With their tax perks and legal protections, discretionary trusts have long been the gold standard for holding family assets built over a lifetime. But the landscape has fundamentally shifted.

The Federal Government’s major tax overhauls, including a new 30 per cent minimum tax floor at the trustee level and capital gains tax changes, mean that when a relationship breaks down, dividing trust assets is no longer business as usual, and the process becomes even more complicated.

Undeniably, when the mutual interest shifts from managing a shared future to formally dividing accumulated assets, things can get sticky.

For a partner who hasn’t been hands-on with the family finances, a discretionary trust can seem like an opaque, impenetrable structure where joint wealth is locked away.

But DDCS Lawyers Special Counsel Geoff Mazengarb says the family court still holds the power to ensure that assets acquired together are divided fairly.

Even the most amicable breakups can hit a few snags.

“I have had clients come to me quite distressed, because they’ve heard the words ‘You’re entitled to nothing; it’s all in the trust,”‘ Geoff says. “That can be a devastating thing to hear.”

While such statements might align with the literal wording of the trust deed, Geoff, a family lawyer with more than 40 years’ experience, says it’s not necessarily the final legal position.

“When faced with these arguments, don’t assume that’s the end of it,” he says.

“The reality is the legal structure can be examined, dismantled or adjusted. The courts can peer behind them to determine what’s really equitable.

“We can see when the trust is the ‘alter ego’ of one party who has control. In such cases, potentially all of the assets held in the trust may be included in the matrimonial settlement.”

DDCS Lawyers Special Counsel Geoff Mazengarb says the courts have ways of pulling back the veil on a trust that seems opaque, to ensure the equitable division of assets. Photo: DDCS.

One common scenario involves the parties to a relationship who are the only directors of a corporate trustee which controls the family trust. In such cases, the assets of the trust are usually treated as part of the property pool and are subject to adjustment orders between the parties.

“It’s worth noting that exceptions apply if, for example, a party is only one of several decision-makers of that trust, such as a trust managed alongside other family members. In these cases, the structure may have been specifically designed to protect specific beneficiaries.”

The assets of the trust might not be included in the property pool of the parties.

In a discretionary trust, you don’t technically ‘own’ money or property until the trustee chooses to give it to you, which can leave one partner in legal limbo.

To untangle it, lawyers start with the ‘rule book’, the trust deed, which defines who the beneficiaries are and their entitlements.

But while doing this, be wary of potential pitfalls.

“All parties will need to look at the tax implications of receiving any distribution that may be considered taxable income or a capital payment, particularly given the recent changes to how CGT is relevant to income capital gains tax calculations,” Geoff says.

“If you don’t square that off, the party receiving a distribution from the trust may be hit with a tax liability that was not taken into account.”

Another issue involves entitlements declared for tax purposes but never actually distributed. One common example is parents who have named adult children with low incomes as beneficiaries to spread the tax load, but don’t actually pay the funds to the adult children. This can lead to a shock later when a child realises they are legally owed money, and wants it paid.

And for a partner remaining in the trust after a family law breakup, one important task is ensuring that once distributions are made in accordance with property settlement orders, the trust deed is amended to exclude the other party as a beneficiary and lock down the deed so no one can come back for seconds.

“That comes down to your legal counsel’s ability to amend the trust deed to properly lock it down,” Geoff says.

For more information, contact DDCS.