What happens with a Unit Trust at Separation?

The way that a Unit Trust is dealt with during separation is based on whether it is categorised as an asset or a financial resource.

What is a Unit Trust?

Different types of Trust structures are commonly used in Australia to either protect assets, or to help with tax planning.

There are different types of Trusts (eg Discretionary Trusts, Family Trusts, Superannuation trusts etc), but this article is going to be focussing specifically on Unit Trusts. 

Unit trusts are commonly used by people to pool together funds and use that for investments. A common example of this are Superannuation funds – which are structured as unit trusts. 

Each unit represents a share in the trust, which allows the Unit Holders to have their interests divided into precise fixed percentages. As an example, if there is a Unit Trust between 4 people and they each have 25 units, then each one would be said to have a 25% interest. 

How would I know if my partner has a Unit Trust?

When a couple separates or divorces, each must provide thorough information about all of their assets, liabilities (debts), and financial resources they hold an interest in. 

This step is commonly known as the disclosure process (or financial disclosure).

This has to be made regardless of whether they are owned individually, jointly, or in conjunction with third parties; and whether the asset is owned under their name, their partner’s, or both.

This information is compiled and known as the asset pool. 

Both parties are obligated to furnish each other with information and documents to authenticate the nature and extent of the assets, liabilities, and financial resources held by each party.

How are unit trusts disclosed in Financial Disclosure?

In the course of this disclosure procedure, if either spouse holds a beneficiary status in a trust, they must furnish copies of all pertinent documents to substantiate their interest. 

These documents include:

• The trust-establishing deed (including any deed variations)
• The trust’s financial statements and tax returns for the three fiscal years preceding the separation.

The requirement to provide these documents depends on the nature of the spouse’s interest as a trust beneficiary, and the degree of control the spouse wields over the trust.

How is a Unit Trust dealt with in a Property Settlement?

A Unit Trust is going to be treated in either one of two ways, either:

• An asset, or
• A financial resource.

As a general rule, if one spouse exercises control over the trust, it is more inclined to be viewed as an asset subject to division in the course of a property settlement claim.

When the Unit Trust is viewed as an Asset

If the trust is seen as part of the relationship’s assets, it is added into the asset pool, to be divided up between the couple as part of the property settlement following separation or divorce. 

Depending on how and when the trust was set up, and how much control one spouse has over it, the spouse with a stake in the trust might get some reward for adding it in to the asset pool. So, if the trust and its goodies came into existence because of the solo efforts and hustle of one spouse, they might get an additional benefit from the property settlement.

When the Unit Trust is viewed as a Financial Resource

In the event that the trust assumes the role of a financial resource for one of the spouses:

• It will not be integrated into the pool of assets.
• Instead, it will be perceived as an accessible resource to the respective spouse at present and anticipated to remain available in the future.

Illustratively, if one party presently possesses and is likely to persist in having access to an income stream originating from a trust, an adjustment favouring the other spouse may be made to the asset pool. 

For instance, the spouse lacking future access to the trust income might receive a form of ‘compensation’ through an adjustment to their property settlement entitlement. 

It is crucial to emphasise that this adjustment or ‘compensation’ is not executed on a one-to-one basis concerning the financial resource’s future availability to each spouse.

The pivotal criterion for the Court’s determination of whether a trust qualifies as an asset within the relational context hinges upon the presence of a controlling interest held by one or both spouses. Typically, lawyers will be able to work out the control and ownership of the trust when reviewing the trust deed.

What happens with the Unit Trust – can it be divided?

If the Trust is classified as an asset and brought into the asset pool, then there will be a question around which spouse would take control of the trust. This would depend on what the asset pool is made up of, and whether one member of the couple has the ability to “buy out” or provide alternative assets to meet the way that the asset pool is set to be divided. 

Tax Implications

In situations where the asset pool includes intricate corporate and trust structures, there can be significant tax implications. 

To balance these consequences, it is common for a spouse relinquishing control over the trust structure to opt for a staggered receipt of their property settlement, potentially incorporating an interest component or an increased overall payment. 

This arrangement serves as a form of ‘compensation’ for the waiting period involved in the settlement process. 

In implementing such agreements, it’s important to address potential non-compliance with the inclusion of security and default provisions.

Conclusion

Dealing with Unit Trusts adds an element of complexity into the Separation process and requires advice by a family lawyer and possibly an accountant.

If you require assistance with your separation and property settlement, then get in touch with Movement Legal for a complimentary 100% confidential chat.