Discretionary Trusts in Family Law Proceedings

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The issue of the treatment of discretionary trusts in family law property proceedings is increasingly becoming an important issue. The starting point for understanding the treatment of discretionary trusts by the Family Law Courts is the definition of “property” in section 4 of the Family Law Act 1975 (Cth), which states that property means… property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion”.

In the leading authority of Kennon v Spry,the High Court gave separate reasons for judgment regarding whether the husband’s interest under a trust could be treated as property. Chief Justice French concluded that: 

The word "property" in s 79 is to be read as part of the collocation "property of the parties to the marriage". It is to be read widely and conformably with the purposes of the Family Law Act. In the case of a non-exhaustive discretionary trust with an open class of beneficiaries, there is no obligation to apply the assets or income of the trust to anyone. Their application may serve a wide range of purposes. In the present case, prior to the 1998 Instrument those purposes could have included the maintenance or enrichment of Mrs Spry. 

Where property is held under such a trust by a party to a marriage and the property has been acquired by or through the efforts of that party or his or her spouse, whether before or during the marriage, it does not, in my opinion, necessarily lose its character as "property of the parties to the marriage" because the party has declared a trust of which he or she is trustee and can, under the terms of that trust, give the property away to other family or extended family members at his or her discretion.

In summary, in Kennon v Spry, the majority of the High Court concluded that the question to be asked is whether the property of the discretionary trust is in reality the property of the parties or one of them which is determined based on the facts and circumstances of the particular case, including the terms of the relevant trust deed. In circumstances where it is established on the evidence that a party has legal or de facto control of a discretionary trust then the relevant interest in the trust will be property and is able to be included in the property pool for division.

In Family Law proceedings which involve discretionary trusts, there needs to be careful consideration of two important issues.

Firstly, whether the other party has legal or de facto control and determine what evidence is required to ground such a finding. If a party has de facto control and that can be established on the balance of probabilities then the relevant assets of the discretionary trust will be treated as property of the parties. In the event that the other party does not have legal or de facto control, but merely a beneficial interest in the discretionary trust, the Court can take that interest into account as a financial resource.

Secondly, if the other party’s de facto control over the discretionary trust is in issue and there is a trustee that is a “puppet” of the other party, it may be important to subpoena the trustee to give evidence in the proceedings to establish the de facto control or alternatively whether the trustee should be joined as a party if there remains an issue in dispute regarding legal or de facto control, or the value of the interest held, or a loan to the trust.

If you have any questions in relation to a discretionary trust in the context of a family law proceeding, contact one of our experienced family lawyers on 1800 VAS LAW. 

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