Discretionary trusts are used with the expectation that the assets of that trust are protected should a trustee or beneficiary decide to separate from his or her partner. However, a misconception exists that gives some people the impression that a discretionary trust will not be treated as a form of property in a family law matter.
The reality is that the court generally does bring the trust up for consideration, often including it as a type of property.
In some cases, the court will make certain adjustments in regards to the other party if they determine that it is both equitable and just (ie, that its fair).
How a discretionary trust is divided
There is a process consisting of five steps that the court uses to determine how the trust should be divided.
- First, it must be determined that the court has proper jurisdiction to be able to hear the particular matter in question.
- Second, they look at what each party’s financial resources are and what their value is.
- Then they analyse each party’s contributions during the course of the relationship as well as before and after.
- Next, they determine if an adjustment should be made to either party or to both according to their potential future needs.
- Lastly, they confirm that the adjustment is a fair one.
As a rule, a discretionary trust is included in the financial liabilities and resources that are considered.
Reasons to involve a discretionary trust
Typically, there are several factors which would cause the court to involve a discretionary trust in a family law matter.
- One possible cause is that either one of the parties has sole power over trustee appointments.
- Another possible factor is that one of the trustees happens to be a company and one of the parties has complete control over it.
- If one of the parties in question is a beneficiary of the trust, or if the company they control is a beneficiary, that might also lead to the trust being treated as property.
Even if the trust isn’t considered to be property, it might still be seen as a financial resource which could still involve it in the legal matter in some way.
For this and all the reasons mentioned, it is very important that these factors be properly considered when a trust is being set up.
You need to know precisely what the reasons are for the trust to be created and whether it will be effective in protecting your assets.