In the context of family law, property settlements often involve dividing assets between parties to a marriage or de facto relationship. A key challenge arises when one or both parties have interests in discretionary trusts, which don’t typically give beneficiaries ownership of trust assets. Instead, beneficiaries are entitled to ensure the trust is administered properly. But can these rights be classified as property for the purpose of a property settlement under the Family Law Act 1975 (Cth)?
The Family Law Act, specifically Section 79, allows courts broad discretion to alter property interests during a divorce or separation. While it’s generally accepted that trusts are part of the property division process, determining whether a discretionary beneficiary’s rights fall within the definition of ‘property’ is more complex. Beneficiaries in a discretionary trust don’t have a fixed right to the assets but are entitled to the proper administration of the trust.
The 2008 High Court case of Kennon v Spry [2008] HCA 56 was a turning point. It explored whether a beneficiary’s rights in a discretionary trust could be considered property for family law purposes. In this case, the Court recognised that the trust’s assets could be classified as property, particularly when one party had significant control over the trust, like being both the trustee and beneficiary, or when their power to distribute trust assets could affect the other party’s financial interests.
This case expanded the understanding of ‘property’ in family law, but it didn’t set a blanket rule. In Kennon v Spry, the husband was both the settlor and trustee of a trust, which benefited him, his wife, and their children. The Court concluded that the wife’s right to the due administration of the trust, coupled with the husband’s power to distribute trust assets, made those assets part of the marital property pool.
However, the Kennon decision was not a free pass for all discretionary trust interests to be considered property. The case was specific to the circumstances in which both parties held a significant influence over the trust. For example, in Rigby & Kingston (No 4) [2021] FamCA 501, the Court clarified that a beneficiary’s mere expectancy of receiving assets from a discretionary trust does not automatically qualify as property. It is the control and power over the trust’s distribution that might turn those rights into a recognisable asset for settlement.
Another relevant case, Woodcock v Woodcock (No 2) [2022] FedCFamC1F 173, further expanded on this concept. The husband in this case had significant control over several family trusts, and the Court found that his influence over the trusts was sufficient for those assets to be considered as part of the property settlement. This decision emphasised that the Court will look at the concentration of power over the trust, whether by the trustee or beneficiary, to determine if the trust’s assets fall within the scope of ‘property’ under Section 79.
In conclusion, while discretionary trusts don’t inherently grant beneficiaries property rights, the control a party has over a trust can influence whether those rights are classified as property for the purposes of property settlement. Cases like Kennon v Spry and Woodcock v Woodcock have broadened the interpretation of what constitutes property in family law, but significant uncertainty remains about how courts will treat discretionary trust interests in future settlements. At Owen Hodge Lawyers, our team of expert family lawyers will be able to assist you with any family law concerns. Get in touch today on 1800 770 780.