Can a Discretionary Trust Protect My Assets During A Divorce?

A widely-held misconception exists where people are led to believe that assets owned by a discretionary trust do not form part of the property pool during a divorce and, therefore, a discretionary trust can be used to protect the assets of one party when it comes time to divide assets between ex-spouses. The truth is that this area of family law is complex, and how assets in discretionary trusts are dealt with during a property settlement will depend on the individual circumstances of each case. Here’s what you need to know about whether a discretionary trust can protect assets during a divorce.

What is a discretionary trust?

A discretionary trust is a type of trust that allows the trustee (either a person or company) to hold and manage trust capital and assets on behalf of the trust beneficiaries.

Where a discretionary trust differs to other types of trust structures is that complete discretion over the way the trust’s income and/or capital is distributed amongst its beneficiaries belongs entirely to the trustee, per the trust deed.

What will the court consider when determining whether a spouse has control over a trust?

Separated spouses may argue over a discretionary trust for a few reasons:

• whether the discretionary trust should form part of the property pool;
• whether the discretionary trust is a financial resource; or
• whether the discretionary trust should have no impact at all on their property settlement.

In these situations, the court will usually decide how the discretionary trust is dealt with.

Ultimately, whether or not a trust will form part of the property pool is dependent on the spouse’s interest in and degree of control over the trust. Typically, where a spouse has control over the trust through their roles as appointer and/or trustee, the trust will be treated as property of the parties and be included in the property pool.

When determining whether a spouse has control over a trust, the court will consider several factors, including:

• the terms of the trust deed;
• the trustee and appointer of the trust;
• how much influence the spouse has over the trustee or appointer (if those roles are not held by one or both of the spouses);
• who the beneficiaries of the trust are;
• the history of distributions made from the trust;
• how each of the spouses has contributed to the property owned by the trust;
• the way the assets of the trust were acquired; and/or
• the types of benefits derived from the trust by the spouses.

Under what circumstances will a discretionary trust protect my assets during a divorce?

It is important to remember that each situation is unique and will be assessed on an individual basis, however, the following is an example of when a discretionary trust may protect a person’s assets from their former spouse at the time of divorce.

If a trust is set up by a person’s parents, and they are the appointers and trustees of the trust, and they have since built up the assets in the trust, the divorcing couple does not have controlling roles in the trust. If the divorcing couple are simply beneficiaries of the trust and there is no other evidence to suggest either of them has a controlling or influencing position in the management of the trust or the way its assets and/or capital are distributed, then that trust would probably be treated only as a financial resource, not as an asset which should be included in the property pool.

If you need further information regarding trusts and other assets during a divorce, speak to a family lawyer at Cairns Divorce Lawyers today.