Key Takeaways
- A well‑structured family trust may shield assets during divorce only if it’s independent, established before marriage and sometimes during marriage, and managed without a party’s control.
- The Family Court can include trust assets as property or treat beneficiary interests as financial resources under the Family Law Act 1975.
- Courts examine factors such as trust setup timing, settlor/trustee control, and history of distributions to the separating spouse.
- Proper asset protection for family law purposes requires independent trustees, transparent records, and reputable legal structuring — not superficial trust creation.
A Closer Look at Family Trusts in Divorce
Family trusts, often used for tax planning and wealth preservation, are not automatic shields in divorce & family law property settlement. Under the Family Law Act, the Court can scrutinise trusts and, depending on the circumstances, treat trust assets as divisible family property and / or beneficiary rights as a financial resource.
In high-profile cases like Kennon v Spry, the High Court confirmed that discretionary trusts can be treated as property when the testator has control over the trust and how it functions, including the distribution of the trust income and capital over the life of the trust.
Simply creating a trust isn’t enough; substance matters over structure.
What Courts Look For
When assessing whether trust assets should be included in property division, the Court focuses on three key factors:
- Timing of Trust Formation
Trusts established well before marriage and not used to fund joint lifestyle expenses are less likely to be challenged. - Control & Trustee Independence
If one spouse is trustee, appointor, or exercises effective control, the trust can be treated as their own property. - Extravagant Distributions
Regular or discretionary distributions to a partner may lead the trust’s income or capital to be deemed part of the asset pool.
Courts also consider whether beneficiaries have enforceable rights to trust assets, depending on the trust deed and past practices.
Risk of “Financial Resource” Treatment
Even if trust property isn’t directly divisible, it may still be classified as a financial resource. This means the Court may factor in expected future access to trust funds when calculating property division or spousal maintenance.
Safeguarding Your Trust: Best Practices
If you’re considering setting up or restructuring a trust to protect assets from future property settlement claims, follow these guidelines:
- Establish the Trust Early: Set it up preferably well before marriage or separation to avoid perceptions of last-minute asset shielding
- Use Independent Trustees: Appoint professionals or trusted third parties instead of spouses or future beneficiaries to reduce risks of control-based claims
- Be Transparent: Keep meticulous records of distributions, trustee decisions, and trust purposes — substance over form is essential .
- Avoid Funding Lifestyle: Do not use trust assets for personal or partner expenses, such distributions raise flags in Court evaluations
- Seek Professional Structuring: Talk to trust and family law specialists to align your trust deed with legal requirements and prepare for future enforcement scrutiny
Final Thoughts
Family trusts can offer genuine benefits in wealth management, tax planning, and asset protection. But there’s no absolute guarantee against scrutiny in divorce and family law property division. The Court will examine control, distributions, and beneficiary expectations, looking beyond the legal form.
If you’re considering a trust for inheritance, succession planning, or asset protection, expert advice is vital. The right structure, paired with careful administration, can bolster your estate planning, while poorly structured trusts are exposed in family law proceedings.
If you would like to discuss your Family Law matter with an expert, please contact me for a confidential consultation. My team and I are highly experienced in such matters.
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