By Erlinda Nunn
When considering your estate plan, you will often want protection over your hard earned assets. The creation of a testamentary trust in a will can provide taxation benefits and asset protection. Under this type of (very simple) structure, the ultimate control and legal ownership of the estate assets is held with the trustee. This means that the beneficiaries do not legally own the assets of the trust; they merely have a right to be considered in the distribution of the income or capital of the trust. Protection is afforded against bankruptcy and relationship breakdowns.
In the recent case of Bernard & Bernard  FamCA 421 (‘Bernard’) the Family Court considered whether assets held in a testamentary trust should be considered matrimonial property and available for distribution despite the marriage breakdown and divorce proceedings.
Generally, the Family Court will consider a number of factors when determining a property division such as:-
- What assets form part of the ‘property pool’;
- What assets are held individually or jointly;
- Whether there are any business assets;
- Any inheritances received;
- Superannuation; and
- Any assets held in trust structures.
The Facts of Bernard
This case involved proceedings for a property division under section 79 of the Family Law Act following their separation. The Wife argued that as a beneficiary under a testamentary trust her husband had an interest in the property belonging to the trust and that the Court should have included the assets of the trust in the property pool. The Husband argued that the assets of the trust should not be included in the property pool as he was not a trustee and did not have any control over the assets or income of the trust.
The facts of the Bernard case were as follows:-
- The Husband and Wife married in 1998 and separated in 2015 and eventually divorced in 2017.
- The Husband’s father made a will in 2012 which created a discretionary testamentary trust for the Husband (the Mr Bernard Family Trust) and one for his sister (the Ms C Bernard Family Trust). The Husband’s father passed away this same year.
- The Husband’s father’s estate was worth approximately $3.5mil and comprised of bank accounts, shares and commercial and residential property.
- The father’s will created two testamentary trusts, one for each of his children. The Husband was the trustee for his sister’s trust and his sister was the trustee of his trust and they were the primary beneficiaries of each other’s trusts.
- In December 2012, the Mr Bernard Trust and the Ms C Bernard Trust conducted business together in partnership for profit through the Bernard Family Will Trust partnership (‘the Q Partnership’).
The Q Partnership owned all of the shares of the deceased. Mr Bernard and Ms C did not own any of the deceased’s shares in their personal capacity. The Wife argued that the testamentary trusts created by the deceased’s will were ‘mirror trusts’ and that the assets of the Husband’s trust were his and the assets of the sisters trust were hers.
The wife argued that a distribution of the income generated by the Q Partnership had not been distributed for the financial year and that an application could be made that the income must be set aside for the benefit of the primary beneficiary i.e. her former husband which therefore becomes a part of the property pool.
The Husband and his sister as trustees made a resolution to deal with the income of the trusts into the future. It was resolved that renovations would need to be completed to the deceased’s commercial property, the V Company would be appointed to carry out those renovations, that the trust would need to keep funds for the renovations and that the trust will need to ‘hold all distributions to beneficiaries, other than the distributions to cover income tax instalments generated by the trust, until completion of the renovations’.
The Husband and his sister (who was joined to the proceedings as a second respondent) argued that the resolution made was an enduring resolution and that the undistributed accumulated income was being held for the specified use, namely the renovations to be carried out on the deceased’s commercial property.
The Court ultimately held that the Husband’s testamentary trust should not be included in the property pool. Why? Upon construction of the Trust Deeds, Justice Henderson found the Husband was not the settlor or the trustee of his trust, rather he depended on his sister (the trustee of his trust) to accumulate and exercise her discretion to distribute income of the trust. The Court also found that Mr Bernard and his sister did not purport to exercise control over the assets in their trusts. The Husband was deemed to be a discretionary beneficiary and did not hold any other entitlement and the assets were never matrimonial property as the assets were not acquired during the marriage. This differed to the case of Kennon v Spry were the Court found the husband as the settlor and trustee of the family trust had control over the assets (which were considered assets of the marriage) of the trust.
The trusts in the will of the deceased created an obligation for the Husband to act as his sister’s trustee and vice versa. Each of them had an obligation and a duty to each other as primary beneficiaries, as well as the other members of that class including the children, grandchildren and great grandchildren of the deceased. An example of a breach of their duties would include if the sister distributed all the assets and income to the husband but failed to consider the other beneficiaries of that trust.
What the case of Bernard demonstrates is that the deceased received sound planning advice to provide the ultimate protection of his assets to ensure his beneficiaries would enjoy their benefit of the estate without the assets becoming subject to a property division.
Specialised estate planning advice should be obtained for each individual situation to maximise asset protection and minimise risks.