Tara (00:51):
Thanks for tuning back into the Art of Estate Planning Podcast. In today's episode, we are going to continue our Family Law Protection of Trusts series, looking at a few more cases.
(01:05):
So we started this series with episode 75, looking at the high court decision of Kennon and Spry and how assets in discretionary trusts, so family trusts and testamentary trusts are protected in a relationship breakdown. So go back and listen to episode 75. If you haven't, it really sets the foundation. We also looked at some cases after Kennon and Spry in episode 79, Pittman, Morton, and Harris. And today I want to cover a few more cases. So the first one is Bernard & Bernard from 2019. And I think this is an excellent case to read. It's actually not a very long decision. So if you are going to print any out and have a read, I do actually encourage this one because it's only 16 pages or so, but it's really helpful for us in an estate planning context because it considers testamentary trusts. A lot of the time when we're looking at these decisions, we are looking at family trusts, and then we have to obviously go and extrapolate the principles to testamentary trust structures, which is fine because at their core, they're both discretionary trusts and they really have that similar or a core fundamental structure, which is the same.
(02:33):
But there are obviously differences in terms of who created the trust and the source of the trust assets. So it's really good to have a case focusing just on testamentary trusts where we can look at how much weight the court has given to the fact that these are testamentary trusts. So not established by parties to the relationship, but established under someone's will as part of a wealth transfer succession plan and legacy planning. So let's have a look at Bernard and Bernard. It's considering a 27-year relationship between the respondent and the applicant. And in this scenario, the respondent's father had set up two testamentary trusts in his will. So one for the respondent and one for the respondent's sister. And the way that he structured or the father structured these testamentary trusts is that one of the testamentary trusts was set up with the respondent and the respondent's lineal descendants as the beneficiaries, and the other testamentary trust was set up with the respondent's sister as the beneficiary and also her lineal descendants as the beneficiaries of that trust.
(03:57):
So sort of earmarking each trust for each of the testator's two children. The control of the trust was set up so that for the trust of which the respondent was the primary beneficiary, his sister was the trustee and appointor. And then for the testamentary trust where the sister and her lineal descendants were the primary beneficiaries, the respondent was the trustee and a pointer. So basically they were in control of each other's testamentary trusts. So interesting structure there. They basically swapped out the control. The respondent's wife was also a beneficiary, and I think that's useful to know because let's have a look at what happened with the income distributions. The default entitlement or default clause for income was the respondent, but the respondent's sister as trustee had actually made a resolution to accumulate all of the income and they basically accumulated the income for nearly the entire duration of the trust.
(05:10):
So basically this decision was considered in 2019. Since 2015, all the income had been accumulated. There had been some distribution, and that was actually to the respondent's son, not the respondent themselves. There's also some interesting comments in the decision where the purpose of the testamentary trust was set out in the will. So I'm just looking at that now. Clause five set out the purpose of the trust. It is to provide financial assistance for the maintenance, education, and benefit in the life of any one of the primary beneficiaries or the children, grandchildren, or great-grandchildren of the primary beneficiary. Secondly, the next purpose is to provide capital for advancement in life of the primary beneficiary, the children, grandchildren, and great-grandchildren of the primary beneficiary. Thirdly, to invest or utilise all or any of the part of the capital to assist or benefit a beneficiary. So there was some discussion around the validity of the resolutions to accumulate income from a tax and trust law perspective, but I think that's a distraction to what we're talking about today.
(06:23):
And overall, the court held that the resolutions were drafted in a effective way to allow for ongoing accumulation. So the wife was basically arguing that because the siblings were trustees of each other's trusts, that they basically in effect have control. They ran things so that they actually just controlled their own trust. And there was, I think, some clouding of this as well, because the two trusts were in partnership. I believe they had a number of joint assets, like I think perhaps property that they ran together. So they were both, for instance, accumulating their income with the view to creating enough capital to be able to complete a project for the partnership. So it was operated very closely together. So let's dive into the court's reasoning here. And they really did rely quite heavily on Kennon and Spry to compare and contrast that decision to the facts in this Bernard and Bernard case.
(07:36):
So to begin with, they said, unlike Kennon and Spry, the respondent is not the seller of the trust. It was settled by the respondent's father. So really giving weight to the fact that this was established by someone who is not a party to the relationship, the assets are an inheritance and purpose set out in the will. They also looked at control. The respondent is not a trustee of the trust, unlike in Kennon and Spry. The respondent also has no power to appoint and remove trustees unlike in Kennon and Spry. I'll just pause there because I often get asked, "Does it matter who the appointer is? Can we just have the trusteeship set up properly, but leave control with the appointer?" And my response to that is in all of these cases, the role of appointor is just as important, if not more important, than the role of trustee.
(08:35):
So whatever you're doing from a control perspective, my opinion is it has to be done for both appointor and the trustee role. They also looked at the beneficiaries in the decision. So the husband respondent is just a discretionary beneficiary. He is a primary beneficiary, but he doesn't hold any other entitlements. Any entitlements he holds is as trustee of his sister's testamentary trust, comparing that to Dr. Spry in the Kennon & Spry decision where he really did have sole control. They further elaborate the fact that it is a broad class of beneficiaries. He is one of the discretionary primary beneficiaries and he has no control, and therefore no proprietary interest in the assets of the trust. They then go on to say, "The respondent's interest in the trust is as a beneficiary of his testamentary trust and none other." So he cannot apply assets or income of the trust to any person himself or the applicant.
(09:42):
The applicant might have her own recourse and action as a beneficiary of the trust as against the trustee who is his former sister-in-law. They also look at the source of the assets. So the assets of the trust were not acquired during the marriage as they are in the main inheritances from the husband's father's estate. So at paragraph 72, they also emphasise that the current assets of the testamentary trust were not acquired during the marriage as they are in the main inheritances from the respondent's father. Although I accept the parties did not separate until three years after probate was granted. They also looked at the wife's argument that the respondent had in reality control of the assets in his testamentary trust and that effectively because of this effective control, they are property. And they specifically say at paragraph 75 of the judgement , "I failed to see how the assets of a trust are managed can change the nature of a trust at law.
(10:47):
And I do not see these practical matters create control for the respondent over the assets in his trust. The power rests with his sister." So this is really interesting language because they are actually saying his trust, acknowledging that that trust has been emailed for the respondent, but because he doesn't have control, it's not enough to make a property of the parties. Paragraph 78, they particularly say, "Mearly because the trust, a mirror image of the other does not give them the power or control the applicant asserts." So I think this is a fascinating judgement , really helpful to show just how important the control is. They further go on to sort of say the applicant has not put forward enough evidence to show that there's a sham or anything that the siblings have controlled their own trust. And they particularly say at paragraph 82, "The evidence is that each of the trustees have faithfully carried out their last father's testamentary wishes to the letter." And there is no blurring by the trustees in relation to the ownership of the assets, roles and obligations as trustees, as partners or in control held over the assets in the trust.
(12:10):
So I think the lessons out of this, you do really need to honour the trust arrangements and have a strict separation. If they had been blurring and each child was almost a puppet for the other in relation to their trust, I don't know that they would've received the same outcome, but the fact that there was a separation of control and each of the primary beneficiaries had no control over their trust was given significant weight, as well as the fact that the assets were sourced from the respondent's father as part of an inheritance. So I think that's a really helpful decision, especially to sort of see where the courts had landed in relation to testamentary trust.
(14:05):
The next decision I want to talk to is Coley and Danae, and I'm going to put the citations in the show notes so you can go have a read of these.
(14:15):
So Coley and Danae is a 2020 Western Australian decision, and it considers basically the equivalent of the Federal Family Law Act. And in that decision, there is a family trust with about $4 million in it established by the respondent's mother before their relationship. So it was initially structured where the respondent was the trustee, appointor and guardian jointly with the respondent's mom. So there were both joint trustees, joint appointers, joint guardians, and that family trust had about $4 million in it. Again, really substantial because the property pool was $5 million. So whether this extra $4 million was included or not would effectively double that property pool. So the assets of the trust were contributed by the respondent's mother and the primary beneficiaries were the respondent, his sister, all of their children, and lineal descendants. And the mother was the residuary beneficiary. So it looked like the mom had set this up for herself, the children, and her bloodline.
(15:34):
The appellant was not included as a beneficiary at all. In 2004, that is when the respondent was added as a joint appointal and guardian and trustee with his mom, and then the mom had sort of nominated the respondent's sister to fill the vacancy if either the respondent or mother couldn't act. 11 years later in 2015, the respondent's mother died. And under the succession plan, the respondent's sister filled her vacancy and became the joint appointor and guardian with the respondent. There was actually some confusion around the succession of the trustee role because as a joint executor with the respondent, I think they initially assumed that the sister also just became a joint trustee by virtue of her role as a joint executor, but that was then fixed the next year through a deed of variation and rectification where the sister became a joint trustee with the respondent.
(16:37):
So the two kids ended up taking it over after mom's death. So again, part of a succession planning strategy. And this decision is an appeal where the trial judge had initially included 50% of the trust assets as property for the respondent. They also, in that decision, in the trial decision, sort of relied heavily on the fact that the estate under the mom's will was split fifty fifty between the respondent and the sibling. Okay. So where did they land on all of this? I would probably encourage you to have a look at paragraph 40 to begin with. That sort of sets out the structure of the trust and how that change all flowed through. So on appeal, the court says, "We need to examine this finding that the trust assets make up 50% of the respondent's property." And at the very least, there needed to be consideration by the trial judge of whether the respondent was the sole trustee of the trust and whether under the trust instrument, the respondent was a beneficiary to whom the trustee could appoint the entirety of the trust assets.
(18:00):
So that's really interesting in terms of what they're looking at on appeal, control and the right to benefit. So I think sort of starting at paragraph 66 is helpful in terms of looking at what the court held on appeal. So they held that the trial judge's reasons disclosed no proper basis for concluding the respondent had a 50% interest in the assets of the trust. So they relied heavily on Kennon and Spry again and the principles from Kennon and Spry and basically reiterated the crux of Kennon and Spry is that one of the parties to the relationship had all the control and the other just a right to benefit. And in this decision, it is therefore necessary for the trial judge to have considered at least whether the respondent was both the sole trustee of the trust and a beneficiary. And they said at paragraph 83, "If, for example, the respondent did not have any control of the trust, none of the assets of the trust would've amounted to his property." So this is really interesting.
(19:12):
In Morton & Morton, which we discussed in episode 79, we looked at where there is shared control, especially with the sibling, as was in that case as well. Neither of the controllers had control to be able to make any action or decision or create an entitlement in the trust without the other. They each had a veto power. They could not act alone. And then that meant that neither had control of the trust for the purposes of Section 79 of the Family Law Act. So did they consider something similar here? Paragraph 88, it was held, "It's for these reasons that in our view, in the absence of special circumstances of the kind considered in Kenon and Spry, the bare equitable right of the beneficiary under a discretionary trust will not ordinarily be included as property for the purpose of the Western Australian Family Court Act." Of course, where a party to the relationship is a mere beneficiary, the prospect of trust distributions to the beneficiary may be considered a financial resource.
(20:26):
And then I think 92 is probably the most helpful paragraph. To summarise these principles as they apply to the present case, the trial judge was required to consider two alternative ways in which the trust might potentially have been taken into account. A, if the respondent was the sole trustee, had de facto control of the trust with power to apply the entirety of the assets of the trust to or for his benefit, the entirety of the trust assets may have been included as his property to a consideration of the origin and assets of the trust. In that case, the right to due administration of other beneficiaries of the trust could be relevant to the exercise of the court's discretion. And then option B, if the respondent was not the sole trustee and did not have de facto control over the trust, none of the assets of the trust could have been included as his property.
(21:22):
And in that case, a reasonable expectation of the respondent that he would benefit from the trust would be a financial resource. And then they conclude at paragraph 96, the respondent was a joint trustee without control of the trust, and this should compel the conclusion that none of the assets of the trust were the respondent's property, not as the trial judge found 50% of the assets. So consistent with Morton & Morton, it's not enough to be a joint trustee to have the assets included as property. You have to be really in sole control. They also considered the right to due administration and whether that could be treated as property, but the value of the right to due administration is not to be assumed to be equated with the assets of the trust or even a proportion of them. So I just sort of keep mentioning this right of due administration because it is becoming more relevant now in the later cases.
(22:32):
So I just want to sort of highlight where the former previous cases have considered it. So this is a really reassuring decision, I think, consistent with Morton & Morton that joint control is not enough. The last case I want to talk about is Dovgan & Dovgan. Now, this is a monster decision. It's over a hundred pages, so I'll try to guide you through the relevant parts. High Net Wealth Group, the parties had about a $35 million property pool, and there were also two trusts that the appellant was trying to drag in to the property pool that were actually the parents of the respondent's trust. So they had an investment trust and a family trust with about six million in the investment trust, five million in the family trust. Both trusts shared a common corporate trustee, D, proprietary limited, and the respondent's dad and mom were both the directors and shareholders, and the respondent was also a director for some time.
(23:44):
So the applicant tried to argue that the respondent was the controlling mind of the corporate trustee, so pushing that alter ego argument. So the corporate trustee, D Proprietary Limited, was registered in 1983, and the respondent was a director between 1999 and 2018. And so this is a 2021 decision, but there was a lot of evidence put forward that all of the decision making throughout that time was made solely by the respondent's dad. The beneficiaries of the trust was basically the whole family of the respondent's parents and then their children and lineal descendants. So the respondent was, of course, a beneficiary. I don't believe the applicant was a beneficiary. However, the respondent had received a lot of distributions from the trust, and also this is a fact that the applicant leaned on ... The respondent himself had also made a lot of loans that were interest free to the trust.
(24:52):
So about $3 million that he was lending into those trusts, which the applicant sort of argued he felt like it was his money rather than an arm's length structure he had no control of, which is why he was giving so much money into the trust. So if you are going to have a look at this decision, there's a lot of different factors at play. The paragraphs particularly concerning the trusts, I think her and the decision are around 275. So for instance, they say at paragraph 275, "Many authorities in this court have used words such as creature or alter ego in this context to describe the relationship of one party to a marriage to the assets owned by a company or a trust." And in this case, the applicant issued the use of the language to the effect that D Proprietary Limited is the creature or puppet of the husband.
(25:51):
Instead, she has focused on the concept of control. So she hasn't run this share arrangement with respect to the trust. Rather, she's really put forward her argument that the husband is in control and that those two investment and family trusts are highly artificial vehicles to park assets for the husband's benefit. There was a lot of discussion around the evidence on cross-examination by the respondent and also the respondent's father. And in cross-examination, it was the heavy theme from the respondent and his father is that it was always my decision as in the father's decision. I always did it on my own. He firmly made the decisions without the input from the respondent. The applicant also accepted in her cross-examination that the father had made a large number of decisions without consulting the respondent. The father is a dominant personality and the patriarch of the family. And based on the evidence, which we're just sort of getting a summary of here, but at paragraph 278 of the judgement , it's held that the father is the controlling mind of the corporate trustee of the trust.
(27:11):
They also looked at the fact that respondent had received considerable financial benefit from the assets of the trust. He hadn't actually received any physical distributions for about 12 years prior to the decision, but over the course of the trust, he really had benefited financially. But at the end of the day, the respondent had no direct powers where he can obtain a beneficial interest in the trust assets. He has no legally endorsed concentration of power nor a degree of power that is recognised in law as power permissibly exercised over the assets of either of the trust. That's mentioned at paragraph 28. And further in paragraph 28, they go on to say, "I'm satisfied that the father knows his own mind, exercises it independently and remained in control of the corporate trustee at all times." It's interesting. I don't know if the decision would've been any different, but the case was really run on the basis that the respondent had control and there are a few sort of indications that they didn't run a sham argument and maybe they should have, or they didn't present any evidence about it being a sham.
(28:32):
So I still don't think there was enough evidence to show it was a sham or puppet arrangement at all. Based on what they've mentioned about the father, it doesn't seem like that would've got up or there was enough evidence, but the court does sort of allude to that. So yeah, interesting whether, I guess they're sort of counterintuitive arguments though, he's either in control or he's not in control and it's a puppet, you sort of can't have both. But yeah, the judge does sort of look at those inconsistencies. So paragraph 290 probably sums it all up. So as pointed out here, the respondent's father made the necessary decisions for D Proprietary Limited, not the respondent. The respondent is no longer director of D Proprietary Limited. He enjoys no existing powers pursuant to a trustee so as to affect the lawful distribution of property to himself. In my view, it is a situation where the husband respondent relies upon his father as the controlling mind of the trustee to make decisions for his benefit.
(29:32):
The respondent is not in control, even if he can influence decision making by his father because of a longstanding understanding, assurance or consensus between them about the assets of the trust. The husband's father retains the discretion to make decisions for D proprietary limited as he sees fit. And subsequently, the outcome is that the assets of those two trusts were merely a Financial resource, not property of the parties. So here we're looking at trying to drag in the parents' family trusts. Again, control is really given the greatest weight, as well as this sort of ... It's not really highlighted, but obviously evidence within these facts is the source of assets mostly coming from the respondent's parents being set up well before the relationship, the respondent not receiving a lot of distributions. So these decisions are really reassuring. So just to recap, Bernard and Bernard, we've got testamentary trusts where each primary beneficiary does not control their own testamentary trust.
(30:45):
Coley and Danae, where we've got two siblings jointly controlling family trusts, neither of them was said to have control enough to allow it to be property of the parties. And then Dovgan and Dovgan where we've got parents, family trusts trying to be dragged into the property proceedings of their children. So I hope these lessons are helpful. There's more cases. We've got a few more episodes coming where we're going to keep diving into some cases. There's a few more of these ones from around that same time period. And then we're also going to look at a couple of the high net wealth big family group cases to see as well. So thanks for listening. Any questions or feedback? You can always post them in the Art of Estate Planning Facebook group. And yes, stay tuned for the next instalment of this family law series.
