Family Law & Family Trusts: Kennon v Spry; Spry v Kennon

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This is a case note of a family law matter involving a family trusts and property.

Kennon v Spry; Spry v Kennon [2008] HCA 56 (Spry) is a particularly noteworthy decision, in that it is an interesting example of the Court’s ability to effectively “dismantle” complex discretionary trust structures.

The Spry decision resulted in trust assets of a Discretionary Trust forming part of a property pool in family law proceedings. It also resulted in the “reversal” of several complex amendments to the Discretionary Trust which had removed the husband and wife as beneficiaries of the Trust.

Spry revolved around the marital breakdown of Dr Ian Spry, a retired barrister and Queen’s Counsel in the state of Victoria, and his wife, Mrs Helen Spry. Dr Spry and Mrs Spry were married in December 1978, and subsequently separated in October 2001. Dr Spry and Mrs Spry had four daughters from the marriage.

In 1968, Dr Spry created a Discretionary Trust, of which he was the settlor and trustee. The Trust Deed went through several variations, which somewhat reflected the state of his relationship with Mrs Spry. These included:

  • The Trust being put into written form in October 1981 to include Dr Spry, his siblings, their spouses and their issue as beneficiaries of the Trust;
  • A variation to the Trust Deed in 1983 to exclude Dr Spry as a beneficiary, and appointing Mrs Spry as trustee upon Dr Spry’s death or resignation, and their eldest daughter as trustee upon Mrs Spry’s death or resignation.
  • In 1998, Dr Spry and Mrs Spry were experiencing difficulties in their marriage. The Trust Deed was again varied, with Dr Spry and Mrs Spry excluded as beneficiaries; and
  • Dr Spry and Mrs Spry separated in October 2001. In January 2002, following their separation, the Trust was split into four different trusts, each for the benefit of the four Spry daughters, with Dr Spry and his friend, Mr Kennon, as joint trustees.

Generally, trust assets do not fall within the definition of property of a party for the purposes of family law proceedings, because a party “could not assert any legal or equitable right in respect of them”. In most cases, trust assets of a purely discretionary trust constitute a mere expectancy, and not a financial resource, given the discretionary nature of such a trust.

The issue in Spry at first instance and in the many appeals leading up the full High Court Appeal, was whether the discretionary trust assets would be considered property of the marriage.

Ultimately, the High Court held that the trust assets were in fact property of the marriage, even though the Trust had been amended to the point where Dr Spry and Mrs Spry were no longer beneficiaries, and the Trust had been separated into four separate trusts for the benefit of the Spry children. The Court overturned the various amending instruments to the Trust, effectively reversing the four trusts for the benefit of the Spry daughters.

In the High Court judgment, and the judgments of the lower courts, a number of arguments were considered by the Courts, such as whether the instruments that amended the Trust were made to defeat an anticipated order in future Court proceedings, and whether it was just and equitable to reverse the final form of the trusts, having regard to the benefits to the Spry children (who were eventually joined in the proceedings and sought to maintain the position created by Dr Spry to “divert” assets away).

One of the main considerations in Spry was the degree of control that Dr Spry had over the trust, despite not being a beneficiary or trustee by the end of the Trust’s life.

Chief Justice French stated in paragraph 70 of the judgment:

The characterization of the assets of the Trust, coupled with Dr Spry’s power to appoint them to his wife and her equitable right to due consideration, as property of the parties to the marriage is supported by particular factors. It is supported by his legal title to the assets, the origins of their greater part as property acquired during the marriage, the absence of any equitable interest in them in any other party, the absence of any obligation on his part to apply all or any of the assets to any beneficiary and the contingent character of the interests of those who might be entitled to take upon a default distribution at the distribution date.

Apart from the nature of the Trust Assets being akin to property of the marriage, the degree of control that Dr Spry had over the discretionary trust was a factor that further established the Trust Assets as property of the marriage.

Even though Dr Spry could not bestow benefits on himself through the Trust, the Court held that Dr Spry had a significant controlling influence over the Trust.

In their concluding statement, Justice Gummow and Hayne (Para 126):

Observing that the husband could not have conferred the same benefit on himself as he could on his wife denies only that he had property in the assets of the Trust, it does not deny that part of the property of the parties to the marriage, within the meaning of the act, was his power to appoint the whole property to his wife and her right to a due administration.

The High Court’s decision in Spry exemplifies the Court’s wide power in the Family Law jurisdiction to dismantle Trust structures for family law purposes. Those who are creating a Discretionary Trust should consider separating the trust from a “controlling” person. The decision assists parties going through the separation process as to considerations to take into account when arguing that trust assets form part of the property pool in a marriage.