Critical Analysis of Discretionary Trusts in Legal System / Society

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Introduction

Trusts are legal arrangements most commonly found in legal systems that are influenced by British common law, members of British Commonwealth, or territories that were earlier British colonies. Trusts are commonly used for holding assets, running small / family business and distributing income in the defined / equal proportions among certain group of people. A trust essentially separates the legal ownership from the benefits associated with ownership such that one party (“the trustee”) has legal title to the assets and uses it for the collective benefit of one or more other parties (“the beneficiaries”). Consequently, in a trust both trustees and beneficiaries hold certain aspects of ownership. Discretionary trusts allow the allocation and distribution of income among the beneficiaries in the manner stated in the trust deed. This allows unequal but predefined allocation of income among the beneficiaries often preferred for charitable purposes and in family situations / bequest or will. A beneficiary of discretionary trust cannot quantify his / her value in the trust property but obtains benefits therefrom.

Through providing a means to split incomes without splitting assets, discretionary trusts offer numerous benefits to the society, such as: providing a vehicle for preferred type of pooling of assets, protection of minor or unwise beneficiaries from their own poor judgment, possibility to minimize income and estate taxes in several jurisdictions and providing protection to estate property against bankruptcy or settlements pursuant to divorce.

Asset protection and division of property u/ Family Law Act, 1975 (“FLA”)

Asset protection strategy is one of the most common uses of discretionary trusts. These trusts provide protection to the trust assets from beneficiary’s creditors in case of bankruptcy, as the trust assets are not generally classified as personal property for the beneficiary or the trustee and therefore not divisible in such circumstances. However, this strategy often fails to provide protection from ex-spouses or ex-domestic partners post-divorce in the disputes brought before the family courts. Such disputes are dealt under the FLA, rather than common law.

Under Section 79(1)(a) of the FLA power is vested in the Family Courts to alter the property interests of the disputed parties in the property. These interests may include, for example, specific investments and business assets, property inherited by either of the parties and the property owned before marriage. This allows courts to decide on and settle disputes relating to the claims over property including properties held in trust, and to which a party may be entitled, whether in possession or reversion. Implications may therefore arise in case of division of trust property which includes financial and non-financial contributions from both spouses.

Traditionally, there has been a strong chain of case laws that view a certain property held in a discretionary trust as if it belonged to one of the spouses and brought to the marital pool under the family trust. This has further been confirmed by the famous and controversial case law Kennon v Spry (2008) which has arguable widened the scope of the powers of the family courts. Accordingly, the courts are said to have disregard the existence of family trusts when dividing pool of marital property on a property settlement case. In case of Spry Trust, the majority judges held that the property in trust can be treated as “property of the parties to the marriage” within the meaning assigned under section 79 of FLA because the property held in discretionary trust has no equitable interest in those assets. The summary of decision by French J is that trust property may be covered under the martial pool if: (i) property is held by one of the spouses under the non-exhaustive discretionary trust without any obligation or restrictions to apply those assets in a particular way; (ii) either of the spouses is trustee in the discretionary trust; (iii) property was acquired through financial or non-financial contributions of that person or his/her spouse; and (iv) such property was acquired before or during the marriage.

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