Parents joined to a child’s family law dispute (for no reason?**)

Anecdotally, there appears to be an increasing number of situations where the parents of a spouse are forcibly required to provide disclosure of their personal arrangements as part of their child’s property settlement proceedings.

Arguably, the highest profile case in this regard was MacDowell and Williams [2012] FamCA 479.

In this case, the parents of a woman going through a property settlement allegedly had access to wealth in excess of $20 million.

Following a marriage of around 7 years, the husband as part of the matrimonial litigation tried to get access to the wills of his former in-laws and the deed for a trust, which he believed his wife was a primary beneficiary of.

Acknowledging that each situation would depend largely on the facts, the court in this case decided:

1. While the husband could get a copy of the trust deed, the court flagged it was unlikely that the trust would be taken into account in any form under the property settlement (i.e. it would be treated neither as an asset or a financial resource), given that the wife was only one of many potential beneficiaries and had received less than $30,000 of distributions from the trust during the entire marriage;
2. The wills did not need to be disclosed on the basis that the parents had full testamentary capacity and may change their wills, or indeed, may otherwise spend or dispose of a substantial part of their wealth; and
3. The privacy of the parents’ personal affairs was seen as an important factor in denying access to the wills and estate planning documents.

Interestingly, the court did however note that if the wife’s parents had lost capacity or they were in extremely poor health, then it may have created a situation where the wills would be required to be disclosed.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Church song 'It’s no reason'.

View here:

(my) spouse** and the family trust

Previous posts have looked at various aspects of what a 'spouse' is, particularly for family law purposes.

Often, however a definition of a spouse under a discretionary trust deed is crafted in a way that is materially narrower than what might otherwise be the case for either family law or tax law purposes.

In particular, if a wide definition is adopted under a trust deed, it can potentially mean that even short term de facto spouses may have some rights as a beneficiary of the trust, particularly in relation to a trustee's obligation to provide an account to beneficiaries of their administration of trust assets.

Where a narrow definition under a trust deed is adopted, there would normally still be the ability for the trustee or appointor to nominate people who do not otherwise satisfy the definition of spouse under the deed, by way of a specific process on a case by case basis.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Blues Brothers song ‘Groove me’.

View hear (sic):

Sometimes** the Family Court will allow access to trust documents

The case of Schweitzer & Schweitzer [2012] FamCA 445 considers the disclosure of documents claimed by one spouse to be in the possession, or under control, of the other.

The specific facts of this case were that the husband was a director of two corporate trustees, but not the sole director. In one corporate trustee, the husband's father was the other director. In the other corporate trustee, the husband's father and mother were the other directors.

While the husband was not a shareholder of either of the trustee companies, however he was a discretionary beneficiary of both trusts.

The appointor of both trusts was the husband's father.

The wife applied to the court asking that the husband disclose the financial statements, tax returns, bank statements and the minutes of meeting relating to trust distributions by the corporate trustees.

The wife’s request was rejected on the grounds that the husband had a fiduciary obligation in relation to the holding and use of trust and corporate trustee documents.

The court also held that the documents were not under the husband’s ‘control‘ for the purpose of the Family Court rules. The decision confirms that directors of corporate trustees have no right to 'possession' or 'control', but only to 'access' trust documents and that such access must be used strictly for the trust or company purposes.

The documents might have been accessible if the wife was able to join the corporate trustees as parties to the proceedings, although this was not necessarily something the court would approve; and even if they were joined, disclosure of the documents would still be subject to the court’s discretion.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, ‘Sometimes’ is a song by Badfinger.

Listen hear (sic):

Thinking that on a marriage breakdown the wife 'automatically' gets 50%? - wise up sucker**

Previous posts have considered an array of issues that arise at the intersection of the rules surrounding asset protection and family law.

The decision in Hsiao v Fazarri [2020] HCA 35 provides another interesting perspective in this regard.

Briefly the factual matrix involved a relationship between spouses, who while they had been in a de facto relationship for around 4 years, were only married for 23 days.

The total wealth of the husband was around $12M. The husband was required to pay the wife around $100,000, as well as contributing $80,000 to her legal fees, bringing her asset pool to around $430,000.

The court relevantly confirmed:

1. The relationship as a whole was of a modest length (ie even including the 4 year de factor relationship), with the wife's non-financial contribution to the acquisition, conservation or improvement of their property also modest, if not nominal.
2. There was nothing to suggest that the marriage had had any effect on the earning capacity of the wife.
3. Furthermore, there were no children whose interests stood to be affected by any alteration of the parties' interests in property.
4. Despite some arguments to the contrary, it was open to the trial judge to decide that the wife did not make any substantive financial contribution to the asset pool, and therefore had no particular claim to it.
5. The right a party has on appeal is to have a review of whether the primary judge's discretion to make a property settlement order had miscarried (see House v The King (1936) 55 CLR 499) - an appeal can not be used to try to make a case that a party chose not to make at the trial.
6. For clarity, the court also confirmed that the Family Law Act permits property settlement proceedings to be continued by or against the legal personal representative of a deceased party to a marriage (noting that this issue was not directly relevant in this case).

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Pop Will Eat Itself song 'Wise up sucker'.

View here:

Divorce** and enduring powers of attorney

Previous posts have considered probably the most high profile case involving a divorce using an enduring power of attorney, that being the decision in Stanford.

The case of McKenzie & McKenzie [2013] FCCA 1013 provides another similar example.

A summary of the facts is as follows:

1. The wife separated from the husband, and around six months later, there was evidence to suggest that she began preparing documentation to apply for a divorce;
2. Around nine months after the initial separation, the wife underwent surgery that ultimately resulted in her losing capacity;
3. Following the loss of capacity, the wife's mother was appointed her legal guardian;
4. Via her role as legal guardian, the wife's mother formally finalised an application for divorce;
5. The court allowed the divorce proceedings to proceed on the application of the mother on the basis that the relationship between her daughter and former son-in-law had broken down irretrievably before the loss of capacity; and
6. The fact that the daughter had not been separated from the husband for 12 months (which is normally required) before she lost capacity was not held to be relevant in the circumstances.

A similar conclusion was reached in the case of Price v Underwood (2009) FLC 93-408 where an urgent application by an attorney for a divorce to be granted (as it evolved, one day for the principal died), waiving the normal waiting period.

Mentioning cases such as Re an Incapable Person D [1983] 2 NSWLR 590, Pavey and Pavey (1976) FLC 90-051, Todd and Todd (No. 2) (1976) FLC 90-008 and Falk and Falk (1977) FLC 90-247, it was confirmed:

1. an enduring attorney can make an application for divorce on behalf of a principal;
2. any such application must be supported by evidence that the marriage has irretrievably broken down;
3. the attorney also needs to be able to show that the principal had the requisite intention to bring the marriage to an end and had lived separately and apart from the spouse for 12 months prior to the filing of the application.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Nirvana song ‘Serve the servants’.

View hear (sic):

Before too long ** - when not even living together is a de facto relationship

As previous posts have touched on, in order to be in a de facto relationship, two people need to ‘live together as a couple’.

The case of NSW Trustee and Guardian v McGrath & Ors [2013] NSW SC 1894 highlights that in order to live together as a couple, you do not necessarily have to share a particular residence.

As is often the case in disputes about whether a de facto relationship existed, following the death of one of the parties, the facts in this case were relatively complicated.

In summary:

1. The couple, with their respective life spouses had been friends for around 20 years.
2. When the respective life spouses passed away, the couple formed a close bond, which they shared for around 13 years.
3. They never lived together as such, however the relationship was often described as ‘boyfriend/girlfriend’.
4. They spoke every night on the phone.
5. They would meet at least a couple of times a week.
6. They would often holiday together.
7. the couple also attended all family functions (for example, birthdays, Christmas day etc.) together for one side of the family - in relation to the other side of the family, there was significant estrangement and no family functions were attended.

Following a dispute about the distribution of the estate on the first of the couple to die, the entitlement of the other party to the relationship turned on whether he satisfied the definition of a de facto.

The court decided that although the case was borderline, there was sufficient evidence to support the existence of a de facto relationship, given how devoted the couple seemed to be to one another, even though they never chose to share a residence for a lengthy period of time.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Paul Kelly song ‘Before too long’. View hear (sic): 

Sometimes**, some of the other key questions concerning family trusts (part two)

Following recent posts, some of the additional questions considered by the court in Beeson v Spence in deciding the assets of a trust were property of the marriage are set out below. 

1. Can beneficiaries be removed or added, and if so by whom?

The beneficiaries could be removed or added by the trustees, only with the consent of the appointor.

2. Is there any risk that the trustee may be seen as simply the ‘alter ego’ of some other person?

The Court found that the trust was created with the wife in control of the appointment of those with the duty of administering it and it was never created to benefit the children alone. The assets of what was essentially a 'standard' discretionary trust were controlled by a party to property proceedings who ultimately had the power to legitimately determine at any point to whom income and/or capital was to be distributed, including herself.

3. Does someone (e.g. an appointor, guardian, principal) have the power to unilaterally change the trustee?

Yes. The appointor was the wife initially. Whilst she subsequently relinquished control and appointed her sister as replacement appointor in 2003, the steps taken via the deed of variation were seen as having been taken at the wife’s direction. This conclusion pointed towards the trust being the alter ego of the wife, and thus the property of the marriage and not the property of the children.

4. If the appointor ceases to act, do their powers pass to anyone else, and if so, who?

The deed provided for the appointor powers to pass to Mr Beeson, the wife’s father and trustee of the trust, upon her death. The deed also allowed for the wife as the original appointor to name a successor appointor (which she did, namely her sister).

5. For an existing trust, has there been a pattern of income or capital distributions?

Distributions were made from income in both 2002 and 2003 to the specified beneficiaries being the children. Distributions were also made to the wife in this period, which she applied, among other things, to payment of her legal costs. Whilst the wife argued the legal costs incurred showed the fund was used for the children’s benefit, it was held that the legal costs should be seen as being incurred on her own account. This supported the conclusion that the trust was not the sole benefit of the children.

Further, there was nothing improper about the trustees distributing funds in the wife’s favour, as she was a potential beneficiary up until the variation in 2003, and continued to be entitled to receive distributions as a ‘parent’ of the specified beneficiaries after the variation.

** for the trainspotters, ‘Sometimes’ is a song by the Brand New Heavies. View hear (sic): 

Sometimes (always)** you need to ask these key questions concerning family trusts (part one)

As flagged in last week’s post, some of the key questions the court in Beeson v Spence took into account when deciding the assets of the trust were property of the marriage are set out below. 

1. Who is the trustee of the trust?

The trustees of the trust were the wife’s father and her solicitor. They had the discretion to administer the trust.

2. Does the trust deed restrict the range of beneficiaries who can receive income or capital distributions?

The specified beneficiaries were the children of the husband and wife, and the husband and wife were initially potential beneficiaries as parents of the specified beneficiaries. By the deed of variation (instigated by the wife) in 2003 the husband and wife were removed as potential beneficiaries. After the deed of variation the wife and husband were entitled to receive distributions, not as potential beneficiaries, but as ‘parents’ of the specified beneficiaries.

3. Does the trustee need consent/approval of any other person for distribution?

No. However, the trust deed gave the wife ultimate control of the distribution of income and capital by giving her power of appointment and removal of trustee, who in turn had the discretion to distribute to the wife and the husband to the exclusion of the children. This level of control pointed towards the trust being an alter ego of the wife, and the conclusion that the assets were property of the marriage, not the children.

4. Does the trustee effectively/practically control the trust in an unfettered way?

No. Up until her resignation under the deed of variation in 2003, the wife as appointor had complete control over the appointment and removal of the trustee. The consent of the appointor was required for the trustee to vary the terms of the trust deed. Nothing, including a request by the trustee, obliged the wife as appointor to relinquish control of the Trust.

5. Does the trustee exercise its powers independently or are they controlled or subject to approval by any other person or entity?

While the trustee had the discretion to make distributions, the power to vary the deed was subject to approval by the appointor and the appointor could remove the trustee at any time.

** for the trainspotters, ‘Sometimes Always’ is a song by the Jesus and Mary Chain. View hear (sic): 

Sometimes** it’s about asking the right questions – Beeson v Spence

Following recent family law related posts, this week, an adviser reminded me of the case of Beeson v Spence [2007] FamCA 200 which highlighted the importance of the factual matrix on how exposed the assets of a trust are. The decision is still regarded as one of the most important in relation to trusts and family law. 

Briefly the case involved a wife and husband who met in 1996 and married in 1997. They had two children and subsequently divorced in 2004. In 2001 the wife had established a trust known as the S Trust. 

On establishment of the trust, the wife’s father and her solicitor were appointed as trustees and the wife was the appointor. The specified beneficiaries were the two children of the marriage and the wife and husband were within the class of potential beneficiaries. 

In 2003, at a time when the husband was going through financial difficulties, and when the wife and husband had separated, the deed was varied to exclude the wife and the husband as potential beneficiaries of the trust, as well as to resign the wife as appointor. A new appointor, being the wife’s sister, was nominated in her place. 

After the variation, the deed practically still entitled the wife and husband to receive distributions, not as potential beneficiaries, but as ‘parents’ of the children who remained specified beneficiaries. 

In the property settlement proceedings, the husband argued that the trust was established for the benefit of the family as a whole and not just the children. 

In contrast, the wife suggested that the trust was ultimately established for the purpose of benefitting the children of the relationship and therefore the assets should not be treated as property of the marriage. 

Having reviewed all of the available facts, the Court ignored the release of direct control by the wife (through her resignation as the appointor and the removal of beneficiaries) and held that the wife still retained sufficient control of the trust to support a conclusion that the assets should be treated as property of the marriage. 

Posts over the next two weeks will look at the key questions the court took into account in reaching this conclusion. 

These posts will show that the factual matrix is decisive in determining whether the property is matrimonial property. This is because the assets of the trust are more likely to be matrimonial property where, among other things, the trust is essentially the alter ego of one of the parties to the marriage. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Sometimes’ is a song by Ash. View hear (sic): 

What do you want from me?** family law and tax fraud

Today’s post looks at the Family Court decision where property proceedings were adjourned to allow for the wife’s allegations against the husband for fraudulent tax evasion to be investigated. 

In Pisani & Pisani [2012] FamCA 532, the main two main issues were: 

1. whether it was appropriate to adjourn the property proceedings given the potential impact on the asset pool?; and
2. whether the Court should bring to the attention of the Australian Tax Office (ATO) evidence of the husband's alleged fraudulent tax evasion, as disclosed by the wife?

The court held that given the potential liability, if the allegations of tax evasion were proven, would have been considerable, it was appropriate to adjourn the property proceedings until the allegations were resolved by the ATO. Until the issues had been resolved, it would be virtually impossible to determine the true asset pool of the parties. 

In relation to the duty of the Court to disclose the allegations to the ATO, the court held it was obligated to take action to bring the issue to the attention of the ATO. This said, the court also confirmed that the question of this type of disclosure was one that needed to be determined balancing all relevant issues on a case by case basis. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘What do you want from me?’ is riffed from the Billie Eilish song ‘Bury a friend’. View hear (sic): 

When family law courts recognise spouses have (gone) ‘Fishing** for documents’

Today’s post looks at a Family Court decision regarding beneficial interests in property proceedings following a matrimonial breakdown.

In the case of MacDowell & Williams and Ors [2012] FamCA 479, the court denied the request for disclosure of the wills and documents relating to the corporate and trust structures of the wife’s parents. 

The wife and the husband married in April 2004 and separated on a final basis on 12 July 2010. The husband had submitted that the documents requested were relevant to the marital property pool and in determining the financial resources available to the wife. 

The wife’s parents filed an objection to the husband’s request on the basis that: 

1. the documents sought from them in their personal capacity were not relevant as they maintained testamentary capacity; and
2. the documents sought from them in their capacity as directors were not relevant as neither the wife nor the husband had any proprietary interest.

In relation to the parents’ wills, the court said the request was a ‘fishing expedition’ by the husband. Although there may be compelling circumstances which warrant the disclosure of will documents (for example, when a parent has lost capacity), here, both parents were alive, in good health and possessed full testamentary capacity. 

In relation to the financial and corporate documents, it was held that there was no evidence to suggest that the wife had control over any of the entities, or that control was likely to arise in the future. 

This lack of control was contrasted with the case of Keach (which has featured in previous posts) where the husband did have significant involvement with a trust and it was held to be his financial resource. 

The court then considered the previous distributions of one trust where the wife was both the primary and default beneficiary. Given, however, that the wife had only received $28,000 over the ten years of the existence of the trust, and during that time, distributions had also been made to other beneficiaries of the trust, the court held that it was clearly ‘discretionary’ in nature. 

The husband also sought to rely on purported interpretation of Kennon v Spry [2008] HCA 56 (again see previous posts) and argue that the wife’s interest in the trust were property, that being her ‘right to consideration’ and ‘due administration’. 

The court held in favour of the wife’s parents that this was a misstatement of the law on this point and that while such rights could be taken into account, they would generally be very difficult to value. 

The court also bluntly distinguished Spry by noting that Dr Spry had total ultimate control of the trust in question, which was not the case here. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Gone fishing’ is riffed from the Stereophonics song ‘Bartender and the thief’. View hear (sic): 

Divorce as a (last) exit** event under a shareholders’ agreement

With the annual spike over the festive season in family law issues, it seemed timely to consider the issue of how the divorce of an individual principal of a company can be addressed under a shareholders’ agreement (or similarly under a partnership or unitholders agreement).

Broadly we see the 2 main approaches as being:

1. having divorce as a specific triggering event allowing the other owners to buy the divorcing shareholder’s interest; or
2. drafting a right of first refusal and pre-emption arrangement broadly enough to capture any proposed transfer as a result of a divorce of a shareholder.

Our approach generally is the second alternative outlined above, unless there are specific reasons to adopt some other process.

Normally there would not be any vendor financing arrangements included into the agreement, although these can always be agreed between the parties at the date of sale, if they are on amicable terms.

It is important to note that any shareholders’ agreement should not be intended to avoid complying with any obligations under a property settlement, rather it should make sure that the non divorcing owners can continue to run the business in the most effective way without being in business with a principal’s spouse or an unrelated third party.

** for the trainspotters, ‘Last exit’ is a song from Pearl Jam. View hear (sic):

‘The Vibe’, family trusts and family law (part 2)

Last week's post considered some of the key issues in relation to the Family Court's ability to access assets of a trust.

The decision in Harris & Dewell and Anor [2018] FamCAFC 94 provides more context to the approach of the court in this area. As usual if you would like a copy of the case please contact me.

In summary, the factual matrix was as follows:

1. A unit trust was established about 5 years before the start of the relevant relationship.
2. The husband and husband’s father were the sole shareholders in the corporate trustee of the unit trust (the father owning 67%, the husband 33%). Although the husband was for many years a director of the corporate trustee, he had retired from this role some years before the trial, replaced by his solicitor. The solicitor was however accustomed to acting in accordance with the husband's wishes.
3. At trial the husband’s father was the sole unit holder of the unit trust (and the husband had never owned any units), although it was assumed that the husband would inherit the units on his father's death (the father was aged 99 at the time of the trial).
4. It was concluded that the level of control held by the husband over the trust was clearly significant.

In holding that the trust was not an asset of the husband (although it was taken into account as a financial resource) the court confirmed as follows:

1. Property of a trust can be treated as property of a party only where evidence establishes that the person or entity in whom the trust deed vests effective control is the ‘puppet’ or ‘creature’ of that party.
2. Control of itself is not sufficient to deem trust assets to be the property of a party to a relationship. Instead, what is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust.
3. In other words, the spouse must have an actual ‘lawful right to benefit from the assets of the trust’.
4. Here, despite the extensive control held by the husband, he did not have the ability to guarantee benefit of the assets to himself - that right at all times rested with the husband's father.
5. In a sentence, the trust was not the husband's alter-ego nor a device used by him for his sole benefit.

Therefore, the assets of the trust were not property of the husband for the purposes of the settlement proceedings with the former wife.

** for the trainspotters closely behind Dennis Denuto and his vibe principle is the refrain ‘tell ‘em they’re dreaming’.

‘The Vibe’, family trusts and family law (part 1)**

Previous posts have referenced the legal principle known as ‘The Vibe’, as developed by the legendary Australian movie ‘The Castle’.

In an arguably analogous decision the family law case of Romano & June [2013] FamCA 344 is relevant. As usual, if you would like a copy of the decision please let me know.

The case was complex and the judgement took over 19 months to be issued by the court following completion of the trial and ran to almost 100 pages in length.

It is important to note that the court held that the husband was not being honest about many of his arguments concerning the trust. Furthermore, several of the witnesses whose evidence the husband also relied upon (for example, close friends and colleagues) was also held not to be honest.

One, of many examples, listed in the case of the courts view of the husband is best captured in the following extract -

“I am quite satisfied that the husband’s resignation as a director of [British Virgin Island company] X1 and several other companies, after the commencement of these proceedings, was effected not for the reasons advanced by the husband and those of his witnesses who gave evidence about the matter, but so that he could not be required to obtain access to any of the records of the companies that directors lawfully have access to. That he did so resign after being put on notice by the solicitors for the wife that he should not do so gives me added cause for such satisfaction, on the balance of probabilities.”

Briefly, the factual matrix was as follows:

1. the relationship was around 16 years in length (9 years of marriage);
2. there were no children of the union;
3. the husband had set up a family trust some years before meeting the wife as part of a number of entities, including (for example) a company the husband was deemed to control (despite having no legal ownership) in the British Virgin Islands, that was set up around the time the husband was advised to (and did) move to Monaco (apparently for tax planning purposes);
4. at all relevant times the husband was one of two directors of the corporate trustee of the trust and a primary beneficiary of the trust; and
5. the husband however was never an appointor of the trust, nor a shareholder of the corporate trustee.

In rejecting the husband's argument that he did not control the trust (and was merely a potential beneficiary of future distributions), the court confirmed:

1. while the husband did not have legal control of the trust, he did have effective control;
2. the husband deliberately looked to avoid being in legal control of the trust, while in reality regarding the assets of the trust as his; and
3. given the level of control the husband exercised over the trust assets, it was appropriate to include them as assets of the marriage and available for division in the property settlement.

The key aspect of the court's reasoning is arguably best captured by the combination of its assessment of the husband's lack of honesty and the following extract from the judgement

“The question whether the property of the trust is, in reality, the property of the parties or one of them.... is a matter dependent upon the facts and circumstances of each particular case including the terms of the relevant trust deed ... [Here the] husband’s actual control would allow him to cause those assets to be appointed to himself or his wife along with his and her right to due consideration constitute property of the parties.”

** for the trainspotters Dennis Denuto and his need no introduction.

How are Windfalls after the Date of Separation Treated in Property Settlements?

One issue that arises relatively regularly in relation to personal relationship breakdowns is the way in which assets acquired by one spouse following the date of separation, but before the property settlement, are treated under the property settlement.

The issues in this regard can be particularly sensitive where the financial windfall is as a result of, for example, the death of a parent of one of the spouses or a windfall gain such as a lottery win.

Unfortunately, as is often the case in relation to family law matters, the one consistent theme is inconsistency.

In other words, the family court has stated strongly on a number of occasions that how financial windfalls received after the date of separation will be allocated under the property settlement will depend almost entirely on the particular factual circumstances.

For example, the family courts have adopted the following approaches:

1) completely segregating all of the financial windfall so that it is only accessible by the spouse who received it, while also not penalising the spouse in terms of what they are otherwise entitled to receive from the joint matrimonial property;

2) segregating the financial windfall to the benefit of the spouse who received it, however reducing that spouse’s entitlement to the joint matrimonial property;

3) including the financial windfall in the pool of assets to be distributed between the spouses, but adjusting the pool to provide a greater weighting to the spouse that received the financial windfall;

4) including the financial windfall in the matrimonial pool and essentially ignoring the source of the funds.

Broadly speaking, where a financial windfall or a significant financial contribution, has been made by a spouse prior to a property settlement, then the longer the time period between the windfall or contribution and the separation, the more likely it is that the family court will ignore the source.

Again however, this conclusion is subject to the overriding theme that the court will ultimately assess each situation on a case by case basis.

Within you; without you - When is a Trust not in fact a Trust? **

The ability of third parties to attack arrangements on the basis they are void because they are a sham has been looked at in previous posts (see - Sham trusts and the Family Court and Leading gift and loan back case).

Arguably one of the leading cases which explores the ability of a trustee in bankruptcy to attack trust assets using the rules in relation to sham transactions is Lewis v Condon; Condon v Lewis [2013] NSWCA 204. As usual, a link to the decision is as follows – http://www.austlii.edu.au/au/cases/nsw/NSWCA/2013/204.html.

Although the facts were somewhat complex, at the centre of the dispute was a trust that had been established by a lady who subsequently became bankrupt and admitted that the structure facilitated ‘her purpose to deceive her former husband, the Family Court and to avoid tax’.

In considering whether the assets of the trust were exposed to attack from a trustee in bankruptcy on the basis that the trust was a sham the Court held relevantly as follows –

1. Before any trust will be held void as a sham, it is necessary to show that there was an intention that the structure created not bear its apparent legal consequence. That was not the case here; 
2. Even where a trust is established with an admitted purpose of deceiving, this is not enough to mean it is a sham, indeed here such an intention was in fact ‘entirely consistent with the creation of a genuine discretionary trust’; 
3. Once it was established that the trust on creation was not a sham, subsequent events cannot turn the structure into a sham. 

The decision also confirmed that in a practical sense, a new trustee holds office from the time of their appointment replacing the previous trustee and not from the time trust property is formally transferred.

** For trainspotters, ‘Within you; Without you’ is the only George Harrison written song on the Beatles release ‘Sgt Peppers Lonely Hearts Club Band’, listen here – https://www.youtube.com/watch?v=q2dMSfmUJec&list=RDq2dMSfmUJec&t=34

Image courtesy of Shutterstock

Privilege (on privilege) in family law matters **

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/E69HxwaO3A4

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

The decision in Nolan (email me if you would like a copy of the judgement) is interesting because former parents-in-law of a spouse actually released all of the material around the estate plan to the former son-in-law, before their lawyer raised that the material might actually be privileged.

When the issue was reviewed, the court held as a general rule, estate planning material of the parents of a couple is privileged. In Nolan however, the court held the parents had already released the information and therefore no privilege attached to it. This is because privilege is the client’s privilege. Once they waive it, that's the end of the discussion.

Another privilege case in the family law space to remember is Kern. As usual, if you would like a copy of the judgement, please email me.

In Kern, the parents had arranged for vacant land to be transferred to their daughter and the son-in-law.

The daughter’s argument during the litigation with the former husband was that clearly the asset had come down ‘her’ side of the family and clearly that needed to come back to her benefit under the family law settlement. Not an amazingly complex argument and one that the court was comfortable to agree with.

Where it started to get somewhat more interesting was that the daughter then argued she and her parents had transferred the land to her for (say) $100,000, when it was actually worth (say) $400,000.

The reason for the transfer being significantly undervalued was to minimise the tax and stamp duty otherwise due and payable. The family court gave the wife the uplift to $400,000.

However, the undervalued transfer breached specific provisions under the stamp duty legislation. So while the court acknowledged the argument and gave an effective benefit under the family law settlement to the wife, the court also immediately sent the matter to the criminal investigations division at the Stamps Office.

Again, generally this information would be protected by privilege. However, as the wife was the one that submitted it into the court, she waived the privilege.

** for the trainspotters, ‘privilege on privilege’ is a line from the Church song ‘Myrrh’ (as I recall it I got an A+ when doing my grade 9 English assignment analysing the lyrics for this song … just sayin’) listen hear (sic) - https://www.youtube.com/watch?v=h6T_BtPSRL0

(It has) access now - estate planning documents & family law cases **

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/GyqLtNpPv_8

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

A classic case study example is where there is a mum and dad with adult kids. The parents have set up their estate plan and one of the adult kids then goes through a relationship breakdown.

The type of argument that can be run by the estranged spouse is as follows –

‘I’ve got reason to believe that under the estate plan of my former in-laws that my ex-spouse will be getting a fair entitlement under their estate plan. So on that basis, I want to get access to the documentation that sets out how the estate plan works and I want to get access to how any family trust they may have is setup.

I also want to get access to all the distribution resolutions overtime. Even though none of this is a direct asset or something that is directly within the portfolio of my former spouse, it is all within the overall family unit, and therefore, I am entitled to get access to those documents.’

The case law in this type of situation is somewhat unclear. There are certainly cases to support the fact that parents’ estate planning documentation can be accessed.

Indeed, there are examples where in the actual trial, the parents-in-law are called into the courtroom, the doctors are called in, and there’s a medical assessment of how the mum and dad are tracking, and whether they are actually going to die anytime soon.

All of this is done to allow the court to put a monetary value on what a spouse’s entitlement might be out of their parents’ estate plan.

** for the trainspotters, ‘it has access now’ is a line from the At the Drive-In song ‘One Armed Scissor’, watch hear (sic) - https://www.youtube.com/watch?v=7NYbojdoAQE

The most important tax tip for family law matters you will learn this week

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/XZx3PozjtTg

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

If you go back many years to the introduction of the Division 7A regime in the late 1990s, early 2000s, one of the anti-avoidance provisions that they brought in was ultimately set out in subdivision EA of the Tax Act.

These rules said regardless of any other provisions, if a distribution was made out of a trust and it was left as an unpaid present entitlement (UPE) to a company and there was then a debit loan made by the trust, that debit loan has to comply with the Division 7A rules.

In this type of situation, some advisers try to argue that if the funds are lent out for income generating purposes and the interest on the debt is deductible, then the loan is not caught by Division 7A. The reality however is that the loan is a significant tax problem.

In this particular case study scenario, there were two key problems. Firstly, there was an EA problem because the trust had made debit loans when there were UPEs to a corporate beneficiary. In addition to the EA loans, there had been purported distributions by the trust to the wife over many years.

However, the wife was not a beneficiary.

So not only was there the big EA problem, there also had been a whole raft of distributions over many years that were completely invalid on the face of the trust instrument.

Ultimately, the parties entered into a settlement where the husband took over control of the trust, the wife got paid out all of her loan accounts, and was entitled to keep all of the historical distributions.

Now the interesting aspect is that the wife and her family lawyers asked for a tax indemnity in relation to both the failure to comply over the years in relation to EA and the inability to read the deed and thus the invalid distributions to the wife.

Then, three months after the wife had been paid out, the husband by chance gets a tax audit. The wife didn’t have to worry about the outcome of the tax audit because she was fully indemnified.

A Practical Analysis of Harris

A previous post has looked at various aspects of the leading family law and trust case of Harris – see - Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case and trust splitting in a ‘vidcast’ at the following link - https://vimeo.com/154687783/

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

Harris is an example of the interplay between using a bespoke constitution, but not doing a trust splitting exercise.

In this situation, under an estate planning arrangement, the dad was the original shareholder and director of the corporate trustee. He died and under his estate plan, he gave shares in the company to the adviser, he gave shares to the husband (his son) and then mum (the wife) retained her shares in the trustee company.

These shareholders also acted as the board of the trustee company.

Inside that family trust was a family business that had been running for many years. The husband was, on all the evidence, important to that business and had a really key role. At no stage did the family attempt to split the trust though.

The husband had siblings, it was clearly still the ‘family’s trust’ and there were still all of the normal rules and obligations you'd expect. The husband had not otherwise been given any significant control. Thus, on his argument, the trust was not an asset of his in the family court scenario.

The wife said the opposite. The wife said even though the family hadn't gone through a trust splitting exercise in a formal sense, there were significant assets that were the husband’s, and therefore, they're things she was entitled to 50% of.

The court held that family law cases will turn on the facts.

Here, they were satisfied that the husband has no control.

There was no de facto splitting.

The terms of the corporate trustee constitution meant that the trustee directors must act jointly and in concert.

There was no evidence to allow the court to assume that the mum was somehow under the manipulation or control or acting as the mere puppet of the husband.

This meant the court essentially ignored the trust.

The reality however is that if the family had gone down the trust splitting path, you can almost guarantee that the earlier family law case of Pittman (email me if you would like a copy of that decision) would have been followed. In that case the court held that assets of a family trust, being a business, were exposed to a family law settlement.