Bernard & Bernard [2019] FamCA 421: Testamentary Trusts, Inheritance, and the Family Law Property Pool
Background
Bernard & Bernard was decided by the Family Court of Australia on 5 July 2019 by Henderson J. The case concerned a property settlement dispute under section 79 of the Family Law Act 1975 (Cth), and whether assets held in a testamentary trust should be treated as property available for division between the husband and wife.
The husband’s father died in 2012. By his will, he established two testamentary trusts. One trust was created for the husband, and the other was created for the husband’s sister. The trusts were structured as mirror trusts. The husband was the primary beneficiary of his trust, but his sister was the trustee. In the sister’s trust, the sister was the primary beneficiary, and the husband was the trustee.
The trusts also operated together through a partnership for a property venture. After the husband and wife separated, the wife argued that the assets in the husband’s testamentary trust should be included in the matrimonial property pool.
The Testamentary Trust Structure
A testamentary trust is a trust created by a will. It only takes effect after the death of the person making the will.
In this case, the father’s will did not leave the inheritance directly to the husband in his personal name. Instead, the inheritance was placed into a discretionary testamentary trust. This distinction became important.
The husband was a beneficiary of his trust, but he did not control it. His sister, as trustee, had discretion over distributions of income and capital. The husband could not simply require the trustee to transfer trust assets to him or use the trust property as if it were his own.
The Wife’s Argument
The wife argued that the trust assets should be treated as part of the matrimonial property pool.
Her argument was based on practical control. She said that because the husband and his sister operated mirror trusts and worked together through a partnership, the husband effectively had control over his own trust assets. On that basis, she argued that the Court should look beyond the formal trust structure and treat the trust assets as property of the husband.
The wife also argued that the sister’s trust should be considered in the overall property dispute because of the close relationship between the two trusts and the way the siblings conducted business together.
Property or Financial Resource
The key issue was whether the husband’s interest in the testamentary trust was property, or whether it was only a financial resource.
This distinction matters in family law.
Property is something the Court can generally identify, value, and divide between the parties. A financial resource is different. It may be something a party can potentially benefit from, but does not presently own or control. The Court may consider a financial resource when deciding what adjustment is just and equitable, but it is not treated in the same way as property directly available for division.
The Court’s Decision
The Court found that the assets of the husband’s testamentary trust were not property of the marriage.
The husband was a discretionary beneficiary. He had a potential benefit from the trust, but he did not have legal control over the trust assets. The trustee, being his sister, had complete discretion and owed duties to the broader class of beneficiaries, not only to the husband.
The Court accepted that the husband’s interest in the trust was relevant, but it was not property that could simply be added to the matrimonial pool. It was better characterised as a financial resource.
Control Was the Critical Question
The Court focused on control.
A trust will be more vulnerable in family law proceedings where one spouse effectively controls the trust and can cause the trust assets to be distributed for their own benefit. That was not the position in Bernard & Bernard.
The husband was not the trustee of his own trust. He could not distribute income or capital to himself. He could not apply the assets of the trust for his own personal purposes. His sister, as trustee, had the legal power and responsibility to administer the trust.
The Court also accepted that the trustee was not merely acting as the husband’s puppet. The trust was administered properly, with records, tax returns, resolutions, and formal decision making. This supported the conclusion that the trust was genuine and operated according to its terms.
Why the Trust Was Not Treated as a Sham
The wife argued, in effect, that the mirror trust structure allowed the husband and his sister to achieve indirectly what they could not do directly.
The Court rejected that argument. The structure had been created by the father’s will. It was not created by the husband during the marriage to defeat the wife’s family law claim. The assets came from the father’s estate and had not been transferred into the trust by the husband.
This was important. The trust was not a device created by the husband to remove matrimonial assets from the property pool. It was part of the father’s estate planning.
The Comparison with Kennon v Spry
The Court distinguished the case from Kennon v Spry.
In Spry, the trust assets were treated differently because the husband had a much greater level of control. He was closely connected to the creation and control of the trust, and the trust structure operated in a way that gave him effective power over the assets.
Bernard & Bernard was different. The husband did not have that level of control. He was a beneficiary, but not the person with legal power over his own trust. That distinction was central to the outcome.
The Development of the Principle
Bernard & Bernard shows that the Family Court will not automatically include testamentary trust assets in the matrimonial property pool.
The Court will examine the trust deed, the source of the assets, who controls the trust, who can benefit from the trust, how the trust has been administered, and whether the structure is genuine.
The case also confirms that inheritance protection depends on substance, not labels. A testamentary trust may provide protection, but only where the beneficiary does not have practical and legal control over the trust property.
Practical Significance
The decision is important for estate planning and family law.
Leaving an inheritance directly to a child may expose that inheritance to a future property settlement claim. A properly structured testamentary discretionary trust may reduce that risk, particularly where the child does not have sole control over the trust assets.
However, the protection is not automatic. If a beneficiary controls the trust, treats the trust assets as personal property, or uses the trustee as a formality, the Court may reach a different conclusion.
The Lasting Lesson from Bernard & Bernard
The lasting lesson from Bernard & Bernard is that structure, control, and administration matter.
A testamentary trust can help protect inherited wealth in a family law dispute, but only where the trust is properly drafted and properly managed. The Court will look at the reality of control. If the beneficiary does not own or control the trust assets, those assets may be treated as a financial resource rather than property available for division.