This is a case note on family law and discretionary trusts.
The facts of Billington v Billington (No.3)  FAMCA 1465 (“Billington”) revolve around property matters following the end of long marriage, with significant inheritances and trust assets.
The husband and wife in Billington commenced living together in 1973, married in 1974 and separated in December 2004. There were 4 children of the marriage, but all of the children were above the age of 18.
There were numerous issues in dispute in Billington, including, but not limited to, whether there should be any allowance made for the contingent liabilities of the husband’s professional practice and the treatment of capital gains tax on the wife’s unsold portfolio of shares.
This article however will focus on the issues surrounding the loan accounts to the Billington Family Trust. In Billington it was considered whether or not the trust loan accounts should form part of the marital property pool.
A common practice in the management of discretionary trusts is the distribution of trust income to a beneficiary loan account. Income received by a beneficiary would be loaned back to the trust.
While this is a common practice, it is not without its inherent risks. For example, beneficiaries may elect to call for the payment of their entitlement to the monies owing under the loan account.
In Billington, the husband argued that only the direct entitlements of he and the wife should be recorded as entered into the marital property pool. The wife, however, argued that the children’s beneficiary loan accounts should be added into the marital property pool. The Court found in favour of the wife.
In coming to the decision, Judge Cronin had considered the objective of setting up the trust, which was revealed to be for the purpose of safeguarding family assets and to deal with income in a tax effective manner. Judge Cronin also considered the fact that none of the children had challenged the trustee nor sought to benefit directly from the trust in recent times.
One of the primary considerations in Judge Cronin’s judgment in relation to the loan accounts was the degree of control the husband had over the loan accounts and the trust. In Billington the husband’s evidence revealed several characteristics that indicating his control over the discretionary trust (and therefore the loan accounts). The husband himself “said he did not dispute that he in fact had control” (paragraph 128).
The importance of the control a party has over the discretionary trust was also considered in the High Court decision of Kennon v Spry Judge Cronin’s referred to the decision and his considerations are effectively summarized in paragraph 136 of the judgment where stated that:
Because of … the husband being a beneficiary, his control and the lack of any prospect of a child making a claim to any funds, I do not find that it would be appropriate in this case to treat the trust as a financial resource. Added to that is the fact that all of the funds in this trust have come from earnings of the husband and subsequent investments. To quarantine these loan accounts would not be just and equitable to the wife.
(Note that in saying he did not consider it appropriate to treat the trust as a financial resource, Judge Cronin was eliminating the option of treating the trust merely as a resource from which a party may derive benefit in the future, rather than part of the property pool. By treating it instead as property of the parties, its value was immediately assessed as part of the pool.)
It should be noted that this decision was made in spite of the argument put forward by the Counsel for the husband that “orders should not be made because the children were not parties and no notice had been given them of proposed orders that may affect their rights” (paragraph 137).
Against this view, the judgement states “The fact that notional distributions of income have been made is irrelevant because… the husband treats them as his own and the children are unlikely to make any call upon them” (paragraph 138).
In spite of the loan accounts being property of the children, the judgement resulted in the loan valued at $297,471.00, being added to the property pool.
Billington highlights the Court’s power to deal with the assets of a discretionary trust loan accounts. It also assists parties considering separation to determine what accounts can form part of the property pool.
Read more case notes here.