispute.
Is there anything that isn’t protected in a family trust?
While a family trust can offer significant asset protection, there are limitations. Some things that might not be fully protected in a family trust include:
- Income generated from the trust: If income from the trust is distributed to the beneficiary (for example, your spouse), it may still be considered part of the asset pool for property settlement.
- Settled property: If the trust was created with the intention of avoiding division of property in a family law dispute, or if property is transferred into the trust just before separation, the court may decide to include that property in the settlement.
- Child support and spousal maintenance: Trusts do not protect against claims for child support or spousal maintenance. These obligations are typically treated separately from property settlements.
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Conclusion
Family trusts can provide a valuable layer of asset protection in the event of a relationship breakdown, but they are not foolproof. The structure, control, and timing of the trust are all factors that will influence how it is treated in family law proceedings. To maximize the protection that a family trust offers, it is essential to set it up correctly and ensure it is managed transparently and independently. Always consult family law professionals to guide you through the process and ensure that your family trust is structured to meet both your financial and legal needs.
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