Latest Trust Case Undermines Discretionary Trust Protections

Late last year the High Court decided in Kennon v Spry that a husband who tried to exclude his wife from the family trust would have to pay her over $2 million.

The point of interest in the case is the decision by the High Court that for the purposes of the Family Law Act the involvement of the parties under ther family trust was "property" and could be dealt with by the Family Court accordingly.

Dr Spry had purported to remove his wife from the administration of the trust and indeed had drafted the trust's terms to say that she could only be a beneficiary of the trust so long as she was his spouse and therefore could not benefit from the trust. As he had already removed himself as a beneficiary he argued that the assets of the trust were not matrimonial assets and could not be dealt with by the Family Court.

Through some novel and tortuous reasoning the High Court decided that the wife had an entitlement to be considered for a distribution under the family trust and the husband (as the trustee) had the power of appointment of the assets in favour of beneficiaries and that therefore between them the general right to expect and carry out due administration of the trust constituted property under the Family Law Act and could be the subject of a Family Court order.

Hot on the heels of a case called Richstar No.6 we have again seen a Court change the way we have traditionally considered family trusts - namely as just a bundle of expectations and obligations but definitely not "property" as such.

Just as the Richstar case may be capable of being limited to its particular facts (relating to the right of a receiver to take charge of family trust assets) this case also may in the future be limited to the Family Law situation.

But if you operate a family trust, or advise others who do, you may want to re-think how to set up these trusts to provide the kinds of protections that we once took for granted or to accept that they may no longer provide those protections which should be sought elsewhere.