A ruling of the Family Court of Australia has tested the effectiveness of using a testamentary trust to protect assets from claims arising from the breakdown of a marriage.
A father established testamentary trusts for his son and daughter in his will. The son and daughter, Mr Bernard and Ms C Bernard, were the trustees of each other’s trusts.
Mr Bernard’s former wife argued that the assets of his testamentary trust should be included in the matrimonial pool.
In the case, Bernard & Bernard, the court rejected this argument, ruling that the son did not have any direct or indirect control of the trust – an important test in these situations. He was neither a trustee nor an appointer.
It ruled that he only had an entitlement to the testamentary trust as a mere discretionary beneficiary.
There had been an accumulation of income which was not distributed by the trustees over a number of years. Mr Bernard and Ms C Bernard operated a business together and were accumulating the income for planned capital works n the business.
Mr Bernard’s former wife argued that under the terms of the trust the accumulated funds should have been distributed to her former husband, where they would be matrimonial property and some of the proceeds would be distributed to her.
The former wife argued that Mr Bernard had effective control of the assets in the trust.
The court ruled that Mr Bernard was a beneficiary with no other entitlement. “He does not have legal entitlement to any asset of the trust, nor does he have any power to appoint a trustee or appoint the assets of the fund to a beneficiary.” It said.
In a note to clients, law firm Cooper Grace Ward says : “It is imperative that the testamentary trust is properly drafted to ensure that the control of the trust is structured properly, balancing the need for protection and the practical circumstances of the client.”
As well as looking at the structure of the trust, the court reviewed the conduct of the trustees.
It found that “neither Ms C Bernard nor Mr Bernard have purported to exercise control over the assets in their trusts, nor purported to have some lawful right to the assets in their trust.”
Cooper Grace Ward says: “Advisers need to be aware that the asset protection benefits of a testamentary trust are not achieved simply through the structure of the trustee and the appointer.
“The ongoing administration of the trust, the way the trustee carries out their role and the records maintained by the trustee are all relevant factors.”