“Puppet masters” of discretionary trusts can be crucial in Family Law property settlements. RMB Family Law Lawyer LUKE ELLIOTT explains. The RMB Family & Relationships Law Division explains.
When a marriage or de facto relationship breaks down, the parties engage in a property settlement process designed to determine a just and equitable division of assets.
The first step of this process is to identify the net asset pool available for division, which includes both parties’ assets, liabilities and superannuation.
Discretionary trusts are commonly established in family-run businesses, as they enable income to be split and distributed to beneficiaries to reduce the tax payable on that income. Discretionary trusts also have asset protection benefits because, strictly speaking, the assets are not the property of the party to a marriage or a de facto relationship.
A typical discretionary trust has a trustee, which may be a corporate trustee such as a company of which one or both of the parties are directors, and/or shareholders. Beneficiaries of discretionary trusts are commonly spouses, children and grandchildren of the person who controls the trust called the “appointer”. The appointer controls the trust and has the power to appoint and remove the trustee.
The level of control that a party to a marriage or de facto relationship has over a discretionary trust will determine whether the trust will be included in the asset pool available for division between the parties. When a party to a relationship exercises a significant level of control over the trust in the role of ‘appointer’ they are referred to as being a ‘puppeteer’ or ‘puppet master’. In these circumstances it is more likely that the trust will be included in the asset pool for division in the parties’ property settlement.
A discretionary trust is more likely to be outside the reach of the Family Law Courts if neither of the parties have control of the trust. That is, neither of the parties have held the positions of ‘appointor’, ‘trustee’ or acted in a way that could be seen as being a ‘puppet master’ of the trust.
If one of the parties is a beneficiary of a discretionary trust and has a reasonable expectation to receive distributions of income or capital, the trust may be considered a financial resource of that party. The distribution of assets that such a party receives by way of property settlement will be adjusted in light of the trust being considered a financial resource to ensure a just and equitable settlement.
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