Tara (00:51):
Thank you for tuning back into the Art of Estate Planning Podcast. This episode is the last case analysis episode in our family law protection series in relation to discretionary trust.
(01:05):
So well done if you have listened to all of the episodes and gone through all of those cases, we are at the end. So next week we will do a practical application of the lessons and principles from the cases and how we can apply that to family and estate planning. But for now, we are going to look at two more cases, Rigby and Kingston, number four, and also Caldwell and Caldwell. So these are both high net wealth, family groups, lots of trusts, a lot of dollars at stake, and looking at how the court basically treated the interests of a child in a broader family group. So let's start with Rigby and Kingston. This was a 20-year relationship. There was a family group with lots and lots of companies, lots of trusts. So there was about four unit trusts, three family discretionary trusts, and one testamentary discretionary trust, and a few super funds.
(02:14):
So the group structure is actually very convoluted and sort of hard to wrap your head around. I'm going to focus mostly on the three discretionary trusts and the testamentary discretionary trust and a lot of the principles about how they're structured of a very similar. So we'll just talk about them generally at a high level. So in this scenario, our respondent wife has two brothers and she practically shares sort of control and benefit holistically speaking with those two brothers. The group is worth about 150 million. So if the applicant husband was successful, then the respondent wife's notional one-third would be about $50 million. So there's a fair bit at stake in this decision. What we had here is a family group with the trust being established by the respondent wife's father in around the 1930s. The assets were all contributed by the respondent's father, and then the family have all worked in the business and built up that wealth over time.
(03:33):
So in terms of what the respondent and applicant have together contributed into the trust, they really didn't contribute anything at all. It was all sourced from the family history. The respondent is a professional and had a career. And at some time over her career, she actually started working in the family group and was remunerated for that work through a salary as an employee. She also has minority shareholding and its various entities throughout the group. The husband really didn't contribute anything at all to the group assets. He didn't work in them. And this sort of evidence that he actually just didn't work at all and he didn't look after the children or really contribute anything much as a homemaker either. The wife was the primary carer and homemaker and also really contributed nearly all of the wealth to the group. There is some interesting commentary in the judgement because it was pretty clear, despite having passed away, there was a lot of evidence that the respondent's father did not want any of the family wealth to go to the respondent's husband.
(04:54):
So for instance, they signed a prenuptial agreement when they first got married that the wife's father really instigated. Now, I actually know nothing about financial agreements, but it does say in the judgement that the prenuptial agreement does not oust the jurisdiction of the court, and it's not a financial agreement that is binding on the husband and wife. So we'll just put that to the side because it's not that relevant. Looking at some of the other facts, they just sort of look at the unequal contribution. So the wife's contribution during their 20-year marriage was about 10 million, whereas the husband's financial contributions were 1.1 million. A lot of the wealth that the wife did have came in the form of inheritances and distributions from the family group as a result of the establishment and expansion of the group by her father and the salary that she received from the group.
(05:58):
It's interesting to look at the wife's father's estate planning arrangements. So prior to his death, her father made it really clear to her and her two brothers that they did not want the wealth that was created by him over his lifetime to be distributed to any spouse of his children or grandchildren. So he reinforced these intentions by using a testamentary trust and setting that up in his will. He died in 2008, and so the trustees, the wife, and her two brothers, the wife's mother has also passed away. So it's just really the three children left and they are the joint trustees. Now it does say that decisions in relation to the testamentary trust are to be made by majority, so the wife could be outvoted. Looking at the father's will, he also makes some specific statements. So for instance, he has an exact clause in his will saying, "In making this will, it is my desire that the benefit of my estate should pass to my children and/or grandchildren.
(07:14):
And it is my express desire that no entitlement should accrue to any present or future spouse of my children or grandchildren, particularly if such entitlement were to disadvantage my children or grandchildren or the continuity of any of the businesses which are conducted by the group of companies controlled by me. " So it is really interesting looking at this because it's very clear that dad was in control of everything and it's only as part of that succession planning exercise that the wife and her brothers have taken it over. Let's have a look at the sort of rest of the structure. If you have a look at the judgement and you go to paragraph 44, starting there, there is like six pages of tables outlining all of the entities of the trusts, the types of shares, the minority shares that the wife held. So I can see she's got C class shares, B class shares, cumulative preference shares, K class shares.
(08:20):
Some of these have voting rights, others don't. They just have a right to receive a dividend and no surplus on winding up, that type of thing. It goes on and on. It's such a big group, so I won't go into all the ins and outs of that. If you are really keen to try to make headway of it, that is a great place to start because it is a well set out table. I think for our purposes in terms of control, we can focus on the testamentary trust, which has the wife and her two brothers as the individual trustees. All three of them are the trustees and appointers. They have to make decisions by majority. Then there are three separate family discretionary trusts with corporate trustees, and the directors and shareholders are basically, again, the wife and her two brothers. So if we just treat it as all three of them have shared control, that's probably enough without getting into the ins and outs of all of the various subsidiary companies.
(09:24):
They also entered into an umbrella deed after their father died, which had some interesting agreements, sort of not binding, especially not in the sense of how Pittman & Pittman was a variation to the deed, but the umbrella deed was sort of like an agreement about how they will work together. So it says, for instance, that the wife and her two brothers are to act as the remaining trustees of the testamentary trust. They are all to work in the business of the family and are entitled to share in any income or capital made under the will. They want to set out an intention in terms of their ongoing entitlement as continuing members, emphasising that they are active members for whom no trigger event like retirement has happened. And then also what happens if they do retire and become an outgoing member and what their entitlement is then.
(10:33):
So they said that their ultimate desire would be to actually wind up the business by 30 June, 2040, and until then they're making a commitment to each other to remain active in the business of the group and in its management, they'll be paid an equal minimum annual dividend, not exceeding 10% of net profits, plus a salary. If they are not active, they'll be paid a death or disability payment, no other directors are to be appointed, no other shares or units will be issued. So it's not really binding, but they are just really setting out the agreement and expectation on how they will conduct themselves with respect to the group. So that is interesting in terms of comparing that to Pittman & Pittman where there was like a fixed entitlement set up and even Woodcock and Woodcock, where they had that family council and the deeds were varied in relation to the fixed capital entitlements on vesting.
(11:42):
There's nothing done at a dean of variation level. It's more of an understanding umbrella deed. In terms of distributions, from 2004 to 2015, the wife and her two brothers received equal distributions from the trust. Then from 2018 onwards to around 2020, bearing in mind the separation happened in about 2015, they had unequal distributions with the wife receiving a lesser amount. So obviously it looks like they've adjusted that based on the relationship breakdown that's happening. There was also mention that the husband, I think, did receive some distributions from one of the trusts, and it looked like that had been done just for tax minimization purposes because he didn't work very much and didn't have much of an income, so they were trying to fill up his marginal tax rate. And while that might have seemed like a great tax strategy at the time, it's obviously come back now as something that's relevant in terms of him actually benefiting from these family trusts over time.
(12:49):
So take a moment to think about how you feel about this and whether you think that the wife has a property interest in the assets of this group. Bearing in mind, this is the $50 million question. Let's start with a few things. We'll start looking at what they thought about it being her interest in the property of the parties. So they refer heavily to Kennon and Spry, but say the Justice Caru says that the factors from Kennon and Spry do not exist in this case. The wife does not control any of the trusts. Legal title is held either jointly with her two brothers or by a corporate trustee, in which the wife is one of three directors. She alone cannot make decisions to distribute trust funds to herself. Further, the source of the assets in the trust fund in at least the Kingston Testamentary Trust was from a stranger to the marriage.
(13:53):
And in relation to the other trust, the wife was eight years old when those trusts were established. The wife's father was the original appointor or principle of the trust and the property settled upon the trust was not acquired through the efforts of the wife or the husband, but by the wife's partner. They particularly distinguish Pittman because in that case, they really created irrevocable entitlements to income and capital. So the discretionary trust had been converted into a fixed trust in which the husband had absolute entitlements, although the quantum of those entitlements might change. In this case, the wife does not hold irrevocable entitlements to either income or capital. For example, the trustees of the Kingston Testamentary Trust retain the discretion as to whom distributions are made and in what son, and the wife can be entirely excluded. So that's really interesting with reference to basically disregarding the umbrella deed and that not being fatal.
(14:57):
So they found the wife had a minority shareholding in various entities in the Kingston group. She does not control any of the entities and does not thereby have an interest in the assets of the entities. They discuss that and acknowledge that she does have a right to due consideration and due administration, and these rights are chosen in action. They specifically say she does not control the trusts and as such, the assets being the chosen action arising from the right to due consideration and administration are not a species of property for the purposes of the Section 79 proceedings. So that's at paragraph 96D. I do just want to mention, if you listen to last week's episode about Woodcock and Woodcock, that was really the emphasis of that entire case and Rigsby in Kingston is before Woodcock and Woodcock. So Woodcock and Woodcock actually cites Rigby and Kingston.
(16:03):
In that case, the respondent was arguing to rely on Rigby and Kingston and Woodcock found that he wasn't persuaded by these comments. So I do apologise that they're a little bit out of order, but I wanted to just cover off Rigby and Kingston and Caldwell and Cogwell because they're both by the same judge. So I thought it was easier to deal with that in this episode. And I really want to look at what Caldwell and Caldwell says about Woodcock. So that's sort of the method to my madness here. But in terms of this, Rigsby and Kingston is another significant family group decision. It's just from 2021, Woodcock and Woodcock is 2022. So Justice Wilson is really on his own when he's pushing the argument. I mean, he's not making the argument, but when he's sort of of the belief that the right to due consideration and administration is property under Section 79 that is capable of valuation.
(17:08):
It's largely dismissed in Rigby and Kingston. If you want to have a closer look at what it says, paragraph 61 and 62 from the judgement also touch on it. The case the husband made, which is sort of represented by this due administration and consideration argument, he says the husband concedes that while the wife cannot currently put her hand on money in the testamentary trust, she does have more than a right to due administration because she is the trustee. And the husband submits that the fact that the wife's rights are difficult to value does not mean that they are not property. He also concedes that it is a discretionary trust. Theoretically, the wife's entitlement could be distributed to her sons, but because of the existence of the umbrella deed, he would expect that she would be personally receiving that equal minimum annual dividend or distribution. So I just thought that's interesting to see that Justice Wilson, this issue comes up nearly in every case we've looked at, but Justice Wilson in Woodcock is quite an outlier in terms of actually addressing it and deeming it to be property under Section 79.
(18:32):
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(19:34):
I want to go back to paragraph 96. Justice Caru really does go through those exact factors that we've been talking about in every decision. So control, purpose of the trust, source of the trust, who the beneficiaries are, what the distribution history has looked like. So he emphasises, even though the wife is a residuary beneficiary, she has no proprietary interest in the assets until the vesting of the trust in November 2026, which I am fascinated to see what happens if something more happens on this or if they just wind it up. The vesting date for the other entities is 2040, but it looks like one of the trusts will vest on 2026. I suspect they might even extend that, but it's just speculation. There's nothing that I know about any of that. The entirety of the trust assets can be distributed to beneficiaries other than the wife prior to the vesting date, and in those circumstances, her interest as a residuary beneficiary would be worthless.
(20:45):
Also, given the will and the father's wish and direction that it just stay within his children and grandchildren's entitlement, such a decision would be entirely consistent with the purpose of the trust created by a stranger to the marriage that none of his property should benefit a spouse of the children. He reiterated the wife does not control the trust. She is one of three trustees, and the fact that she is one of those three trustees does not enhance her rights. So she has no irrevocable rights to income or capital, and the rights that she has to due administration and consideration in the absence of control are of little practical worth and do not equate to a proprietary interest in the assets of the trust. So I really think that is quite helpful in reiterating all of the principles that we've looked at in the previous decisions.
(21:50):
Control that is shared is not enough control to mean the assets are your property under the Section 79 of the Family Law Act. So that's a really helpful decision to refer to. And I'll also want to turn your mind to the Caldwell and Caldwell decision. So this came out at the end of 2025 and again is really helpful or even affirming of the principles that we've seen in the earlier cases. So we've got another big family group where we've got our respondent husband and his mother, and he also has two adult children who are involved in the group structure. So there's three family trusts, each with corporate trustees. And these, again, were set up by the husband's father, grandfather, and great-grandfather. So the business of which these trusts own were actually set up by the husband's great-grandfather in the early 1900s, and then control has passed through the generations.
(23:13):
Before this decision, the husband's father had recently died and the husband respondent took over control as a result of that succession plan. So the group was worth around 16 to 22 million here and on the death of the respondent's father, the respondent's father had set up this transfer of control. So the respondent and his two adult children would become the joint appointers of all three trusts, but they had an interesting quirk to this because the respondent in his sole discretion could actually remove either or both of his children as appointors without giving reasons and replace them. So he almost had this super appointor power. Those children did not have reciprocal ability to remove the respondent as a appointor. In terms of shares, so the respondent's mom held some of the shares and the shares that the respondent's father had, he left them to the respondent and his two children jointly under his will.
(24:30):
There's an interesting quirk in the Constitution. So the Constitution for the company said whoever's name appears first in the register of members of shares gets to, at a general meeting, be the person who makes the vote. So only the first named person on the register is accepted to the exclusion of any other joint holders of shares. And so the respondent's name is the one who was in the register as the first owner. There's also a lot of information about the purpose. So the trustees themselves specifically stated that the purpose of the trust was for the future operation and administration of the family business. And the trusts were established for the exclusive benefit of direct lineal descendants of the respondent's father, and no person who was not a lineal descendant should benefit. In the respondent's father's will, he also left a direction. I have discussed with my family at various times over the years the origins of the business and the intention of my father and me, that the business remains within the family.
(25:40):
The overall purpose and intent is that the business upon my demise should go to and be under the control of the respondent husband and his two adult children, or the survivors of them jointly. They are and have been working in and directing the business, and I consider that all three of them should have the privilege and opportunity to take the business into the future. Now, interestingly, the respondent never received a distribution from any of the trusts. He is a beneficiary, but he actually has not ever received a distribution, which I think is so powerful and helpful, and actually such an unlikely factual scenario. I mean, perhaps they was getting money in other ways or a large salary package or something, but I think that really helps to show that he didn't actually control or even direct a benefit to himself from this trust during the marriage.
(26:39):
They also had an update into the deeds, I think while the father was still alive, where they expanded the definition of excluded beneficiaries to include a person who was not a direct lineal descendant of the respondent's father. So though anyone who was not a direct lineal descendant cannot receive a distribution, and that also extended to any company whose directors and shareholders are not direct lineal descendants and any trust whose beneficiaries are not direct lineal descendants. And as you can probably guess, the applicant wife also never received a distribution and then was expressly excluded. So let's have a look at the judgement . So obviously the question here is whether the assets in the trusts are enough to be property of the respondent husband. At paragraph 217, Justice Kuru basically lists and reminds us of the factors we need to consider and the circumstances that need to be evaluated under Section 79.
(27:47):
So they say it may depend on the terms of any trust, the purpose of the trust, the origin of the trust assets, whether a spouse party has control of the trust, whether that party has the power to distribute capital to one or other of the spouse parties, the histories of any dealings of trust property and whether but for the trust, the property would unquestionably be the property of the spouse party or parties. However, without the control of the trustee, whether direct or indirect and a power to benefit by distributions one or other of the spouse parties, there is little prospect, if any, of successfully arguing the trust assets are property for the purposes of Section 79. So that's a helpful restatement to summarise for our last case analysis. They distinguished Kenan and Spry and basically said, again, the unique facts are not present here. And in contrast to Kennon and Spry, the family have conducted this business over four generations initially established in the early 1900s, and the assets have grown since those early days.
(28:59):
But what exists in the trust reflects the efforts of a long line of direct lineal descendants of the founder of the business. So it is uncontentious that the origin of the trust assets does not reflect contributions made by the husband or wife. The husband was well remunerated throughout his working life in the family business, and he and his wife have a mass significant wealth and assets outside of the trust. The wife cannot point to a long history of the husband exercising control over the trusts which have been established and utilised by the husband during a marriage for the benefit of the husband, wife, and their children. Indeed, the husband has not received any distributions from the trusts, either during the marriage or since separation. The court emphasises the purpose of the trust is to provide for the future operation and administration of the family business.
(29:56):
They emphasise the exclusion of people who are not direct lineal descendants and that they cannot be a beneficiary or a controller of the trust. Until his death, the respondent husband's father was the appointer of each trust and held all the voting shares in all of the trusted companies. There's no suggestion that the father was acting as puppet or ego of the husband, and if there was any doubt about the purpose of the trust, the wishes as expressed in the will emphasise the intention to keep the business operating and to maintain the benefits emanating therefrom within the direct family. And such a recent restatement of intention, although in a codosol must, in my view, directly impact upon the exercise by the trustees of their powers, as it confirms the narrow purposes of the trusts to only benefit the direct lineal descendants. Since his father's desk, the respondent husband has the voting power to remove his children as directors and appointors without providing any reason, but there is no evidence that the husband is likely to do so.
(31:12):
And indeed, the side agreement's only relevance for present purposes is that he has indicated an intention not to do so, and I accept that to be the case. I accept the husband's submissions that the purpose of the trust is to facilitate the intergenerational management of the family's business for the benefit of future generations of the lineal descendants of his father. And I find that it is only in the pursuit of that purpose that the powers residing in the husband can be validly exercised. In my view, while the husband has very wide powers and in that sense may be said to control the trusts, his primary duties are to act in good faith and in accordance with the purposes of the trust and to give real and genuine consideration to the interests of all potential beneficiaries. If the husband exercised his powers for the purpose of benefiting the wife, whether directly or indirectly, even if not the dominant purpose, he would be in breach of the proper purpose rule and to do so would diminish the trust asset.
(32:19):
And while no potential beneficiary has a legal or equitable interest in the trust assets, they each have a right to due consideration as an object of benefaction and a right to due administration of the trusts and to enforce those rights. So in the conclusion at paragraph 235, they really emphasise the trusts were established at the instigation of the husband's ancestors. The husband's father controlled the trust until his death in 2022, which included the period during which the variations were made. There is no evidence that the father was the puppet or alter ego of the husband. They're not a sham or alter ego of the husband. The husband did not assume a position of any real power within the trust until and after his father's death in 2022. The purpose of the trust is to facilitate the intergenerational management of the family business, which has been in operation since the 1900s.
(33:19):
The wife is excluded as an beneficiary of all the trusts and not herself entitled to benefit. So it is held that the trusts are a financial resource only for the purposes of Section 79, not property. I think that this decision is really favourable towards discretionary trusts protecting the assets on a relationship breakdown of one of the beneficiaries. And even though the husband in this case did have pretty substantial control, they looked at the weight given to all of the factors. So the purpose and the source of assets and the beneficiaries and history of distributions, all of those together really outweighed the control that the husband had. I think it's also worthwhile noting that the control was part of an intergenerational wealth transfer. His sons were part of that as well. So all of that together built the story. So I think Caldwell and Cordwell still shows us that control is important, but it's not the only factor we need to consider.
(34:35):
Interestingly, being after Woodcock and Woodcock, it doesn't consider in much detail at all the argument that the right to do consideration and administration is property under Section 79. And that might be because the argument was not brought by the wife, but I think it is interesting if people are concerned about Woodcock and Woodcock. We've got this significant decision after that ignores Woodcock. It doesn't cite it as an authority. It doesn't even really consider the same argument. So in respect to Woodcock and Woodcock and whether that is going to undermine the protection, we definitely have to watch this space. I will be watching it very closely. And if we do get more updates that give us a practical takeaway, I will be bringing another episode. But for now, well done on making it through these case notes. Join me next week where we tie it all together as to what can we learn when structuring testamentary trusts for our clients under their estate plan.
(35:46):
Thank you.
