The Puppet Master – Can you Trust a Trust?

In the Full Court decision of Harris & Dewell and Anor, the Court considered, amongst other things, whether a Unit Trust legally owned by the husband’s 99-year-old father was the husband’s “puppet” or “creature”, and therefore matrimonial property.

The Court ultimately found that the significant assets of the E Unit Trust, legally owned husband’s father, was not matrimonial property of the parties available to divide between them. However, the Full Court did find that the assets and income of the E Unit Trust were a financial resource of the Husband, which he could continue to rely upon in the future.

How did they conclude this? The Court examined the conduct of the husband in his usage and treatment of the income and assets of the E Unit Trust, both prior to and after separation.  This case is yet another example of how the Family Law Courts rely heavily on evidence of the conduct of parties (not just legal ownership) in determining how Trust assets and income should be treated in a property settlement.

The facts of this case are critical and highly relevant to those involved in intergenerational businesses. They can be briefly summarised as follows:

1. the husband’s father established the E Unit Trust in 1981, predating the commencement of the husband and wife’s relationship by 5 years;
2. the E Unit Trust had a corporate trustee from inception and the beneficial interest in the E Unit Trust was held via 60 units, with the husband’s father eventually becoming the sole unit holder over time. The husband was never a unit holder of the E Unit Trust;
3. the husband and his father were sole shareholders in the corporate trustee of the E Unit Trust, with the husband holding two ordinary shares to the father’s four. The husband held his shares on trust for his father after they were transferred to him in 1999 from a former shareholder and director;
4. the parties had been married 24 years;
5. the Court accepted that during the marriage the husband treated the E Unit Trust assets and income as his own property (albeit with the delegation and consent of his father);
6. from 2011 onwards the husband’s conduct included the intermingling of E Unit Trust funds with matrimonial funds. The husband also represented that he was the legal unit holder and proprietor of the E Unit Trust in loan/finance applications and documents.

Post separation the wife asserted that the husband’s high level of control in the E Unit Trust, and the treatment of the assets and income of the Trust as his own, resulted in his father being a “mere puppet”, and therefore the estimated $5.1 million of E Unit Trust assets should be regarded as property of the husband.

The Court ultimately disagreed with the wife and held that, despite the husband’s high level of control, he was not the “puppet master” of the E Unit Trust as his father permitted him to deal with the Trust assets and income as he saw fit.  Moreover, it was clear the husband never had any legal ownership of the Trust.

Although the wife was unsuccessful in having the E Unit Trust assets regarded as matrimonial property, she did receive a significant adjustment of the remaining matrimonial property in her favour (from a net property pool of approximately $16 million) as a consequence of the Court concluding that the husband would continue to have complete freedom to utilise the E Unit Trust assets and income as he saw fit.

In fact, the Court gave the wife a 17.5% adjustment of the net matrimonial property pool in her favour for her future needs, in recognition for husband’s greater earning capacity and the husband’s financial resource in what the Court concluded would be his ongoing unfettered access and usage of the E Unit Trust assets and income.

As the matrimonial property pool was approximately $16 million, this adjustment equated to approximately $2.8 million in favour of the Wife (you will recall that the E Unit Trust assets were approximately $5 million).

This case highlights once again that the Family Law Courts has the power to give with one hand (found not to be matrimonial property) and take away with the other (deemed instead to be a financial resource).  Evidence of how the parties have used the assets and/or income of a Trust will have a significant impact on the determination of the property proceedings in the Family Law Courts.

Marsh & Maher Richmond Bennison are specialised in both family law and estate planning matters and are able to provide high level advice as to how these two areas frequently intersect to best protect our client’s interests and avoid costly litigation. This includes proactive asset protection measures in an attempt to avoid issues such as these arising at all.

For more information please contact our Family Law Partner Shannon Hilton on 9604 9400 or shannon@mmrb.com.au