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Family Trusts and Relationship Property _________________________________
Relationship Property and Trusts
Relationship property law divides assets into relationship property which, subject to certain exceptions, is divided equally on separation, and separate property which is the separate property of the party who owns it on separation.
Trust property sits outside the relationship pool of assets because trust property is owned by the trustees of a trust and not by the partners or spouses themselves personally.
There are, however, a number of ways in which relationship property laws can apply to trusts.
Distributions received from a trust
A distribution received by a spouse or partner from a trust (where that trust was established by a third party) comes within the relationship property regime. A distribution from the trust is treated as that person’s separate property, unless that person consents to the property being intermingled with relationship property such that it is no longer practical or reasonable to treat it as separate property.
Where the spouse or partner established the trust or where the spouse or partner contributed to the bulk of the assets in the trust, then distributions to a beneficiary spouse or partner will not necessarily be separate property and will not necessarily be afforded the same protections as they would have had, had the trust been established by a third party.
Interests in a trust
If a spouse or partner is a beneficiary of a trust, then that interest may be of a type sufficient to constitute “property” and capable of being dealt with in accordance with the relationship property regime.
Whether or not a beneficiary’s interest in a trust is capable of being classified as “property” depends on the nature of that interest. Generally, a beneficiary’s interest in a trust will fall into one of the following three types:
- A discretionary interest: this is where the person is named as a discretionary beneficiary of the trust. A discretionary beneficiary may apply for a distribution from the trust but it is up to the trustees to determine whether the payment will be made. A discretionary beneficiary has a right to be considered by the trustees for a distribution but there is no guarantee that they will ever receive anything.
- A vested interest: this is where the trust fund vests in the beneficiaries on the date the trust winds up. The beneficiary’s interest is guaranteed to be received as the trust fund automatically vests in the beneficiaries named in the trust deed on winding up.
- A contingent interest: this is where the beneficiary may receive assets of the trust but whether or not they will receive assets is dependent on the happening of a certain event.
A spouse or partner who is a discretionary beneficiary of a trust has no interest in the assets of the trust as they are merely one of a number of beneficiaries to whom trustees may, in the exercise of a future discretion, from time to time distribute income or capital. The trust assets in that case do not therefore full into the category of “property” under the relationship property regime. Likewise, a contingent interest is unlikely to be regarded as “property” where the interest has not crystallised at the time at which property rights are being determined.
Relationship property laws will, however, apply if a spouse or partner has a vested interest in a trust, as that interest is sufficiently certain to qualify as “property”.
Where an interest in a trust is considered “property”, the next issue is the classification of that interest as relationship property or separate property. It will usually constitute a partner’s separate property but if the trust property is the family home or family chattels then the interest in the trust may be relationship property because of the overriding provisions in the Act that the family home and chattels are to be classified as relationship property.
For more information on this topic, please contact Cathy Fisher on phone (09) 915 2412 or email firstname.lastname@example.org.