Most health professionals think of trusts as a device for reducing income tax. A recent Family Court matter demonstrates the role of trusts and the value of careful planning in relation to preserving family assets from generation to generation.
In Bernard & Bernard  the Family Court had to decide whether assets worth about $3.5 million were excluded from the “pool” of available assets for splitting between the husband and wife.
The facts are summarised as follows:
- the father of the husband made a Will that, upon his death, created two “testamentary trusts”. The husband was a potential beneficiary of one of the trusts, but he was not the trustee of this trust. Similarly, he was trustee of another testamentary trust of which his sister was a potential beneficiary, but he was not
- upon the breakdown of the relationship between the husband and wife, the wife (unsuccessfully) argued that the $3.5 million to which the husband was a potential beneficiary should be available for splitting with her, ie part of the matrimonial asset pool
- these two testamentary trusts effectively “mirrored” each other
The Family Court declared that the $3.5 million of trust assets (that his sister was trustee) were not matrimonial property and no share would be available to the wife because:
- the husband’s sister was the trustee and had discretion in determining who received the distributions, eg the wife and the children of the relationship were potential beneficiaries as well
- the husband had no definite and guaranteed entitlement to the income or capital of the trust. That is, the trust did not give him title in any of the assets of the trust
Although none of the assets of the trust were available to the wife as
part of a property settlement, the Court did find that the trust was a
financial resource. This meant that
there could have been some impact (presumably on earnings from the trust) on
the determination of child support and spousal maintenance.
This case shows how important good legal and accounting advice can be in protecting family assets from one generation “leaking” to potentially non-family members. The possibilities for estate planning can be expanded if we consider that:
- the creation of a testamentary trust as part of preparing a Will can be a relatively simple matter
- the asset of each testamentary trust could be something like:
– a part-interest in a property, eg the parent’s family home, investment property or farm
– an investment portfolio
– the proceeds of insurance or superannuation if they can be transferred to the Will-maker prior to death
If you or your parents wish to investigate the degree of asset protection in the possibility of future relationship breakdowns, or other adverse events, then you should seriously consider (and get good legal advice!) about the use of a Will that adopts testamentary trusts.
Bernard Hoey is a partner in Burswood Partners, an accounting practice that has a strong focus on creating opportunities and solving problems for health professionals.
If you would like an obligation and cost-free meeting, or a chat and a coffee, please call Bernard on (08) 9472 4944 or 0419 045 908.