While designed for asset protection and wealth management, discretionary trusts, shareholder agreements and binding financial agreements can become central points of contention in family law disputes.
A significant challenge arises from the Family Court’s broad discretion in considering the contributions of both parties to the acquisition, conservation, or improvement of assets. This extends beyond legal ownership, allowing the Court to scrutinise the substance of financial arrangements.
So, to what extent can these strategies actually protect assets from family law risks?
Trusts and the Family Court
Discretionary trusts, commonly employed for tax efficiency and asset protection, are frequently examined by the Court. The Court will assess the history of distributions, the settlor’s intentions, and the degree of control exercised by the parties. If the trust is deemed to have been used as a vehicle for the parties’ financial affairs, or if one party significantly contributed to its growth, the trust assets may be considered part of the matrimonial pool.
Furthermore, the principles of constructive and resulting trusts can significantly impact the distribution of assets. A constructive trust may be imposed to prevent unconscionable conduct, while a resulting trust arises when it’s presumed that the legal title holder holds the property on trust for another. These equitable arguments can establish interests in assets, even when legal ownership is not held.
Shareholder agreements and the Family Court
In the case of family businesses, shareholder agreements, intended to govern business relationships and more importantly what happens when that relationship is the subject of a dispute. The Family Court will analyse these agreements to determine their validity and forensically determine whether others are affected by any alterations to any change in shareholding. The Court’s judicial focus is on assessing the parties rights under the shareholder agreement before making family law orders concerning those interests.
Binding financial agreements and the Family Court
While binding financial agreements (BFAs) are often the first option considered to protect against family law risks, they have significant limitations. BFAs can be challenged on grounds such as duress, undue influence, or a lack of full disclosure. Therefore, a more comprehensive approach to asset protection is recommended, emphasising proactive strategies and thorough documentation.
How financial advisers and lawyers can work together
While discretionary trusts, shareholder agreements and BFAs do have limitations, that doesn’t mean they aren’t useful vehicles for asset protection. A combination of these strategies may be a suitable approach for high-net worth individuals. However, to maximise their efficacy, advisers should take a holistic approach which identifies risks as they occur with suitable interventions taking place early.
These interventions are only made possible when there is a collaborative approach between financial advisers and lawyers. This ensures the client’s team can effectively navigate the complexities of trust and equity in high-net-worth family law disputes.
This approach ensures that clients’ financial interests are protected and the best outcomes can be achieved from family law proceedings. To truly safeguard clients’ interests, a proactive and integrated strategy is paramount, bridging the distinct expertise of financial planning and legal counsel.
Below are some of the key areas in which financial advisers and lawyers can collaborate to mitigate family law risks:
- Early identification of risks and proactive planning
One of the foundational areas for collaboration lies in the early identification of risks and proactive planning. Financial advisers are often the first to notice subtle shifts in a client’s financial behaviour that may signal an impending relationship breakdown before this is disclosed by the client.
Discreet changes in spending habits, sudden liquidation of assets, large transfers of funds to different accounts, or a sudden disinterest in joint financial planning are all red flags that warrant immediate attention.
While a potential relationship breakdown can be a difficult topic to raise with a client, it’s much better to have a frank conversation early in order to maximise the eventual outcome in future family law proceedings. Financial advisers should also encourage their client to seek legal advice promptly.
This early intervention is critical because any asset restructuring or significant financial changes ahead of a relationship breakdown are best undertaken well before a separation is on the horizon to avoid being construed as an attempt to defeat a family law claim. A lawyer, brought in at this early stage, can advise on the legal implications of any proposed changes and ensure they are structured to withstand future scrutiny.
Ultimately if your client is considering divorce, it’s important this is raised and dealt with as early as
possible.
- Strategic implementation and ongoing review of asset protection mechanisms
When establishing discretionary trusts, shareholder agreements, or BFAs, financial advisers can provide crucial insights into the client’s financial goals, asset structures, and historical financial dealings.
Lawyers, in turn, can draft these documents with a keen understanding of family law principles, anticipating potential challenges and incorporating clauses that strengthen their defensibility in court. For instance, in the context of trusts, lawyers can advise on how to maintain clear distinctions between trust assets and matrimonial property, while financial advisers can guide on distribution strategies that align with legal intent.
Regular joint reviews of these arrangements are also vital, especially as financial circumstances or relationships evolve, ensuring that the protections remain robust and compliant with current family law interpretations.
- Litigation preparedness and dispute resolution
Should a family law dispute arise, the combined insights of both professions are invaluable. Financial advisers can provide detailed financial histories, valuations of assets, and expert testimony on the economic contributions of each party, which directly informs the Court’s assessment of the matrimonial pool.
Lawyers can then leverage this financial data to construct compelling legal arguments, whether advocating for the integrity of a trust, the validity of a shareholder agreement, or the enforceability of a BFA.
This shared understanding of the financial realities and legal intricacies allows for a more unified and effective representation of the client’s interests, ultimately aiming for the best possible outcome in complex family law proceedings.
The synergy between financial acumen and legal expertise transforms potential vulnerabilities into
fortified protection, truly safeguarding assets from family law risks.
Kristy-Lee Burns is partner at Owen Hodge Lawyers
Significant ethical issues there. If a relationship is in the process of breaking down then both parties are likely to be an advisers clients. They can’t act unless they formally resign from one or both or only do things in mutual best interests of the two parties. Even if they resigned from one I would posit it’s questionable ethical behaviour to not warn the severed client as to the reason for the severance due to existing duty of care. The act of severance is likely to be read as intention of the opposite of best interests when they are technically still a client.