Does a Family Trust Protect Assets in a Divorce in Australia?

Introduction

What counts as property when a trust is involved?

Section 4 of the Family Law Act 1975 defines property broadly. It covers anything a party is entitled to, whether they hold it now or expect to receive it later. Traditional trust law treats a beneficiary's interest in a discretionary trust as a mere expectancy. Family law takes a much wider view.

The landmark Kennon v Spry [2008] HCA 56 case changed the game. For property settlements under section 79, the court looks at the full combination of rights a party holds over trust resources. Legal title alone does not decide the question. The court examines the total concentration of power a spouse has over the trust.

Courts apply several key tests to determine if trust assets should be treated as property:

1. The Control and Benefit Test. The court checks whether you can distribute the trust's income and capital to yourself. Control alone is not enough. You also need a lawful right to benefit from the assets. Harris & Dewell [2018] FamCAFC 94

2. The Alter Ego Test. This asks whether the trust is really just your personal vehicle. If the trustee does whatever you say, the court treats the trust assets as yours. Ashton v Ashton [1986] FamCA 20

3. The Origin of Assets. The court looks at whether the trust assets came from the joint efforts of both spouses during the marriage. Kennon v Spry [2008] HCA 56

4. Fixed and Irrevocable Entitlements. In rare cases where a trust has no appointor or guardian, a beneficiary may have a locked-in right to a share of capital when the trust ends. That counts as property. AC and Ors & VC and Anor [2013] FamCAFC 60

"Dr Spry was the sole trustee of a discretionary family trust and the person with the only interest in those assets as well as the holder of a power, inter alia, to appoint them entirely to his wife. ... For so long as Dr Spry retained the legal title to the Trust fund coupled with the power to appoint the whole of the fund to his wife and her equitable right, it remained, in my opinion, property of the parties to the marriage for the purposes of the power conferred on the Family Court by s 79."

Core Point: Trust assets count as property when your control over the trust lets you treat it as your own. Without that control or a right to benefit, the trust interest drops to a financial resource.

Why does it matter whether trust assets are property or a financial resource?

Whether trust assets count as property or a financial resource is the biggest fight in high-net-worth Australian divorces. Here is what turns on that classification:

• Inclusion in the divisible pool. If trust assets are property, their full market value goes into the pool to be split. If they are a financial resource, the court adjusts the split percentage instead, usually giving the other spouse a smaller share.

• Direct court orders. When assets are property, the court can order the trustee to wind up the trust early or pay a specific sum to the other spouse.

• Valuation requirements. Property needs an exact expert valuation. A financial resource only needs evidence of the likely benefit and a reasonable expectation of future distributions.

Key Point: When a trust counts as property, the court can treat the assets like a personal bank account. A financial resource classification usually means a much smaller payout for the spouse who does not control the trust.

How do courts assess trust assets in different scenarios?

How a family trust is treated in your divorce depends on the trust's structure and how it actually operates. These three scenarios show how different facts lead to different outcomes.

Scenario 1: You are the sole appointor and trustee

Common Misconception: If you are just a trustee and do not own the assets personally, they are safe from your ex.

Legal Truth: If you have the power to appoint assets to yourself or your spouse, the court treats you as the owner in practice. The trust assets are almost certainly property of the marriage.

"...the husband's power of appointment, and all the attributes it carries with it, amounts to de facto ownership of the property of the trust. ... this court is not bound by formalities designed to obtain advantages and protection for the husband who stands in reality in the position of the owner."

• De facto control matters just as much as legal control. If you make all the decisions regardless of what the deed says, the court treats you as the owner.
• If you want to protect a trust, make sure independent trustees or co-directors actually exercise independent judgment. Keep minutes of their meetings.
• Do not use a trust as your personal ATM for daily expenses if you plan to argue it is an independent entity.

Scenario 2: Shared control or third-party trust

Common Misconception: If you are a beneficiary of your parents' family trust, your ex is entitled to half of your share.

Legal Truth: If the trust is genuinely controlled by a third party and you cannot demand a distribution, the trust assets are usually a financial resource or a mere expectancy, not property.

"Control is not sufficient of itself. What is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust."

Key: The decisive factor is the lawful right to benefit. In Harris & Dewell, the husband managed the trust but held no units and could not legally claim the assets. In Ogden & Ogden, the wife could appoint a separate trustee for her class portion, giving her effective power to direct those assets to herself.

• If you are a beneficiary of a family trust, make sure the appointor is an independent person or a group where you do not hold majority control.
• Document loans from family trusts with formal agreements, interest rates, and repayment schedules. This proves they are genuine debts, not gifts.
• Avoid being the sole director and sole shareholder of a corporate trustee if you are also the primary beneficiary.

Scenario 3: Trust used to defeat claims (s106B)

Common Misconception: You can move assets into a trust or remove yourself as a beneficiary once you separate to keep the money away from your ex.

Legal Truth: Under section 106B of the Family Law Act 1975, the court can set aside any transaction designed to defeat a property claim.

"...the dispositions, irrespective of an intention, are likely to defeat an anticipated order."

• Any changes to trust structures should be for genuine business or succession planning reasons, made well before any marital problems arise.
• Disclose all trust interests early. Hiding them often backfires. The court may assume you have more wealth than you admit and add it back into the pool.
• Never remove a spouse as a beneficiary or appointor around the time of separation. This is a red flag for section 106B.

Summary

1. De facto control equals legal control. Even if the trust deed gives control to a third party, the court finds out who actually calls the shots. Romano & June

2. Control alone is not enough. You also need a lawful right to benefit from the assets. Harris & Dewell

3. A trust without an appointor may create fixed entitlements. When nobody can exclude a beneficiary, the interest becomes property. AC & VC

4. Post-separation trust manipulation gets reversed. Any trust restructure aimed at defeating a property claim risks being set aside under section 106B. Atkins & Hunt