Preserving intergenerational wealth - key considerations in family law proceedings

The decision in Caldwell and Caldwell [2005] FedCFamC1F 506 (Caldwell) reaffirmed the position that while the Federal Circuit and Family Court (Court) has broad powers in respect to family law disputes, its powers are not limitless. In the context of preserving intergenerational wealth, particularly where long-standing family-operated businesses are involved, Caldwell provides welcomed reassurance that where trusts are established and structured effectively, for a clear genuine purpose, they can successfully limit assets from the reach of the Court.  

Key Facts  

The parties were married for approximately 30 years before separating in 2022 and subsequently divorcing in 2023. During their marriage, the parties accumulated a substantial matrimonial asset pool, excluding trust and company assets, of between $16 million and $22 million.

Notwithstanding that the asset pool was more than sufficient to achieve a just and equitable outcome between the parties; the wife applied to the Court seeking a declaration that assets held within three discretionary trusts – which operated a long-standing family business founded in the early 1900’s by the husband’s great-grandfather - were ‘property’ of the marriage for the purposes of section 79 of the Family Law Act 1975 (Act).

The wife argued that following the death of the husband’s father, the husband held a level of control in the operation and administration of the trusts and therefore, assets of the trusts, should be considered ‘property’ for the purposes of the Act.

The Court rejected the wife’s application, reaffirming several key principles:

1. Control – the husband was one of three appointors of the trusts and therefore, was unable to exercise any power over the trusts and their assets without the consent of the other appointors. The Court accepted that the husband could not use his position as an appointor to divert assets to himself, or indirectly to his wife, without breaching the fiduciary duties imposed upon him.

2. Origin and purpose – the Court placed significant weight on the origin and purpose of the wealth derived by the trusts. Notably, the assets of the trust did not reflect contributions of the husband and/or the wife during their marriage, instead were the exclusive result of accumulated efforts of the husband’s family over multiple generations.

In establishing the trusts, the purpose of the trusts was explicit, namely that the trusts were to facilitate the intergenerational management of the family business of the husband’s family for the direct benefit of lineal descendants. Any exercise of power in relation to the trust was required to be in accordance with the purpose and required real and genuine consideration of the interests of the intended beneficiaries. Significantly, the wife was expressly excluded as a beneficiary of the trusts and therefore, had not and could not receive distributions from the trusts. While the husband was a beneficiary of the trusts, he had not received distributions other than for direct remuneration for his work in the family business.

Therefore, if the Court were to compel the husband to restructure or access the assets held by the trusts to satisfy a property settlement with his wife, this would have undermined the interests of the other beneficiaries of the trusts and defeated the intended purpose of the trusts.

3. Just and equitable outcome – the existence of a substantial asset pool meant that the Court was able to reach a just and equitable outcome without expanding its reach to the assets of the trusts. In such circumstances, it would have been unnecessary, and inappropriate, for the Court to lift the ‘corporate veil’ to expand the definition of ‘property’.

While the Court held that assets of the trusts were not considered ‘property’ in the context of the family law proceedings, they were considered a financial resource of the husband.

Significance of Caldwell in succession planning and structuring

Caldwell is a clear illustration of what must be considered in order for trusts and corporate structures to withstand the reach of the Court in family law proceedings. Significantly, the decision highlights the importance of:

1. Clear intent – in Caldwell the trusts predated the relationship between parties and were established with long-term family succession as the fundamental objective.

2. Exclusion of spouses as beneficiaries – the wife was excluded as a beneficiary of the trusts, and therefore unable to receive distributions of income or capital from the trusts.

3. History of distributions – the trusts were not treated as a financial resource by the parties. The husband, notwithstanding that he was a beneficiary of the trusts, was renumerated for his work in the family business and did not receive distributions of income or capital in addition to that remuneration.

4. Multiple appointors and shared control – the husband did not have unfettered discretion over the administration of the trusts, rather was required to act jointly with the other.

These key factors were pivotal in the Court arriving at its decision and can be contrasted to a significant number of decisions where structures collapsed under the scrutiny of the Court. For instance, where there are sole appointors, historic and regular distributions of both parties to the relationship and the trusts being established well into the relationship without a clear identifiable purpose. In such circumstances, the Court has historically seen through the structure and categorised trust assets as ‘property’ for the purposes of the family law proceedings.

It is important that when considering asset protection, particularly the preservation of intergenerational wealth, that appropriate advice be sought from the outset. The Court will not lightly unravel genuine intergenerational structures simply because of a breakdown in a relationship.

Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal

Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal

Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal