Are Family Trust Assets Protected in Divorce?

Family trusts are commonly used for tax planning, business structuring, succession planning and asset protection. However, when a relationship breaks down, assets held in a family trust may still be relevant to a family law property settlement.

A trust does not automatically place assets beyond the reach of the Federal Circuit and Family Court of Australia (‘the Court’). Depending on the circumstances, trust assets may be treated as property available for division or as a financial resource available to one of the parties.

What is a family trust?

A family trust, often called a discretionary trust, is a structure in which a trustee holds and manages assets for beneficiaries. It may hold property, shares, business interests, investments or other family wealth.

In a family law matter, the Court will look beyond whose name appears on a title and consider:

  • who controls the trust;
  • who benefits from it;
  • how it was used during the relationship;
  • where the assets came from; and
  • whether the trust supported the family’s lifestyle.

Control is often the key issue

The Court will examine who has practical control over the trust, including who:

  • acts as trustee, appointor or director of a corporate trustee;
  • can appoint or remove the trustee;
  • makes decisions about distributions; and
  • has historically received or used the trust’s income and assets.

A trust effectively controlled by one spouse may be treated differently from a trust genuinely controlled by independent family members or third parties.

What if the trust was established before the relationship?

The timing of the trust is relevant, but it is not decisive. A trust established before the relationship may still be considered where its income or assets supported the family, increased in value during the relationship or formed part of the couple’s broader financial arrangements.

Trusts established or restructured around the time of separation may also attract scrutiny, particularly if there are concerns that assets were moved to reduce the property available for settlement.

What if the trust owns a business?

Where a trust owns or operates a family business, the property settlement may require consideration of:

  • the value and control of the business;
  • income and distributions received by the parties;
  • loans and transactions between related entities;
  • tax consequences; and
  • whether the business can continue operating after settlement.

An independent business valuation and coordinated legal, accounting and tax advice may be required.

Financial disclosure

Each party to a family law property matter must provide full and frank financial disclosure. Where a trust is involved, relevant documents may include the trust deed, financial statements, tax returns, distribution records, trustee resolutions, bank statements, company records and valuations.

Failing to disclose trust interests or documents can increase costs, cause delays and damage a party’s credibility.

Can trust assets be moved before separation?

Care should be taken before transferring assets, changing trustees, altering control or restructuring a trust.

Transactions intended to reduce the apparent value of the property pool may be challenged and can lead to greater scrutiny. Legal advice should be obtained before making changes, even where there is a genuine commercial, tax or succession-planning reason.

The key takeaway

Family trusts can be valuable financial and business structures, but they do not automatically protect assets following divorce or separation. The Court will look at the practical reality of the arrangement, including control, access, benefit, contributions and the parties’ overall financial circumstances.

In a recent full Court case of Caldwell & Caldwell the importance of effective control was confirmed. The Court essentially found that if a party can take control and benefit themselves, the trust will likely to be considered property for the purposes of an overall settlement.

Early advice is particularly important where a separation involves trusts, companies, businesses, SMSFs or other complex asset structures.

Need advice about a family trust in a property settlement?

Our family law team can help you understand how trusts, businesses and complex assets may be treated following separation. Please click here to contact us or call 9525 8688.