Tara (00:51):
Hello and thank you so much for coming back to the Art of Estate Planning Podcast. In this episode, we are going through the appeal decision of Caldwell and Caldwell.
(01:05):
So you might remember that we actually covered this decision in episode 83 where it was the trial judge and they found in favour of the husband to say that the assets in the family trusts were not property of the relationship. If you've been following this podcast series, I'll just remind you that this episode is actually part of a little series I've been doing in the podcast about the protection that a discretionary trust and testamentary discretionary trust offers in a relationship breakdown. So we started with episode 75. If you haven't listened to any of those, I recommend start there with 75 and then basically working through from 79 through to 84 and then that brings you to here. So in episode 83, we really did a deep dive in the background and I will give you a little refresher on the background of the case because I know we've talked about a lot of cases and then in episode 84, I wrapped it all up in terms of the lessons for estate planning and particularly testamentary trust structuring.
(02:22):
And I did say in episode 84, watch this space there'll probably be more episodes in the future. I really was not expecting it to be quite this soon, which is totally wild. And you probably know that I usually record these with a little bit of lead time before they get released. They have to go to my incredible editor sound engineer Daniel. Hi Daniel. And then I kind of try and batch a few while I'm feeling inspired to just sit in a room and talk to myself for a couple of hours. So there can be a bit of a delay. I'll have them ready to go and release and only sort of record a couple of times a month. So yeah, this episode came out the very middle of May and the judgement basically came out exactly around the same time. So we are back. We are giving you another instalment and that is just how the cookie crumbles and how the law is.
(03:27):
And isn't it amazing that there is so much changing in the estate planning space? Whoever said estate planning is boring. Okay. So we'll dive in. I was going to sort of spoil the ending, but I will just say this is of a particular interest because the federal court, three justices to an agreement, one in dissent held that the assets in the family trusts actually are now property of the husband. So they've overturned the initial trial decision and we are going to look at their reasons for doing that. Before we dive into reasons, I want to go over the background. So this is one of our large family groups. We're sort of looking at a $22 million group of trusts and companies. The entities, you might recall, were actually established by the husband's great-grandfather in the early 1900s. That's when the business was set up and then the three main trusts were sort of set up over time by the husband's great-grandfather, grandfather and father.
(04:41):
And our husband, after his 30-year marriage, took over control of the trust as part of succession planning for his father's death. And on his father's death, he took over control. So we've got three discretionary family trusts, no testamentary trusts with corporate trustees. And a few key features which are really important to note is the husband became the appointer of the trust after his father died with two of his adult children. So there's three appointers of each of the three trusts, but our husband has like a super apointer type role where he can actually unilaterally remove his two children as appointors with him without giving any reasons and he is the one who chooses the replacement. The shares in the corporate trustees are also held by the husband and his two children. And in the constitution for the corporate trustees, it's set up so that the person who is named first in the register of members is the person who gets to vote at the general meeting to the exclusion of the other joint holders.
(06:05):
So even though our respondent husband holds the shares as joint tenants with his two adult children, his name is the one on the register of members first. So he is basically the one who gets to vote and so therefore you'd probably know at corporations law, the directors are chosen by the shareholders. So the decision to appoint and replace directors of the corporate trustees is basically with the respondent. The father had done a lot of succession planning, like a proper exercise as part of handing over control to our respondent husband and he particularly included in his will like a direction that the business which is owned by one of the trusts has to remain with the family and it should be with the control of the husband and the husband's two adult children. He also expressly excluded people who are not lineal descendants from benefiting from the trust and the husband himself is a beneficiary of the trust.
(07:17):
It doesn't look like he's actually received any distributions, but he has been remunerated for his role within the business and they sort of indicated it had been quite good remuneration and he and the wife had amassed quite significant personal wealth and he'd also received a loan from the trust and benefited. And in the appeal judgement , they also indicated that he had also benefited from the trust indirectly in the sense that his father had taken distributions and then gifted those distributions to him. In the trial judgement , they considered that the husband had only recently taken over control. It was bad timing that the relationship breakdown happened pretty much around the same time as the father's death, but the trust had not been established by or utilised by the respondent husband during the marriage. All of the assets had been contributed from parties outside of the marriage.
(08:18):
It was relevant. The respondent wife applicant wife was excluded as a beneficiary and they really focused on the father's long reign of control until his death. So let's have a look what actually happens in the appeal decision. So in the federal court on appeal, it was held two to one that the assets are property of the respondent. They basically said the respondent did have capacity to exercise control of the trust due to his power to unilaterally remove his co-appointers as well as having the ability to control the directors of the corporate trustee because he had the voting power and he's also a beneficiary. So they also looked at the fact that he was actually involved in setting up his father's succession plan. There was some commentary that he had sort of made sure his sister and his siblings were not involved in the new control structure after his father died and he had a lot of influence over the control structure of the trust.
(09:28):
So let's have a look at some of the interesting quotes coming from here. The judgement itself is actually quite easy to read. So it is worth having a read that it's not even that long and it's really nicely written quite sensibly laid out. So for instance, at paragraph 22, they do say it is worth highlighting that a finding that the trusts and their assets are property of the husband does not necessarily mean that the wife will receive an adjustment from that species of asset. That is a separate question which the trial judge will determine as part of the assessment of matters in Section 79. So we're still to see how they are distributed. Remember, we always concede that assets in a discretionary trust will be a financial resource of the parties and at least one of the parties. What we're trying to do is avoid having the assets paid out to a party to the marriage that is outside of the basic family bloodline.
(10:36):
So here there's a strong intention that these business assets relating to this Caldwell family business that has been running for over a hundred years stays in the bloodline for their lineal descendants. So really curious to see what happens in terms of whether that is preserved because of the purpose documented in the trust and the estate plan or if the wife does get to walk away with some of those assets. So we don't know that yet. All we know is the classification of the assets in the trust as property being more than a financial resource. Back to the judgement , they also acknowledge at paragraph 23, we accept that there may be occasions where assets derived from generational family wealth may not attract the classification of property of the parties to the marriage, but this is not one of those cases. So when I look at this, when I first saw this came down and the outcome, I was just like, oh my goodness, this is not ideal.
(11:51):
This is bad optics. And what does this actually mean for testamentary trusts and discretionary trust protection? But when I've read the judgement , I'm going to take you through it. They're not actually, there's no new legal principle. They're not extending anything. They haven't even referred to Woodcock and Woodcock. So perhaps have a look at episode 82 where there is Woodcock and Woodcock where they're saying that the beneficiary's right just to due administration of the trust is property, but they cannot work out what it's valued at, but obviously much less than the right arising from control. So that's still sort of up in the air and the 2025 trial judgement of Caldwell and Caldwell, which came after Woodcock. So Woodcock was handed down I think in 2022. Caldwell still ignores Woodcock. There's just no mention of it. They're not pursuing that line of argument. So there's actually no new legal principles coming out of this Cordwell appeal.
(13:00):
It is just a reconsideration of the facts. So what facts are they particularly concerned about on appeal? So they were particularly concerned with the husband's control. So remember, he almost has the superpower as an appointer and can choose the directors. So even though they're trying to share control with the adult children, the husband is the ultimate controller because those adult children can be removed, potentially outvoted, and no one has the power to remove the husband. So at paragraph 75, they say the husband's capacity to exercise control is not in question, but the debate by the trial judge was whether he would have to take action to exercise the control. And the trial judge found that the capacity to exercise control was not without more sufficient to establish that the trusts or their assets were property of the parties of either of them. And I think I commented in episode 83 that the trial judge was quite generous and the husband said, "I won't exercise control to benefit myself as the sole controller." And the trial judge said, "Great, thanks.
(14:26):
Okay, I'll take your word on that. " So they really were quite generous with that. So they have obviously reconsidered that on appeal. So particularly the husband during the proceedings had entered into some agreements with the children and the children who were the co-appointers and directors of the corporate trustees in relation to a loan from the trust to the husband that a condition of the loan is that the husband would relinquish his capacity to remove the children as co-apointals of the trust. So basically he would not remove them. And at paragraph 96, the court says it would appear as though the primary judge in reaching her conclusion that the trusts were not property took into account the existence of the agreement between the husband and the children as evidence that the husband did not intend to exercise the control which he is permitted to exercise under the deeds.
(15:25):
Whether the husband intends to act as he is permissibly allowed is incidental to the question. The husband may elect to relinquish control. The question for determination was about whether he has effective control at present. The graven of this appeal is in what circumstances may a power to remove and appoint a trustee of a trust and a power to appoint capital and/or income of the trust to an eligible object sometimes referred to as a discretionary beneficiary amount to or be considered to be property available for division pursuant to Section 79 of the act. Does the ability of the husband in the particular circumstances of the case to cause the property of the trust to become his by engaging in legal acrobats in order to seize control of the trusts and the trustees as the appellant wife seeks suffice to qualify those trusts and all their assets as existing property within the meaning of Section 79.
(16:27):
And they say, "You know what? The husband at his absolute discretion without being required to give any reasons can remove either or both of the children as appoints and nominate any one or more replacements." They also say the timing of the husband's inheritance is relevant. The husband became entitled to the control he presently holds upon his father's death in late 2022 and the parties separated in early 2022 and it is unremarkable that this case does not turn on the manner in which the husband has exercised control. Focusing on the lineal descendants and excluded beneficiaries ignores the capacity of the husband to benefit the husband. Also, the terms of each of the trustees speak strongly against the conclusion that the powers to change the trustee are fiduciary in nature since the husband is permitted by the terms of the deed themselves to exercise those powers for his own benefit.
(17:30):
They also criticise the reliance on the purpose documented to benefit only the lineal descendants of the Caldwell family. So they say one of the trustees does have a recital to say, I think it says, "The settler has become aware of the desire of Mr. K, the father, to ensure that sound financial provision is made for certain members of his family and for the future operation and administration of part of the Caldwell family business." So that's only in the recital for one of the deeds from 1982. The other two, there's three family trusts in question. The other two do not have anything in the recital. So they said the primary judge's finding about the reliance on the purpose of the trust made no distinction between the trust despite only one trust setting out the purpose. They also said that they could not rely on a term which appeared in only one deed.
(18:34):
All of the trustees permitted the husband to act in his own interests, including that he may distribute to himself the assets of the trust. There's a board power which is central to the question of whether recital B curtailed that power in a matter which impacted upon the categorization of the trust as property. So the question of whether he may be ordered to pay funds to the wife from the trust assets in due course is not to be conflated with whether the trust can be considered his property. So that's the saying that's a separate trust law question, not about the question of whether it's property of the parties. They also looked at the estate planning documents relating to the family trusts, particularly in the will and they criticise the reliance on that by the trial judge because they say the purpose of the trust may not be ascertained by reference to documents which significantly postdate the trustees.
(19:38):
This argument gains more weight from the number of amendments to the trustees, none of which seek to further expound upon the purpose of the trust and the use of extrinsic documents, especially those created subsequently, cannot speak to the purpose for which an instrument was created because the general principle of construction by reference to the document itself is designed to avoid the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later. So here the October 2021 code is all is not a document contemporaneous with the establishment of any of the trusts. It does not refer specifically to any of the trusts. It is not contemporaneous with amendments to any one of the trustees and it is contrary to the express terms of each trust, which reserve to the husband the capacity to exercise ultimate control.
(20:36):
Okay. So to summarise that, if it looks like a duck, sounds like a duck, it is a duck, right? The husband has ultimate control and we know that control is one of the fatal conditions for assets in a discretionary trust to be treated as property. So even though it looked like shared control and they're trying to get in the realm of our shared control cases like Rigby and Kingston, Morton & Morton, it's not truly shared control. And in fact, this is a great demonstration of the principle that the family courts can look past what they see at first glance on the face of the documents and actually go to the true scenario and situation. I do want to just say Justice Strum did dissent and upheld the trial judge or said the trial judge was correct. He said at paragraph 255, "The mere fact that the husband is the first named owner of the A class shares in the corporate trustees and as a consequence is presently able to control the composition of the board of directors of each of those companies does not without more bring the trusts and/or their assets within the meeting of property for the purposes of Section 79.
(22:03):
The capacity to control the corporate trustee of each of the trust does not in this case give the husband effective control of the trusts at present. So remember, he's only one of three directors, but he can change the directors with his voting shares. In order to do so, he would need to remove the children as co-appointers. Accordingly, control of the trust, which is a necessary prerequisite to any finding that the trusts and/or their assets are property of the husband is not presently capable of being exercised without more. So whether by reason of being the first name holder of the A class shares or all the more so by reason of his power to remove his co-appointers, he would need to seize control of the trustees and/or the trusts. The need for such legal acrobatics sanctioned by the court distinguishes this case from the cases considered above.
(23:02):
Right. At paragraph 257, they further go on to say," The wife seeks to create new property interests by compelling the husband to exercise powers reposed in him by his father in such a way as to disenfranchise the sons and to compel the distribution of assets from trusts that were neither created by the husband or wife nor hold assets produced solely or even substantially by the labours of the husband or wife. While in appropriate cases, the court may treat the combination of a power of a spouse party to apply the assets of a discretionary trust, coupled with a right of themselves or the other spouse party to be considered for benefit as if the assets of the trust were property of the spouse parties of either of them. It does not follow that the trusts or their assets are property of the parties to the marriage.
(23:52):
In deciding whether the assets of the trust are to be treated as if they were property, factors other than control and eligibility will inform that decision, including the history of the trust, the origin of the assets, and apparent purpose of the trust. Finally, they distinguish Kenan and Spry. This is not a case where a party to the marriage has acquired or placed assets in a discretionary family trust and attempted to avoid an order being made, which would enable the other party to the marriage to share in the property owned by the trust. So an interesting outcome there, looking at episode 84 and how we've summed all of this up, I actually don't think this appeal decision really changes anything that we've said there. Shared control is really important. You have to live and breathe the control arrangement. We can't have a sham, we can't have puppets, you have to follow through with it and this is a good example of them trying to make it look like one thing but actually potentially being something else.
(25:01):
I do get the impression that had there not been the ability of the husband to remove the children, his co-appointers, had they all had the shares in their own right and not held as joint tenants with only one of the shareholders being able to vote I don't think this appeal would have gotten up. That was the main emphasis of the decision. The comments on purpose I think are really interesting and it actually gives me some hope with respect to testamentary trust at least because we are affirming the purpose of the trust to provide for the lineal descendants and the whole bloodline at the time of creation of that trust compared to say a family trust, which was established by a generation or two before and they were trying to sort of apply a later purpose to it. And there's no new law here. It's just a different application of the facts and considering of the facts.
(26:07):
I hope that it's useful as we say it's never ever bulletproof when it comes to family law protection and trusts. We can pretty much say that with bankruptcy and insolvency protection, but family law protection, you can't give any kind of guarantee. But what you can say is you get a fighting chance. You get to have the fight, you get to be on the front foot, you're shifting the owners of proof to the spouse when you have the assets in a trust or a testamentary trust. So we can then do things to look at exactly how we're going to structure the control to be workable for the family, but also try to maximise the protection. Whereas if for instance, you own the assets directly so you receive an inheritance directly in your own name, game over, there's no chance. If the husband here had received the assets personally and the business had just been not in the trust and passed down from the father directly to the husband, we wouldn't even have this judgement to look at because it would straight up be on the table as property of the parties.
(27:25):
The fact that there are trusts mean they get to defend it and it is up to the wife trying to attack the trust. So we have been talking about this in the TT Precedents Club. We will have been through a detailed case analysis probably a week or so before this episode comes out. So if you want to be able to get and hear about these types of things in more detail, ask questions and get it hot off the press, the TT Precedents Club is the place to be. Thank you so much for listening to this episode. I do hope I'm not back with any more family law updates for our asset protection series in the short term, but as usual, we'll be watching this space. I'm paying very keen attention to what's coming out of the courts and the lessons that we can take into our estate planning practise.
(28:21):
So thank you so much for tuning in.
