After ten years of litigation, a recent ground-breaking decision by the Supreme Court in the case of Clayton v Clayton, underlines the fact that you can’t take a ‘one size fits all approach’ with Trusts.
The facts of the case in themselves are not remarkable: Melanie and Mark began living together in a de facto relationship in 1986. They married in 1989. Shortly before their wedding, they entered into a prenuptial agreement in which Melanie agreed that she would make no claim against Mark’s separate property. In the event that they separated after a three-year period, her entitlement would be $30,000. They went on to have two daughters and separated in 2006. By that time Mark had built up a substantial sawmilling business and had set up two trusts.
A 'true' trust?
The first legal question centred around whether one of the trusts was a true trust or a ‘sham’ or ‘illusory’ trust. After much debate, the Supreme Court finally decided that the bundle of powers held by Mark were tantamount to ownership (eg: the power to appoint and remove beneficiaries, the power to appoint and remove trustees and the power of the trustees to distribute capital). This led to the decision that the property was in fact relationship property of both parties. If Mark and Melanie had not reached a settlement, the majority of the Court would have held that the Trust be split equally into two shares.
If you have a Trust or are thinking of setting one up, you could well be asking yourself, ‘So what does this mean for me?’
A few things to consider
The first thing to think about is: Who has the power to nominate the beneficiaries and trustees of your trust? At Davenports, we always advise our clients to appoint a trustee outside the family in order to strengthen the terms of the trust and ensure that your intentions stick. Without this, the trust could be at risk of being busted if challenged in court.
If you are setting up a trust while married with the intention of keeping personal property separate, you need to be very careful about how that trust is set up. Trusts need to be drafted to specifically reflect your circumstances. If, during a relationship, you put what would otherwise be relationship property into a trust, then it is likely that it will be treated as relationship property if push comes to shove.
If you are setting up a trust for your children to protect your assets in the event that their de facto relationship or marriage fails, you need to carefully consider who holds what powers in what circumstances and have the trust drafted accordingly.
Take specialist advice
The recent precedent makes it even more important to take specialist advice to protect your assets. If you already have a Trust, make sure that it is reviewed to see what can be done to strengthen the existing terms and make them more robust. One thing that this case has made very clear is that there can be no ‘one size fits all’ approach when it comes to Trusts.