+ Discretionary Trusts and Kennon and Spry

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In Kennon v Spry [2008] HCA 56, a family law case, the majority of the High Court has reconsidered some of the accepted features of the discretionary trust.

The facts were in 1968, Dr Spry (the husband) created a discretionary trust of which he was trustee and over which he retained a power of variation.

By deed in 1998, the wife and the husband excluded themselves as potential beneficiaries. In 2002, the husband/trustee directed that all the capital and income of the trust be transferred equally to separate trusts for the benefit of each child of the marriage.

The wife subsequently made an application for property settlement pursuant to the Family Law Act (FLA) and the Court used s106B of the FLA to set aside the beneficiary exclusions, as well as the dispositions to the children's trusts.

Two strands of reasoning are of interest. Firstly, French CJ linked (i) the trustee's legal title with (ii) his power to distribute to the wife and (iii) her right to be considered, in order to conclude that assets of the trust were the husband's assets.

Furthermore, the Court noted that (i) the wife's equitable right of due administration of the trust, (ii) the husband¿s fiduciary duty consider when and how the power of distribution should be exercised and (iii) the fact that the power could have been exercised by distributing the whole of the trust assets to the wife, together meant that the trust fund was property of the wife as well.

The High Court therefore concluded that the trust property was "property of the parties to the marriage or either of them," giving the Court jurisdiction to make a s79 property order. The Court dealt with the whole of the trust property in its orders by finding that the value of the due administration right of the wife was equal to the value of the whole of trust fund . The Court orders in favour of the wife had the effect of the wife receiving a capital payment from the trustee for her interest in the trust.

Can it still be confidently said that an object of a discretionary trust has no interest in the assets of the trust prior to the trustee's appointment in the object's favour? What about CGT event E4 which is triggered by a trustee's payment to a beneficiary in respect of the beneficiary's interest in the trust? Should the wife in Kennon-v-Spry therefore be liable for an assessable taxable gain? Of course, the decision does not venture into this territory!

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