Tara (00:51):
Welcome back to episode number 82 of the Art of Estate Planning Podcast. We are continuing our family law asset protection case series, and today we've got a big one, Woodcock and Woodcock number two, 2022.
(01:08):
You might have heard in the earlier episodes about the family law as a protection of trusts that I've mentioned this Woodcock decision a number of times. It's actually quite an important one to be paying attention to, so you're in the right place. And this decision is by no means resolved. It is still going through the courts. We are still waiting for a final outcome, but I wanted to bring you up to speed about why is this one so controversial and an outlier compared to some of the other family law cases that we've discussed. So if you've listened to the earlier episodes, most of the outcomes in those cases that have been considered have been in favour of protecting the assets in the trust on a relationship breakdown. Woodcock and Woodcock has the potential to really undermine some of the confidence that we might have from those earlier decisions.
(02:15):
Now, there's no need to panic. I don't think it is currently at that state, but it could end up being one of the landmark decisions sort of like Cannon and Spry, which turns industry practise on its head. But it also has some really unique facts around it as well, and it's still very much up in the air. So this is the 2022 decision, the number two case, and Justice Wilson is the sole judge sharing his findings. So let's begin. This is one of those big intergenerational family groups as well. So there's four trusts. Three of them were set up in the 1990s and one was set up in the 1970s. And the trusts were set up by the respondent husband's grandparents. So we're now onto the third generation with the respondent and his wife trying to access the wealth in his grandparents' trusts that they set up as part of their relationship breakdown property settlement.
(03:32):
So when we look at our factors, remember we need to think about the control, the purpose, the source of the trust assets, who are the beneficiaries? Have there been distributions in place? Have we got a share more puppet arrangement? So when we look at some of these, the purpose was really intergenerational wealth set up by the grandparents of a party to the relationship. The source that's all really been contributed by the respondent husband's grandparents. And then the wealth has been accumulated and grown through the family and intergenerational wealth transfers. Let's have a look at the beneficiaries. So with these four trusts, and I'm just going to sort of talk about the trusts together as a group, because they are nearly all set up in a similarly identical way. So our respondent husband is a beneficiary of all of the trusts. Sometimes it's a primary beneficiary.
(04:38):
Other times he's referred to as a general beneficiary, but he basically is a beneficiary together with the founding grant, I'll call them the grandparents. So the respondent's grandparents, those founding clients had four children. And then of those four children, there are 15 grandchildren. So to my knowledge, based on the facts at least, those are the people mentioned. And so all of them, the four children and their children, including our respondent husband, are the beneficiaries of the trust. In terms of control, there are corporate trustees in place and our respondent husband is a director of each of those. And for one of the trusts, he is actually the sole director. Now, things get quite interesting because in 2020, they started varying the trustees to create a more corporatized type structure. So essentially what they did was put in restrictions around how decisions are made with respect to the income and capital of the trust.
(06:00):
And this is the same across all of the trusts. Now, in addition to this, and I'll explain what they did with the income and capital, but in addition to this, they've created a family council. Now, that includes five family member directors and two external directors. Of particular interest is the five family member directors. So you might recall me just mentioning that our founding grandparents had four children. So to create those five family member positions on the family council, those positions are comprised of each of those four daughters. They had four girls and our respondent husband. So our respondent is a grandchild, not a child of our founders, but he has been almost elevated to the status of a child by being given a position of one of those five family member directors. And even more important, there is evidence given in the decision that the husband is actually the head of the entire family council.
(07:21):
So he is the leader of it and he is also the CEO of the business or the family group that is carried on by the trust. So he has a more elevated position above the other grandchildren of that same generation of his. So I think that is really important to bear in mind. I want to just make a little side note that under these deeds, there actually is a disqualification trigger that anyone going through a relationship breakdown cannot be a director of the corporate trustee of the trust. But interestingly, despite this event happening to our respondent husband, the trustees of each trust resolved that disqualifying trigger did not apply or should no longer apply to our respondent husband. So he remained in that position despite being disqualified. So they've actually taken proactive steps to keep him in. So let's have a look at the variations from 2020 about what those variations do.
(08:40):
They mostly focus on reiterating that sort of family council structure with respect to the income and capital distributions from the trusts. So with respect to income, distributions of income each financial year have to be made by majority decision. So that is at least four of the five family member directors plus both of the non-family member directors. So pretty much just one person cannot agree, but all the others have to agree. So that is the ruling for how to distribute income or how to accumulate income each financial year. If they want to distribute to a trust in the group, so if the distribution is actually to another one of the trusts in the group, there is a lower standard of decision making. So that can just be ordinary decision where at least four of all of the directors, so more than the seven directors, so any four of them have to make the decision, but that's only if the beneficiary is one of the other trusts in their group.
(09:59):
In relation to capital, if they want to make an interim distribution of capital, the voting threshold is the same pretty much. So they want to allocate it amongst the family, those four children and 15 grandchildren. It has to be at least four of the five family member directors and both of the non-family member directors have to agree. On the vesting of the trusts, which firstly, they've nominated the vesting date as 30 June 2072, or which actually thinking about that, I wonder how they're doing that if they've somehow extended the vesting date, because one of these trusts was set up in the '70s. Oh yes, I'm just checking. The one from the '70s, the vesting date is 30 June 2056. So on those vesting dates, the distribution of capital is basically set. So they've predetermined that on the vesting date, it will be about 21.66% to child one, 23.68% to child two, 20.65% to child three, 18.63% to child four, and our respondent husband, despite not being a child and in fact being a grandchild, is entitled to 15.38%.
(11:24):
It's not clear to me whether there was a fifth child and the husband is taking that child's spot. It doesn't mention that anywhere. And it might have been something I've overlooked because that would be a common approach, right? Where a child has already died that you elevate the grandchild who's an adult to basically be their representative and take their share. But there's no information in the decision and judgement about that being the case. And I think the 15.38% is more to represent his contribution to the group and the business as the CEO of the family business and head of the family council. It's also worth noting over the recent history of the trust, the husband has received over $15 million worth of distributions. So he really has a history of benefiting from the trust. I've actually just checked if you look at paragraph 26 of the judgement .
(12:32):
In fact, it has submitted that he's received $15 million only between 2016 and 2020, so in that four-year period. So that is really hard to argue that he's not benefiting from the trust. Now, Justice Wilson says there's two issues being considered in this decision. The first is whether the husband's equitable right to due administration and his right to due consideration is property for the purposes of Section 79 of the Family Law Act. The second issue is whether such rights were property that is capable of valuation. So you might have noticed from the earlier decisions, they've really focused on control being the main factor that will get them over the line as to whether the assets in the trust are property of the parties. And here, the fact that it is such a corporatized control structure, and he only has a 15% interest, they're actually looking at expanding the factors that could give rise to property, or all the other decisions have said maybe the right to due administration and consideration is property, but no one's put forward in any evidence about it being valued.
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And we've just ignored that really. They all ignore it. But finally, Woodcock is tackling this head on and looking at, is the right to be a mere beneficiary, to have the trust administered appropriately and for the trustee to give real and genuine consideration to you as a beneficiary is that property. So that's what this decision focuses on. And if ultimately it is held to be property and a value is attached to it that is significant, then that is really going to create a big change in the way that the trusts are treated when it comes to property of the parties. So it is really worthwhile paying attention to it, and we don't have an answer yet. It's Tara jumping in real quick to let you know that this episode is brought to you by our online course, Testamentary Trust, the Essential Guide for Australian Lawyers.
(15:06):
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(16:11):
So in particular, the Court of Appeal, now not the high court, but the Court of Appeal, focused on the right to due consideration of a discretionary trust being property separate and distinct from the assets of the trust itself. And in respect of that right, the Court of Appeal held as follows in Kennan and Sprite. The value of such a right, if it might be possible, is almost certainly not to be equated with the assets of the trust or even a proportion of them. Such a valuation would be a matter for expert actuarial or valuation evidence in light of all of the facts. So the applicant's counsel are obviously leaning on that to say, "Okay, we don't think we're going to get up on the assets of the trust being property of the respondent husband, but we're going to really have a hard go at getting his rights under the trust deed to be property." The husband's counsel rely on Coley and Denae to basically say, "No, the right to due consideration can only amount to a financial resource, not divisible property under Section 79." And Justice Wilson preferred Kenan and Spry.
(17:34):
He said, "Colleen and Denae, you might remember this from the podcast episode where we covered this of episode number 80." So that's actually a Western Australian single court decision. The Western Australian legislation is pretty much identical to the federal legislation, but Justice Wilson much preferred to the Kenan and Spry authority on it being capable of valuation. He also looked at Ricky in Kingston as support as well. So expert evidence was obtained from a valuer from the wife and also a valuer from the husband, and they had to give expert evidence to the court about whether it was actually capable of valuation or not. So a report from Mr. T looked at the following. They said the rights are capable of being valued both prior to and after those 2020 amendments. Historically, the husband's rights have given rise to substantial cash flows from distributions from various trusts, and they may give rise to future cash flows and other benefits.
(18:50):
Without the husband's rights as a beneficiary, the husband would not have been entitled to receive those distributions. Also, future benefits that will accrue from the husband's rights are subject to three categories of uncertainty. First, there is uncertainty about the earnings and distributions of the entity and assets owned or controlled by the various trusts. Second, there is uncertainty about the dispositions of the amounts available for distribution by the various trusts. So what is the share of the husband's distributions? And you might remember that is not fixed with respect to income or interim distributions of capital. They need basically both of the independent members of the council plus four of the five family members. And third, there is uncertainty about the husband actually surviving so that he could receive any distributions, including that 15.38% on the vesting date in 2070 or 2050. Where there's uncertainty about the amount and timing of future benefits arising from property to be valued, this is a common feature of valuation and it does not on its own make that property incapable of being valued in a normal situation.
(20:14):
So Mr. T expressed the opinion that the husband had significant influence over the trustee's decisions and after the amendments in 2020, his influence has increased so that substantive allocation decisions can only be made over his objection if all the other directors agree. So they're basically saying he can have a veto power, but can only be outvoted if everyone else agrees. Now, that's actually the same for all of the directors. I don't think that's unique to him, but he does effectively have, in the husband's situation, at least have the power to veto any income or capital distributions other than those made in accordance with specified percentages, meaning he does have an ability to ensure he could receive at least a certain percentage of all future income and capital distributions during his lifetime. Mr. T did concede that he had not previously valued a right of the kind in issue in this case, and however, he does think it is possible to develop a reasonable basis on which to estimate the future outcomes in relation to money that would be paid to the respondent.
(21:32):
In particular, the fact that he has that veto power over two of the trusts and in one of the trusts, he is the sole director. He said he's the CEO of the family group and chairperson of the family council. If you look at the five years of history, there is a distinct history of distributions which have emerged. In combining this pattern of distributions, the husband's influence and his effective veto power, Mr. T gave evidence that it is his view that it is very likely on the balance of probabilities to be able to develop a reasonable basis for estimating what would happen in the future. He did acknowledge as well that the husband's rights were not capable of being assigned or transferred, and he didn't factor in any possibility of those rights being assigned or transferred in his evidence. Other expert evidence was given by another valuer, Mr. Yu, and he basically gave evidence that the husband's rights were not capable of being valued if the applicable standard of value is market value because those rights cannot be sold or transferred.
(22:48):
He also said they cannot be capable of being valued if the applicable standard of value is the value to the owner because there is no reasonable basis for estimating the timings, amounts, and risks of any future cash flows from the husband's rights as a beneficiary. In particular, he said the husband's rights do not cause distributions. Rather, the cause is the decision of a trustee to exercise its discretion to pay a distribution to the husband. The historical distributions are not helpful, and the husband has only limited influence over the appointment of or a decision made by a trustee. Mr. Yu really emphasised in his evidence that if the property is not capable of being sold, which he said is the case with the husband's rights, then there will be no market value, and the amount of the value to the owner will depend entirely on the cash flow the owner could expect from continuing to own the property.
(23:51):
And in his opinion, there is no reasonable basis for estimating the expected cash flows from the husband's rights, and as a result, the value to the owner is not capable of being determined. He also took issue with Mr. T's view that it is certain the husband will receive some further distribution from the trusts. So to sum that up, Justice Wilson has helpfully done that at paragraphs 104 and 105, and I am going to repeat that because look, I don't know about you, but I am not anywhere close to being an actuary or truly understanding the valuation methodologies. So basically, Justice Wilson, I'll just read out what he said here at paragraph 104. "Mr. Yu expressed the view that those rights cannot be sold. He opined that if the property is not capable of being sold, which is the case with the husband's rights, there will be no market value, and as there is no reasonable basis for estimating the expected cash flows from the husband's rights, the value to the owner cannot be determined.
(25:02):
Mr. T took the view that the husband's ongoing level of influence and past distributions provide a prima facie reasonable basis to incorporate various uncertainties into the valuation of the husband's rights. So Justice Wilson ultimately decided that he preferred the evidence of Mr. T, and looking back at our two issues in question, yes, the husband's equitable right to due administration and due consideration can be property for the purposes of Section 79, and yes, they are capable of valuation. So it is then left to actually get a valuation on what those rights are worth, and that is really critical. So it is concerning, I suppose, that this expands the meaning of property under Section 79 to include the due right to consideration and administration of the trust, but it may not actually have much of a practical consequence where we are dealing with a fully discretionary trust if those rights are of a nominal value.
(26:25):
So there have been multiple decisions after Woodcock where they have been going back and forth about what is the actual value, and we still don't have clarity on that four years later. So this is very much a watch this space to try and find out what does this mean for family law protection. I'll refresh you back to the decision of Pittman and Pittman, and that was covered in episode 79, where they actually created fixed entitlements where they were all entitled basically irrevocable entitlements in equal shares. And as a result of the fixed entitlements, where he was entitled to a quarter of the trust assets on vesting and each financial year with respect to income, there was clear certainty that the quarter would come to that husband unless he didn't survive and the quarter was considered to be property of the parties. So this isn't a new necessarily that new.
(27:38):
Pittman & Pittman is from 2010. So we know that if you've got fixed entitlements, you really don't have a lot of protection, but Woodcock and Woolcock is trying to expand the concept of property under Section 79 to include the rights of a mere discretionary beneficiary. So that is concerning. It's not cause for alarm yet. We don't know what that valuation will come in. We do know from Kennon and Spry that it is not equal to necessarily percentage of the assets of the trust. It's something different. So we really need to watch this space. I also wanted to mention another decision, Aaron's and Aaron's number four, also 2022 by Justice Wilson. And it's a few months after the Woodcock and Woodcock decision because this judgement on its own is not actually that interesting, but it is interesting because it can tell us a little bit about where Justice Wilson is thinking and maybe the tone.
(28:48):
And so in this case, it's actually a very short judgement . It's like seven pages long. They considered a number of issues and one of the issues was a family trust that the wife had an interest in. So in the case, this is like the third issue, paragraph 23, if you want to have a quick look, basically the wife is a director of the appointer of the trust and also a director of the trustee of this discretionary trust, and the husband contended that the wife's interest in the family trust is capable of being valued and comfortably falls within the definition of property under Section 79 of the Family Law Act. So that is the submission that the husband's counsel made. They basically, it looks like this is all dealt with in four paragraphs where there wasn't a lot of evidence given or analysis given by the applicant husband about the trust.
(29:55):
Justice Wilson dispensed with it quite quickly. He says, "This is a an ambitious submission and fails to engage with any of the considerations I extoled in Woodcock and Wardkook as constituting property under Section 79 in the absence of a vastly more sophisticated debate on the issue, I am not at all persuaded that the husband is correct in his contentions that four matters identified as being possessed by the wife constitute property. In those circumstances, I refuse the husband's application to value the wife's interests in the family trust. He also acknowledges the time limitations of obtaining a valuer to value it. So what I take out of this case is even though everything is pointing towards it looking and feeling like the wife's assets, you have to still go through the analysis, provide the evidence about those facts, look at control, look at the purpose, the source, the range.
(31:02):
Like here they basically said she's in control, it's her trust. So they really didn't put together any kind of submissions. So even though Justice Wilson is taking a expansive view of the meaning of property in Woodcock, he's not just antitrusts and letting all trusts be bust wide open in a family law context. So I thought that was just of interest. We are also going to look at two more cases in the upcoming episodes, so Rigby and Kingston and also Caldwell and Caldwell. So Rigby and Kingston is before Woodcock, but Caldwell and Caldwell is from 2025 and it actually doesn't give Woodcock and Woodcock any weight at all. So we will look at that in the next episode. I hope you found this useful. Stay with me for next week where we finish our case summaries and then we'll have another episode after that, wrapping it all up into lessons from an estate planning context.
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Thank you so much for tuning in.
