Asset protection generally

All asset protection is a compromise between protecting assets and retaining control and enjoyment of those assets.

Asset protection spectrum
Complete control and enjoyment = no asset protection
Example: you own the asset legally and beneficially, e.g. family home
No control or enjoyment = excellent asset protection
Example: asset owned by someone you cannot direct or influence

Each asset protection strategy sits somewhere on the spectrum from complete control, which means little-to-no asset protection, to the other end of the spectrum where we have excellent asset protection but limited control of the assets. Some asset protection strategies are so successful in removing control of the assets from those who paid for that asset, or inherited it, that there is no guarantee the person will ever be able to properly enjoy the asset and you begin to wonder whose asset it is.

It is a truism that the only certain asset protection in the Family Court arena is a binding financial agreement (BFA) made in careful compliance with the requirements of the Family law Act 1975 (Act). Done properly, a BFA will remove the jurisdiction of the Family Court to make an order over the assets which are the subject of the BFA. [1]

Many clients come to us asking for an estate plan where the inheritance for their children can be protected, as much as is possible, from any relationship breakdown that their children may have in the future. In such situations we can provide testamentary trust wills which go some way to separating the child’s inheritance from their other marital property.  Note that this generally does not mean the assets are protected unless a BFA is used or the inheritance is almost completely removed from the control of the children to the extent that they can have no reasonable expectation of benefiting from it.

The recent Family Court decision of Bernard[2] sheds light on the Family Court’s view as to when an inherited asset within a testamentary trust forms part of the matrimonial property of the parties.

Mr Bernard’s parents had established 2 trusts in their wills; namely the Mr Bernard Trust and one for his sibling, the Ms Bernard Trust.

The structure was as follows:

  • Mr Bernard was the primary beneficiary of the Mr Bernard Trust;
  • Mr Bernard was the appointor; and
  • the trustee was his sister, Ms Bernard.

The terms of Ms Bernard Trust were the mirror of those for Mr Bernard’s trust. The 2 trusts were in partnership in a common property venture at the time of the case.  Mr Bernard had been married for 24 years prior to his inheriting under the Mr Bernard Trust, but only remained married for 3 years after the inheritance.

Mr Bernard’s wife, as his spouse, was a beneficiary of his trust (a potential beneficiary in the context of a discretionary trust).

On 2 July 2015 Ms C Bernard, as trustee of Mr Bernard’s Trust, made a resolution to accumulate all future income for the purpose of renovations of trust property. The Court was satisfied this was an enduring resolution and there was no need for a fresh resolution to be provided each year for the income of those future years.  We advise our clients to ensure they have a fresh resolution as to income each financial year. This is not just because from a tax and accounting perspective it is wise since you don’t know what your income will be in future years and therefore there is significant uncertainty in trying to distribute it before it is earned; but also that trustee’s discretion under trust law must always be maintained. A trustee cannot fetter their own discretion. Therefore a prudent practitioner assumes that a resolution as to future income would be such a fetter and may be void. However, this is not what was decided by the Family Court.

Mr Bernard’s wife asserted that the assets of Mr Bernard’s Trust were:

in reality his, that he exercised control over the assets in the Mr Bernard Trust and it would therefore follow that the assets of the Ms C Bernard Trust are hers in reality and she exercised control over the assets of the Ms C Bernard Trust[3].

The Court had regard to the seminal case of Spry[4]. The Court helpfully sets out the differences between the circumstances of the Spry case (where the assets of the trust were deemed to be assets of the marriage) and the Bernard case:

  • Mr Bernard was not the settlor of his trust as Dr Spry was in his case.

As with all testamentary trusts, the settlor of the Mr Bernard Trust was a parent of the primary beneficiary i.e. Mr Bernard’s father.

  • Mr Bernard was not trustee of the trust unlike Dr Spry.

This means that Mr Bernard did not have legal ownership of the trust assets. From a bankruptcy perspective, legal ownership of an asset is somewhat immaterial in attempting to protect it because the Bankruptcy Act considers the beneficial owners. In family law however, legal ownership can be critical[5].

  • Mr Bernard did not have power to appoint and dismiss trustees, as Dr Spry had[6].

The Court quoted the key principle from the Spry case:

Dr Spry’s power as trustee to apply assets or income of the trust to Mrs Spry prior to the ….[amendment] … was, as pointed out by Gummow and Hayne JJ, able to be treated for the purposes of the Family Law Act as a species of property held by him as a party to the marriage, albeit subject to the fiduciary duty to consider all beneficiaries.” (at paragraph 70)

Mr Bernard’s situation was different:

The husband’s interest was a beneficiary of the Mr Bernard Trust, and none other.  He cannot apply assets or income of the trust to any person, himself or the wife.  The wife has her own recourse and action as a beneficiary of that trust, as against the trustee who is her former sister-in-law.” (at paragraph 71)

Unsurprisingly, the wife asserted that because his trust was run in partnership with his sister’s trust, and the trustee of his trust was his sister, that in reality he had actual control of the assets of the trust. I must confess it is not the realms of aluminium foil headwear to draw the inference that where siblings have otherwise identical mirror imaged testamentary trusts that they are each, in reality, controlling their own trust.  This might be particularly the case where the trusts are in partnership in a common venture.

The Court was not so persuaded. The Court said the fact that the trusts were mirror images did not give either sibling power or control of their own respective trust.  The Court rejected the comparison to another Family Court case where the Court had ruled that someone could exercise control over a trust which was formerly controlled by their parents.  In that case there was apparently some evidence that their son, and party to the marriage, had been de facto controller of the commercial activities carried out by the trust.

However, in this case, the Court said there was no evidence that Mr Bernard had attempted to control his trust and instead it appeared that he and his sister had faithfully carried out their late father’s testamentary wishes.

Miss C Bernard and Mr Bernard have been scrupulous in their company dealings, in their promulgation of resolutions, to ensure accumulation of funds to carry out renovations of the property, holding of meetings and the filing of tax returns and their distinct roles as trustee and beneficiary.  I rarely see a family law matter where tax returns and disclosure is so up to date and thorough as has been in this matter.” (at paragraph 84)

The Court even considered whether the 2 trusts might be a sham and rejected this outright. The Court said it was in fact the opposite of a sham trust.

The wife’s application failed.

We must remember that the assets of the Mr Bernard Trust would not have been irrelevant when the property division was determined. Whilst the judgment does not consider the issue, we expect that the Court would have included those assets in Mr Bernard’s financial resources, which may have altered the balance how the marital property was divided between them.

Estate planning lessons from Bernard and Bernard

This case [7] is an excellent exposition in careful estate planning and the utilisation of testamentary trusts. Mr Bernard’s father was apparently able to successfully quarantine his wealth after he had died from being part of the marital property of his son and his daughter-in-law.  The wealth in The Mr Bernard Trust was not dragged into the property division between Mr Bernard and his wife. That same wealth will be available for Mr Bernard and his descendants, perhaps for generations to come.

Careful estate planning provided a predictable trust law outcome in the Family Court arena – a laudable achievement.

Testamentary trusts can protect the inheritance you will provide to your children, from attack if your children separate.

[1] Note that this assumes the circumstances at the time of making a BFA remain reasonably similar or at least as predicted by the parties when their BFA was entered into.  If circumstances vary wildly, particularly if those circumstances involve children coming into the relationship, then the Court may have reason to examine whether the BFA remains just and equitable for the parties.

[2] Bernard and Bernard [2019] FamCA 421

[3] At paragraph 51

[4] Kennon and Spry [2008] HCA 56

[5] The trustee of a trust is the legal owner of all assets of the trust

[6] Mr Bernard was described as the appointor for his trust but still did not have power to hire and fire the trustee.  This is unusual as typically the primary role of an appointor is to appoint and dismiss trustees.  The terms of the trust i.e. the will, was not part of the judgment and we have not ben able to review it.

[7] We will provide an update if the case is appealed but it does not appear to have been appealed at this stage.

[1] At paragraphs 54 and 55

[2] Re Dion Investments Pty Ltd (2014) 87 NSW LR 753

[3] Cisera -v- Cisera Holdings Pty Ltd [2018] NSWCA286

[4] At paragraph 68

[5] Chapman -v- Chapman [1954] UKLH1

[6] Arakella -v- Paton (2004) 60NSWLR334

[7] At paragraph 85

Latest News

April 18, 2024

A housing trust’s modernisation requires Court approval

Background The Baxter Homes Trust (Trust), was a charitable trust established in Victoria by a deed executed in 1960. Its purpose was to provide aged inhabitants of Geelong Victoria or its neighbourhood with housing as administered by The Geelong and Western District Ladies Benevolent Association’ incorporated under the Hospitals and Charities Act 1890. The Trust A housing trust’s modernisation requires Court approval

Read Article

April 18, 2024

Draft Regulations for NPO Self-Review Assessment Return Released

We have previously written in bulletins about the forthcoming self-assessment tax review for non-profit profit organisations which have an Australian Business Number (ABN) but are not registered as charities with the ACNC – Be alert to being alarmed on viewing your club or society annual report this year and self-assessment by tax-exempt. The background is Draft Regulations for NPO Self-Review Assessment Return Released

Read Article

March 13, 2024

Last of the loopholes? Let’s hope so!

Background All Australian employers will be acutely aware that the Federal government has, since the last election, embarked on a fairly aggressive program of targeted changes to the nation’s industrial relations laws. So far, we’ve had changes aimed at supporting Australia’s jobs and economic recovery[1], gained more respect at work[2], we’ve secured our jobs and Last of the loopholes? Let’s hope so!

Read Article