Are Multi-Generational Family Trusts Still Property in Divorce?

Introduction

What legal test decides if an inherited family trust counts as property?

The High Court in Kennon v Spry [2008] HCA 56 established that trust assets become property when a party holds a sufficient bundle of rights. That means the right to proper administration of the trust plus the power to distribute assets to themselves. This test applies the same way whether the trust was created last month or passed down through three generations.

For inherited family trusts, the court looks at three layers:

• Legal power: Can the party remove and appoint trustees, or amend the trust deed?
• Factual reality: Does the party direct the trust's activities, mix trust and personal funds, or use trust assets as security for personal loans?
• Right to benefit: Does the party have a lawful right to receive distributions?

The critical point: formal structures can become irrelevant. A party who lacks legal control but exercises factual control, particularly through compliant family members, will be treated as the effective owner.

"...the question whether the property of the trust is, in reality, the property of the parties or one of them... is a matter dependent upon the facts and circumstances of each particular case including the terms of the relevant trust deed."

This makes clear that no trust is immune from scrutiny, regardless of its age or origin. The inquiry is always factual: does the party exercise enough control and hold a sufficient right to benefit?

The Romano decision shows a common pattern: appointing family members to formal positions does not defeat a property finding if those family members act at your direction.

Can a multi-generational trust's purpose shield it from the property pool?

In Caldwell & Caldwell [2025] FedCFamC1F 506, the court found that a four-generation family trust was NOT property. The key factors were the trust's genuine multi-generational purpose, the husband's fiduciary duties to the wider family, and the availability of enough marital assets to achieve a just settlement.

The Caldwell decision introduces what is called the proper purpose rule as a factor in trust classification. Where a trust was set up for the exclusive benefit of descendants across multiple generations, the court recognised that using trustee powers to benefit a divorcing spouse would breach fiduciary duties owed to the broader family. As Carew J observed, the trust assets reflect the efforts of a long line of direct descendants spanning over a century. That is a fundamentally different situation from a trust the parties set up themselves.

"If the husband exercised his powers for the purpose of benefiting the wife whether directly or indirectly... he would be in breach of the proper purpose rule."

The contrast with Ogden & Ogden [2010] FMCAfam 865 shows the decisive factors. In Ogden, a grandmother's trust was divided into five portions. The wife's portion was classified as property because she held Class Appointor powers that gave her effective control. She could personally appoint a trustee to transfer her portion to herself. There was no formal restriction on the trust's purpose.

Decisive factor: Caldwell succeeded where Ogden failed because of three cumulative protections. First, the trust served a genuine multi-generational purpose written into the deed. Second, the husband owed fiduciary duties to a wider family group that would be breached by self-serving distributions. Third, there were enough marital assets to achieve a fair settlement without touching the trust. In Ogden, the wife's personal appointor powers and the lack of formal restrictions meant the trust was effectively under her control.

How do courts weight inherited trust wealth in property settlement?

Even where inherited trust assets count as property, courts treat the inheritance as a financial contribution by the inheriting spouse under s 79. This does not exclude the assets from division. But it can significantly affect the ratio. Courts may use a two-pool approach, dividing marital assets equally while applying a different ratio to the inherited portion.

The principle from Bonnici & Bonnici [1991] FamCA 86 is useful here: an inheritance does not fall into a protected category. But where there are enough other funds, a recent inheritance may be treated as belonging to the inheriting party. For multi-generational wealth, the question becomes how much weight the court gives the blood ties connection.

"...it is apparent that [the wife's] interest arises purely because of the wife's blood ties to her grandmother and that other than that, neither of the parties, and in particular the husband, has made any contribution whatsoever to that asset."

The two-pool approach in Ogden offers a practical middle ground. Inherited trust assets are included in the pool, which avoids the all-or-nothing classification battle. But the non-inheriting spouse's share is reduced to reflect the absence of any contribution to that wealth. For multi-generational trusts where the wealth spans decades of family accumulation, the non-inheriting spouse's share may be minimal.

Can restructuring after separation protect inherited trust assets?

Resigning as trustee or appointor after separation does not automatically shield inherited trust assets from the court's reach. Under Section 106B of the Family Law Act 1975, the court can set aside any document, including a deed of removal or resignation, if it was made to defeat a property settlement claim.

The puppet trustee doctrine is particularly relevant here. When a party resigns from formal positions but the replacement does nothing without that party's direction, the court treats the trust as that party's property regardless of the formal structure.

"Pivotal to 'alter ego' and 'mere puppet' cases is evidence that the entity, for example, through a trustee, director or shareholder, acted at the spouse party's bidding... it is not open to a party to assert on the one hand that the assets acquired in a family trust are not his and at the same time deal with them as if they are."

The E Pty Ltd & Zunino decision is a direct warning. Surface-level restructuring after separation invites the court's suspicion. The more elaborate the steps taken to distance yourself from an inherited trust, the more suspicious the court becomes. This is especially true when you continue to enjoy trust-funded benefits.

Summary

1. The control test applies regardless of the trust's age. Romano & June shows that a trust set up decades before the marriage can still be classified as property if the court finds factual control through compliant family members.

2. Genuine multi-generational purpose CAN protect. Caldwell & Caldwell shows that a four-generation family trust may be excluded from the property pool where the trust has a genuine multi-generational purpose, the party owes fiduciary duties to a wider family group, and there are enough other assets.

3. The level of personal control is decisive. The contrast between Caldwell (excluded, formal purpose restriction) and Ogden & Ogden (included, personal appointor powers) comes down to whether you can direct distributions to yourself.

4. Inherited wealth still affects the ratio. Ogden & Ogden shows that even when inherited trust assets are included in the pool, the non-inheriting spouse may receive as little as 10% of that portion where the wealth came from blood ties alone.

5. Post-separation restructuring backfires. E Pty Ltd & Zunino confirms that resigning after separation while continuing to enjoy trust benefits is treated as evidence of alter ego control.