Intergenerational Discretionary Trusts

Discretionary trusts, often called family trusts, are important structures frequently used in intergenerational family business.  As multiple family members are usually beneficiaries of such trust entities the treatment of the assets of these trusts are often considered in family law proceedings.

Courts have previously recognised that when a discretionary trust is effectively controlled by a spouse and either spouse is also a beneficiary, then the assets of the trust will likely constitute an asset in family law proceedings.[1]  If, however, a party does not have both control and a beneficial right of the trust then the party’s interest in the assets of the trust may only be considered to be a potential financial resource. 

In situations where control of a discretionary trust is shared with third parties, as is often the case with intergenerational trusts, effective control cannot generally be shown and the assets are usually excluded from family law proceedings.  The case of Woodcock v Woodcock (No. 2) [2022] FedCFamC1F 173 (Woodcock) may change this position.

Mr Woodcock’s grandparents established discretionary trusts to operate the family group.  Mr Woodcock was one of many beneficiaries and had received distributions from the trusts in excess of $15 million over a five year period prior to the hearing.  Mrs Woodcock argued that her husband’s interest as a beneficiary was matrimonial property but Mr Woodcock disputed this arguing that the trusts in the group were established by his grandparents, the trust property was provided by his grandparents and had grown organically, and the trusts continued to be operated for the family’s benefit.

In this case, the intergenerational trusts were established well before the parties’ marriage, the trusts involved third party family members, Mr Woodcock did not exclusively control the trusts and they were not created to quarantine assets from Mrs Woodcock.  Therefore, it seemed likely that Mr Woodcock’s interests would only be classified as a financial resource.  However, instead of pursuing all of the trusts’ assets, Mrs Woodcock argued that her husband’s entitlement to “due consideration” (the right to compel the trustee to consider whether to make a distribution to him or not) and “due administration” (the right to proper administration of the trust) as a beneficiary of the trusts were assets of the marriage.

Mrs Woodcock argued that her husband had substantial influence over the assets of the trusts as he held considerable influence on the family council, had received significant distributions, was CEO of the family group, was on all the boards, and had the ability to veto decisions.  The Court agreed that Mr Woodcock enjoyed a legally endorsed concentration of power over the four trusts in the family group and that his beneficial interest could be considered to be property.

The Court was then asked to consider whether a value could be placed on Mr Woodcock’s beneficial interest so it could be included in the asset pool in the proceedings.  Mr Woodcock argued that his interest could not be valued as it was purely discretionary but the Court found that his right to due consideration and proper administration of the trusts (which are equitable choses in action) may be capable of valuation.  

This was an interim hearing and the Court found that Mrs Woodcock’s case had merit and held that the issues of whether Mr Woodcock’s rights are property as well as the value of those rights were issues that warranted determination at trial.

Woodcock was recognised by Justice Wilson as a ‘test case’ in respect of considering whether the interest of a beneficiary in a discretionary trust is a financial resource or property of the marriage for the purposes of a family law settlement. Whilst the issues have yet to be finally determined, it is relevant to note that these issues may remain problematic in family law proceedings.

It therefore further highlights the need to carefully consider the use of discretionary trusts in intergenerational family businesses, particularly in the context of how the trustee exercises discretion and how assets are held within a particular family group, already a topical issue in the context of beneficiary disputes because of the Victorian Court of Appeal decision in Owies v JJE nominees Pty Ltd [2022] VSCA 142.

Written by Kylie Wilson and Deborah Johnson from Sparke Helmore Lawyers.