Tuesday, 3 April 2011
A recent decision of the Full Family Court in Brisbane (Harris & Harris  FamCAFC 245) has been food for thought for those who have used discretionary family trusts as part of their estate planning or business structuring.
Mr Harris appealed a decision of the Honourable Justice Bell in relation to the property settlement and spousal maintenance. Bell J had determined that the pool available for division was $4,269,180 which included an agreed figure of $1,500,000 as the value of a family discretionary trust, the Harris Family Trust. Bell J had concluded that the assets of the trust were the assets of Mr Harris, and should be considered as such in the context of a matrimonial property settlement.
Mr Harris’ appeal challenged Bell J’s decision, on various grounds but specifically including whether the Harris Family Trust was the “alter ego” of Mr Harris, such that the trust’s assets were Mr Harris’ assets?
The background of the Harris Family Trust is one which many families will identify with. Mr Harris’ family had run a business for a number of years, and that business was conducted through the trust. The Harris Family Trust had been established by Mr Harris’ father over 30 years ago and Mr Harris had worked in the family business throughout his life. Mr Harris Snr had been the first appointor of the trust until he passed away in 1995. Mrs Harris’ mother (Mrs Harris Snr) then became appointor and continued to hold that position.
The beneficiaries of the Harris Family Trust were Mr Harris Snr (now deceased); Mrs Harris Snr; the children of Mr Harris Snr (including Mr Harris and his sister); “the lineal issue” of Mr Harris Snr and “other beneficiaries” (which was referred to in a Schedule to the Trust Deed). Mrs Harris did not appear to be recorded as a beneficiary of the Harris Family Trust, nor fall within a class of beneficiary defined by the Trust.
Distributions from the Harris Family Trust had been made to the beneficiaries and also to Mrs Harris, and AB Pty Ltd (a company in which the sole shareholder and director was Mr Harris).
Mrs Harris Snr (as appointor of the trust) gave a written direction after the parties’ separated that the trustee would be changed from Harris Nominees Pty Ltd (a company in which both Mr Harris and Mrs Harris were directors) to HA Pty Ltd. Neither Mr Harris nor Mrs Harris were office holders nor share holders of HA Pty Ltd.
During the course of the hearing, Bell J posed the question “who has the control of the business and the trust?” to which he concluded Mr Harris did. Whilst Mr Harris accepted that he was essentially “the manager” of the business, his appeal argued that Mr Harris did not have sufficient control of the trust, such that the trust’s assets could be considered as his own.
The Full Court carefully considered the questions raised by the appeal. They found that Mr Harris appeared to simply be a beneficiary of the Harris Family Trust, as he was not the appointor of the trust nor hold any position in the current trustee company.
Counsel for Mrs Harris argued that Mrs Harris Snr was the “puppet” of Mr Harris, and that Mr Harris ultimately controlled HA Pty Ltd and the Harris Family Trust through his mother. The Full Court considered this and found that Mrs Harris could not point to any evidence which supported her position.
The Full Court upheld Mr Harris’ appeal, overturning the Orders of Bell J. The Full Court found that the assets of the Harris Family Trust should not be considered as assets of Mr Harris, and thus should not be included in the property pool available for division.
This decision must be considered in the current climate of decisions regarding trusts and their treatment in property settlements. In Kennon v Spry, the High Court held that the property of a discretionary trust can be defined as property for property settlement purposes, even if the spouse is not the appointor nor the trustee of the trust (but is a beneficiary) if it can be shown that the spouse has “indirect control” of the trust. Presumably this was Mrs Harris’ argument when advancing her position that Mrs Harris Snr was a “puppet” of Mr Harris.
Harris and Harris illustrates the importance of the structure behind discretionary trusts. It is important when considering your estate planning or business planning that you give careful consideration to the structure of the trust, the trustee (or trustee company) and beneficiary classes. It is also important to consider the issues of “indirect control” and “direct control”.
People who are considering separating, or family businesses that may be impacted by a separation, should contact us to discuss the treatment of trusts in property settlement matters.
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This article should not be considered as either formal or informal legal advice. This article should only be read as general information relating to the particular subject matter it is written about. The information may or may not apply to the reader's particular circumstances. Wiltshire Lawyers only purport to provide legal advice to clients who have provided detailed instructions and who have formally retained our services.
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