The rise of family trust disputes

Over recent years there have been a number of high-profile family trust disputes brought to our attention by the media.  One notable example is the drawn out litigation between Gina Rinehart and her family over the Margaret Hope Hancock Trust.

Advisers will appreciate that many of their clients have family trusts which hold considerable assets.  Events such as a client’s incapacity, death or relationship breakdowns can have considerable ramifications on family trusts and the assets within it.  It is vital clients have been informed of the legal and investment consequences of such events.

So, what is a family trust?

‘Family trust’ is the generic term given to a discretionary trust created during a person’s lifetime.  The features of a typical family trust include:

  • The beneficiaries of the trust are a broad group including the Primary Beneficiary, their spouse, children and other lineal descendants;
  • The Primary Beneficiary is a controller of the trust by virtue of their role as trustee and appointor – the latter meaning they can replace the trustee at any time;
  • No beneficiary has a fixed entitlement to income or capital, so the controller has ultimate power; and
  • The trust ends on the ‘vesting date’ which is usually 80 years from when the trust was established (but, as with the Hancock Trust, a shorter period can apply).

What are some key lessons to take away from recent cases?

  • Trustees should not seek to control the way which beneficiaries behave. A classic example is a Western Australian case where two uncles controlled a trust. The main beneficiaries of the trust were their nieces.  The uncles made it clear to the nieces that they expected them to live their lives a certain way otherwise they would not receive future distributions.  The Court removed the uncles from their controlling positions.
  • Beware the Family Court. Although beneficiaries only have a ‘discretionary interest’, in some cases the Family Court will treat the interest as ‘property’ resulting in trust assets being allocated to a former spouse. Strategies dealing with this significant risk must be implemented wherever possible.
  • Primary Beneficiaries do not own the trust assets. It is not uncommon for a Primary Beneficiary to mistakenly regard the assets in the family trust as their own.  Two problems arise from this: First, the trustee will breach the significant duties and obligations owed to the trust and beneficiaries, leaving the trustee open to be sued.  Second, many Primary Beneficiaries try to dispose of the family trust assets via their Will when in fact they cannot (because the family trust assets do not form part of their estate!).
  • Amending the deed can amount to a resettlement. Some deed amendments change the nature of the family trust so much that the Commissioner of Taxation will regard the trust to have been wound up and a new trust established. In such an event the trust is said to have been ‘resettled’ and a CGT event to have occurred, giving rise to a potentially significant CGT liability.
  • Be careful with promises. Many family trusts operate family businesses that employ family members.  Take care with promises such as “One day, all this will be yours!” as they can give equitable and legal rights to the promisee. A recent Victorian case went all the way to the Supreme Court of Appeal because of a dispute between a father and a daughter over alleged representations regarding control of the trust upon the father’s death. The father successfully defended the claim, but the cost to all parties (in dollar and emotional/family terms) must have been enormous.
  • Compliance issues. It is not uncommon for family trust to have historical compliance issues relating to matters such as trustee resolutions.  Any such issues can complicate trust litigation.
  • Understand loan accounts. Many family trusts make ‘distributions’ to beneficiaries that are not physically paid but recorded by journal entry as a distribution and then as a loan back to the family trust from the beneficiary.  It is imperative that these distributions/loans be understood because at some stage the beneficiary just might knock on the trustee’s door and ask that the loans be repaid!  Sometimes the beneficiary’s ex-spouse will be delighted to discover that these loans form part of the property pool that can be divided by the Family Court. The loans must also be understood from an estate planning perspective.

Talk with us

Family trusts were first regularly established in the 1970’s and 1980’s.  The time for transfer of control of many of these trusts is now.

It is imperative that clients work in conjunction with a lawyer who has the skills to deal with trust law nuances as well as tax law, Corporations law and a strong litigation capability.

Contact our experienced team if you are interested to learn more about the future control of your family trust and want to reduce risk of costly disputes.

Contact:

Bernie O’Sullivan
Rob Warnock
Patrick Cussen