Binding Financial Agreements are powerful legal tools for protecting assets in the event of a relationship breakdown, but their interaction with trust structures can be complex. Understanding what can and cannot be protected when trusts are involved is essential for anyone seeking to safeguard their financial interests through a BFA.
How BFAs Interact With Trust Assets
When one or both parties to a BFA hold assets through a trust structure, the agreement cannot directly bind the trust itself. This is because a trust is a separate legal entity, and the BFA is an agreement between the two parties to the relationship, not involving third parties like trustees or beneficiaries outside the relationship. What a BFA can do, however, is set out how the parties agree to treat their interests in the trust, including their roles as trustees, appointors, or beneficiaries.
The key distinction is between legal ownership and beneficial interest. If you are a trustee of a family trust, you hold the legal title to the trust assets, but you do not own them personally. A BFA can address your position as trustee and how your role in the trust should be treated if the relationship ends, but it cannot transfer or divide the trust assets themselves. Similarly, if you are a beneficiary of a discretionary trust, your interest is contingent on the trustee’s decision to distribute to you, which means there is no guaranteed entitlement that can be easily quantified or protected.
For parties who are appointors of a trust, the BFA can be particularly important. The appointor holds significant control over the trust because they have the power to remove and appoint trustees. A well-drafted BFA can specify that this control remains with one party or outline how it should be dealt with upon separation. Without such provisions, the Family Court could potentially make orders affecting the appointor’s role, which could have far-reaching consequences for the trust’s management and the wealth it holds.
Discretionary Trusts and Contingent Interests
Discretionary trusts present unique challenges when it comes to BFAs. Because beneficiaries of a discretionary trust have no automatic right to receive distributions, their interest is considered contingent rather than vested. This means that at the time of entering into a BFA, there may be no actual asset to protect or divide. However, the agreement can still address how any future distributions from the trust should be treated, whether they should be considered separate property, or how income or capital distributions made during the relationship should be characterised.
It is also worth considering that even if you are not currently receiving distributions from a family trust, the potential to receive them in the future can still be relevant in property settlement disputes. A BFA can help clarify that such potential interests are excluded from the relationship property pool, provided both parties understand the arrangement and receive independent legal advice. This is particularly important in families with intergenerational wealth, where trusts are used to manage and protect assets across multiple generations.
Unit Trusts and Fixed Interests
Unit trusts operate differently from discretionary trusts because unit holders have a fixed entitlement to the trust’s income and capital based on the number of units they hold. These units are considered property and can be more easily valued and addressed in a BFA. If one party holds units in a unit trust, the BFA can specify that these units remain their separate property or outline how they should be divided or valued in the event of separation.
Because unit trust interests are more concrete than discretionary trust interests, they are often easier to protect through a BFA. The agreement can treat the units like any other asset, such as shares in a company, and clearly set out their treatment. This makes unit trusts a more straightforward proposition when drafting a BFA, though it is still essential that the agreement is properly drafted and that both parties receive independent legal advice to ensure enforceability.
What Can Be Protected in a BFA Involving Trusts
While trust assets themselves cannot be directly divided or protected by a BFA, there are several important elements that can be addressed. Your role as a trustee, appointor, or beneficiary can be clearly documented, and the agreement can specify how these roles should be treated if the relationship ends. For example, the BFA might state that one party will retain their position as appointor of a family trust, or that the other party waives any claim to distributions received from a trust during the relationship.
Income or distributions received from a trust during the relationship can also be addressed. The BFA can specify whether such income is to be treated as joint property or kept separate, which can be particularly useful if one party is the primary beneficiary of a family trust established by their parents or other relatives. By making this clear from the outset, both parties can avoid disputes later about whether trust distributions should form part of the divisible property pool.
Another important aspect is protecting future interests in trusts. If you expect to inherit a role in a family trust or anticipate receiving distributions in the future, a BFA can document that these interests are to remain separate from the relationship property. This is especially relevant in families with significant wealth held in trust structures, where clarity around ownership and control is essential to avoid lengthy and costly legal disputes.
Contributions to Trusts During the Relationship
If one or both parties make contributions to a trust during the relationship, whether through loans, guarantees, or other means, these contributions can be documented and addressed in a BFA. For instance, if one party provides financial support to a family trust that benefits their extended family, the BFA can specify that this contribution should not be considered a joint asset or that the other party has no claim over any benefits arising from it. This can prevent disputes about whether one party should be compensated for indirect contributions to a trust that primarily benefits the other party’s family.
What Cannot Be Protected Through a BFA
It is important to recognise the limitations of BFAs when it comes to trust structures. A BFA cannot bind third parties, which means it cannot compel a trustee to act in a certain way or force a trust to distribute assets to one party over another. If the trustee is not a party to the agreement, they are not bound by its terms, and any provisions purporting to direct the trustee’s actions may be unenforceable.
Additionally, a BFA cannot override the terms of the trust deed itself. If the trust deed specifies certain conditions for distributions or limits who can be appointed as trustee, the BFA cannot change those rules. The agreement can only address how the parties to the relationship will treat their interests in the trust, not how the trust itself operates. This means that if the trust deed gives broad discretion to the trustee, a BFA cannot remove that discretion or guarantee a particular outcome for one party.
Another limitation is that BFAs cannot prevent the Family Court from examining the financial circumstances of the parties, including their interests in trusts, when considering whether to set aside a binding financial agreement. If the Court finds that one party failed to disclose their full interest in a trust, or that the agreement is manifestly unjust because it does not adequately provide for one party, the BFA may be set aside. Full and frank disclosure of all trust interests is therefore essential when negotiating and drafting a BFA.
Trust Assets Subject to Third-Party Claims
If trust assets are subject to claims by third parties, such as creditors or other beneficiaries, a BFA cannot protect those assets from such claims. The agreement only governs the rights and obligations of the two parties to the relationship, not the rights of external parties. This means that even if a BFA specifies that certain trust assets are to be treated as separate property, those assets could still be subject to claims by creditors of the trust or disputes with other beneficiaries.
Important Considerations When Drafting a BFA Involving Trusts
When a BFA involves trust structures, it is critical that both parties obtain independent legal advice from lawyers who understand both family law and trust law. The interplay between these two areas of law can be complex, and a lawyer with experience in both fields can help ensure that the agreement is enforceable and achieves the desired outcome. Each party should also receive advice on the tax implications of any proposed arrangements, as the treatment of trust income and distributions can have significant tax consequences.
Full disclosure is another essential consideration. Both parties must disclose all their interests in trusts, including their roles as trustee, appointor, or beneficiary, as well as any distributions they have received or expect to receive. Failure to disclose such interests can result in the BFA being set aside by the Court, which would defeat the purpose of having the agreement in the first place. It is also important to provide copies of trust deeds and financial statements for any trusts in which either party has an interest, so that both parties and their lawyers can properly understand the nature and extent of those interests.
The timing of the BFA is also relevant. If the agreement is entered into before the relationship begins, it may be easier to argue that certain trust interests should remain separate property. However, if the BFA is signed during the relationship or just before separation, the Court may scrutinise it more closely to ensure that it is fair and that both parties understood what they were agreeing to. In either case, both parties should have sufficient time to consider the agreement and seek legal advice before signing.
Regular Review and Updates
Trust structures and family circumstances can change over time, so it is important to review and update a BFA periodically to ensure it remains relevant and effective. For example, if a new trust is established during the relationship, or if one party’s role in an existing trust changes, the BFA should be amended to reflect these changes. Regular reviews can help prevent disputes and ensure that the agreement continues to protect both parties’ interests as intended.
Get Help With Your BFA and Trust Structures
Protecting your interests in trust structures through a Binding Financial Agreement requires careful planning and expert legal advice. As BFA lawyers in Australia, we can help you understand how BFAs interact with trusts and draft an agreement that protects your financial interests. Contact our team today by calling 1300 529 888.