Who is the Legal and Beneficial Owner of a Trust?

Who is the Legal and Beneficial Owner of a Trust

A look at Harris & Dewell and Anor {2018} FamCAFC 94

Introduction

Families often establish trusts to take advantage of tax benefits, with discretionary (family) trusts and unit trusts being among the most common types.

A recurring issue that the Family Courts must grapple with is how trusts are dealt with in the context of a breakdown of a marriage or de facto relationship, namely, should a trust be included in the asset pool for division or treated as a financial resource?

The answer varies depending on the circumstances surrounding trust; however, an important factor to be considered is who the legal and beneficial owner of the trust is.

Why? If one of the parties is found to be the legal and beneficial owner of the trust, then the Court would likely include the trust as an asset of the party in the property pool. If not, then the Court may consider it to be a financial resource available to that party instead.

Guidance on this issue can be found in the case of Harris & Dewell and Anor [2018] FamCAFC 94 where this issue was addressed by Full Court of the Family Court of Australia.

Background

The Husband and the Wife commenced cohabitation in 1986 and married in 1991. The Husband and the Wife separated in July 2010 but continued living together in the former matrimonial home.

A central point of contention was a Unit Trust established by the Husband’s Father in 1998 (predating the date that the parties commenced cohabitation).  Over the years, the Unit Trust acquired and sold property with the Husband’s Father making significant contributions to its assets.

From 1999, the Husband’s Father was the sole unit holder of all units in the Unit Trust. The Husband himself never held any units in the Unit Trust. The Trustee of the Unit Trust was a company where the Husband’s Father held 67% of the shares while the Husband held 33% of the shares. At the time of the Trial, the sole director of the corporate Trustee was a solicitor.

The Husband’s Father, as sole unit holder, could remove the Trustee and appoint a new or additional Trustee. The corporate Trustee itself could resign at any time and could appoint a new Trustee or an additional Trustee.

In these circumstances, the Husband’s Father appeared to have ultimate control of the Unit Trust given that he held all of the units of the Unit Trust and that he had a majority of the voting rights in the corporate Trustee. Seemingly, the Husband himself did not hold any interest in the Unit Trust and, therefore, the Husband argued that the Unit Trust should not form part of the property pool for division.

Conversely, the Wife argued that the Unit Trust was the Husband’s “puppet” and his “creature” due to his extensive involvement in the manner and history of decisions made by the Husband that directly affected the trust and his dealings with the trust property.

The argument was grounded on a series of factual propositions that were established at Trial before the Trial Judge, which demonstrated that the Husband had:

1. Exercised control over the Unit Trust;

2. Engaged in various dealings on behalf of the Unit Trust;

3. Directed agents on behalf of the Unit Trust;

4. Benefited from the assets owned by the Unit Trust as they were used as security for his own personal borrowings;

5. Continued to exercise control of the Unit Trust despite resigning as a director of the corporate Trustee of the Unit Trust in 2011; and

6. Intermingled his funds with the funds of the Unit Trust.

It was plainly clear that the Husband and the Wife had competing views about the Unit Trust and a determination needed to be made by the Court on this issue.

The Trial at First Instance

The Trial Judge, after carefully considering the evidence before her, was ultimately not satisfied that the Unit Trust was the Husband’s alter ego, or a device used by the Husband for his sole benefit.

Although accepting that that the Husband had exercised control over the Unit Trust, the Court was satisfied that the Husband’s Father was the real legal and beneficial owner of the units in the Unit Trust.

The Trial Judge quoted the following passage from Stephens v Stephens & Anor (2007) FLC 93-336:

”I accept that no earlier authority in this court has gone so far as to hold that control alone without some lawful right to benefit from the assets of the trust, is sufficient to permit the assets of the trust to be treated as property of the party who has that control.”

In other words, it was not sufficient for the Wife to establish that the Husband had control of the Unit Trust alone, rather, the Wife needed to also establish that the Husband had some lawful right to benefit from the assets of the trust for the Court to treat the Unit Trust as property of the Husband. The Wife was not able to do so given the ultimate legal and beneficial control of the Unit Trust vested in the Husband’s Father.

Accordingly, the units in the Unit Trust were not included as an asset for division in the property pool. Instead, it was treated as a financial resource for the Husband resulting in a percentage adjustment to the Wife of the assets which were considered to form part of the property pool.

The Decision of the Full Court of the Family Court of Australia

The Wife filed a cross-appeal against the Judgment contending that clear and unchallenged factual findings made by the Trial Judge about the control of the Unit Trust and the Husband’s dealings with the Unit Trust should have led to the conclusion that the Unit Trust was, in effect, the Husband and that the units in the Unit Trust were his property.

The Full Court rejected the Wife’s contention and observed that control of the Unit Trust itself was not sufficient. The Full Court held that “what is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust”, that is, to have some lawful right to benefit from the assets of the trust.

Here, the Husband had no legal or beneficial control of the Unit Trust or the corporate Trustee. In order for the Wife to succeed, the Wife needed to demonstrate to the Court that the Husband had control over the person who had legal and beneficial control of the trust, that is, the Husband’s Father.

The Husband’s Father had ultimate control of the Unit Trust as he was the sole unit holder of the Unit Trust, had control over the distribution of trust property and was the only person entitled to benefit from the distributions. Accordingly, the Full Court dismissed the Wife’s cross-appeal.

Legal and Beneficial Owner of a Trust

The case of Harris & Dewell highlights the importance of determining who the legal and beneficial owner of the trust is at the outset to help determine whether a trust should be included in the asset pool or treated as a financial resource.

The control of a trust alone does not automatically qualify it as an asset for division and one must also consider who has the lawful right to benefit from the trust's assets.

If you would like advice in respect to Family Law, please contact Nevine Youssef at nyoussef@marsdens.net.au

The content of this publication is for reference purposes only is for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.