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3 Oct 12
Trust assets protected on property settlement

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The Harris case

Towards the end of 2011, the case of Harris v Harris [2011] FamCAFC 245 considered whether the assets of a family trust should be treated as assets of a marriage and so subject to division on a property settlement. 

The case provides further context to the general attitude of the Family Court in relation to family trust structures, especially in relation to the concept of indirect control as outlined in Kennon v Spry.

Facts of the case

The case involved a property settlement in the divorce of Mr and Mrs Harris, a couple who had two children together as well as others from previous relationships.

At the time of the divorce, the husband (H) was a beneficiary of a trust, The Harris Family Trust (Trust).

The structure of the Trust is summarised in the following diagram:

 

The Trust was established by H’s father with the main beneficiaries being H and his siblings. At the time of the divorce, the appointor for the Trust was H’s mother, with the shareholders of the trustee company (X Pty Ltd) being H’s mother, H’s son from a previous relationship and a friend of H. 

The main asset of the Trust was a business which was run on a day-to-day basis by H and his wife (W). During the marriage W received distributions from the Trust, however this ceased upon separation with H.

Issues

The main question before the Court was whether the assets of the Trust should be treated as the property of H in the property settlement proceedings. 

Consideration of statements made in the Kennon v Spry decision regarding direct and indirect control of the Trust played a significant role in answering this question.

The Court acknowledged that H did not directly control the Trust as he individually was neither the appointor nor the trustee and that he did not hold any position of control via the current trustee company. 

W also argued that H’s mother, in her role as appointor, was merely the ‘alter ego’ of H (seeking to use the doctrine that was applied in the Richstar case), and so was in effective control of the trust assets.

The Court found that H did not have any indirect control of the Trust as it could not be proven that H’s mother (in her role as appointor) was a ‘puppet’ acting in accordance with H’s directions.

While there was evidence the distributions to W ceased after the separation, there was no direct evidence of a puppet situation.

Decision

Ultimately the Court held that:

  • the Trust and its assets were not an asset of the marriage
  • at most, the Trust should be considered a financial resource for H
  • if a party to the marriage is not directly the appointor or in control of the trustee, then they do not have direct control
  • in order for there to be indirect control by a beneficiary, there must effectively be a situation where someone who has direct control is considered a ‘puppet’ of the beneficiary, and
  • in order to demonstrate indirect control (e.g. through a ‘puppet’ scenario) there must be clear evidence to support the argument, and merely reviewing a history of trust distributions of itself will not be sufficient.

Implications of the decision

The decision in Harris reinforces that many of the potentially concerning aspects of Kennon v Spry can be explained by the particularly unique circumstances of that case. 

Furthermore the importance of carefully considering all aspects of the control of a trust in light of the broader asset protection objectives of the family remains critical.

 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.

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