Are Discretionary Trusts Property of the Relationship?

Case Note:  Decision of Harris v Harris [2011] FamCAFC 245

In the marriage of Harris v Harris the Full Court of the Family Court of Australia was asked on Appeal to review the decision of His Honour Bell J who found at first instance that the assets of a discretionary trust with an agreed value of $1,500,000.00, were effectively under the control of the husband and were property of the relationship, available for distribution between the parties.

The issue raised by the case was whether the husband had sufficient control of the Trust itself such that its assets could be regarded as his assets.”

 The main shareholder of Trustee Company of the Trust was the husband’s mother. The mother had the controlling interest in the Trust – or at least, on the face of it.

The wife sought to argue that the husband’s mother was a ‘mere puppet’ of the husband and that in reality the husband had the real controlling influence over the Trust. The wife pointed to the fact that the husband received the vast majority of income from the Trust and that he agreed that he was the driving force of the trustee company which generated the income for the Trust (a separate entity).

At first instance, the wife was successful in her argument. However on Appeal, the Court did not come to the same conclusion.

The mother was not called to give evidence at the trial and there was what amounted to speculation on the wife’s part rather than direct evidence about the husband’s real role and his alleged controlling influence over his mother in her dealing with the Trust.

“…while the husband was and remains a director and minority shareholder in the original trustee, Harris Nominees Pty Ltd, he is neither a director nor a shareholder in the company, HA Pty Ltd which has been Trustee of the Trust since 1 June 2007.”

 It has long been open to the Court to determine that the assets of a Trust are property of the relationship but the key factor in considering whether such property is marital property is the level of control exercised by the relevant  party involved (in this case, by the husband).

The law as established in Kennon v Spry (2008) 238 CLR 366 at 387-389 (French CJ) remains unchanged:

“… that the term “property” when used in s 79 of the Act should be given a wide meaning,”

 and  

 “The beneficiary of a non-exhaustive discretionary trust who does not control the trustee directly or indirectly has a right to due consideration and to due administration of the trust but it is difficult to value those rights when the beneficiary has no present entitlement and may never have any entitlement to any part of the income or capital of the trust.”

 The issue in Harris which ultimately lead to the husbands Appeal succeeding and the matter being listed for a re-trial, was the lack of evidence to support a finding that the husband had the ‘real’ control of the Trust.

 In Harris the Full Court complained that there was simply not enough evidence to support the assertion that the husband’s mother was a ‘mere puppet’. She may well have been – but the Court could not find same in the absence of any direct evidence:

 “The difficulty, however, for the wife on this appeal is to be able to point to any evidence which would support a finding that the husband’s mother is his puppet, and that it is through her, or perhaps otherwise, that he exercises de facto control of the trustee company and of the Trust.”

Matters involving disputed trusts are notoriously hard fought and difficult – trusts are set up for particular reasons and often with careful consideration given to any potential challenges to be made (wether by a spouse, the ATO, a beneficiary or some other entity).

In Harris it is a case of back to basics – does the evidence support the assertion? The wife in Harris is unlikely to make the same mistake twice and undoubtedly her mother in law will have the dubious pleasure of giving evidence in round two of this matter at the rehearing.

 

For further information about this case note, the creation of or challenge of a discretionary trust, please contact us at enquiries@jvlegal.com.au

 

 

Author: Vanessa Steinfelder

The information in this case note is not intended to address the circumstances of any particular individual or entity and does not constitute specific legal advice.