Family Trusts and Divorce: Asset Protection in Australia

BY WEALTH ADVISER

Introduction: The Rise of Family Trusts and the Challenge of Relationship Breakdowns

Family trusts have become a cornerstone of wealth management in Australia, valued for their flexibility, tax efficiency, and capacity to facilitate intergenerational wealth transfer. As families grow more financially sophisticated, advisers are increasingly turning to trusts to help clients preserve assets, minimise tax liabilities, and plan for the future. According to the Australian Bureau of Statistics, the use of trusts has grown steadily over the past decade, with family trusts now holding billions in assets nationwide (ABS, 2023). Yet, as the popularity of trusts has risen, so too has the complexity of family relationships. Australia’s divorce rate remains significant, with approximately one in three marriages ending in separation or divorce (ABS, 2022). The intersection of these trends presents a unique challenge: what happens to family trust assets when a relationship breaks down?

As one article notes, “Family trusts are a popular structure for holding family wealth, but their effectiveness in protecting assets during a relationship breakdown is often misunderstood” (Firstlinks, 2024). The legal, financial, and emotional stakes are high. When couples separate, questions about who controls, benefits from, or ultimately owns the assets held in trust can become contentious and confusing. “When a marriage or de facto relationship ends, the treatment of family trust assets can be a source of significant confusion and dispute” (Movement Legal, 2023). This article explores the practical realities and philosophical questions surrounding family trusts in the context of relationship breakdowns. We will examine how courts treat trusts, what asset protection strategies work (and which do not), and how advisers and families can build resilience into their wealth planning-while remaining mindful of ethical and legal boundaries.

Australian family law is designed to ensure that property settlements following a relationship breakdown are “just and equitable.” The Family Law Act 1975 grants courts broad powers to scrutinise financial arrangements, including family trusts.

How Australian Courts Treat Family Trusts During Divorce

The Legal Framework

Australian family law is designed to ensure that property settlements following a relationship breakdown are “just and equitable.” The Family Law Act 1975 grants courts broad powers to scrutinise financial arrangements, including family trusts. While trusts are legal entities distinct from the individuals who create or benefit from them, the courts are not easily deterred by legal form where the substance suggests otherwise.

As Osborn Law explains:

“The Court will look beyond the legal structure to the reality of control and benefit: if a party can ‘effectively control’ the trust, its assets may be treated as theirs” (Osborn Law, 2023).

This principle is reflected in leading cases such as Kennon v Spry (2008) 238 CLR 366, where the High Court found that assets held in a discretionary trust could be included in the marital property pool if one spouse had effective control over the trust and its distributions.

Control and Beneficiary Interest

A central question in these disputes is: who really controls the trust? The court examines factors such as:

• Who is the trustee, and do they act independently?

• Who has the power to appoint or remove trustees (the “appointor”)?

• Who are the beneficiaries, and how have trust distributions been made in practice?

• Was the trust established before or during the relationship?

As Movement Legal notes:

“The timing of the trust’s creation, its administration, and the parties’ conduct all play a role in the Court’s decision” (Movement Legal, 2023).

If a spouse is both trustee and appointor, or has routinely benefited from trust distributions, the court may find that the trust assets are, in substance, marital property. Even if a trust was established before the relationship, if it has been used to support the family’s lifestyle, its assets may be included in the property pool.

Recent Legal Developments

Recent cases demonstrate the courts’ willingness to “look through” trust structures. In Harris & Dewell[2018] FamCAFC 94, the court included trust assets in the property pool because the husband exercised effective control over the trust and used its assets for family purposes. Conversely, where a trust is genuinely independent and the spouse has no control or benefit, the assets may be excluded.

The upshot? Legal form matters, but substance matters more. As Osborn Law succinctly puts it:

“Recent cases have shown that even well-drafted trusts can be vulnerable if the Court finds evidence of de facto control” (Osborn Law, 2023).

Asset Protection Strategies: What Works, What Doesn’t, and Why

Common Strategies

Families and advisers often employ several strategies to protect trust assets in the event of a relationship breakdown. These include:

• Careful Trust Deed Drafting: Ensuring the trust deed limits the powers of beneficiaries and appointors, and appointing independent trustees.

• Use of Testamentary Trusts: Establishing trusts via a will to control asset distribution after death.

• Binding Financial Agreements (BFAs): Entering into prenuptial or postnuptial agreements that specify how assets, including trust interests, will be divided.

• Regular Trust Administration: Maintaining clear records and consistent administration to demonstrate the trust’s independence.

  
  

Limitations and Legal Realities

Despite these efforts, no structure is immune from court scrutiny. As Firstlinks cautions:

“No structure is completely safe from the reach of the Family Court, but careful planning can reduce risks” (Firstlinks, 2024).

The effectiveness of asset protection strategies depends on the facts:

• Independent Trustees: Having a truly independent trustee (not a family member or close associate) can help, but courts may still look at who influences decisions behind the scenes.

• Timing and Purpose: Trusts established long before a relationship, with clear evidence of separate administration, are more likely to be respected as independent.

• Binding Financial Agreements: BFAs can provide significant protection, but they must be properly drafted, with full disclosure and independent legal advice for both parties. Courts can set aside BFAs that are unfair or entered into under duress.

As Osborn Law observes:

“Recent cases have shown that even well-drafted trusts can be vulnerable if the Court finds evidence of de facto control” (Osborn Law, 2023).

Practical Advice

• Review Trust Structures Regularly: Circumstances change-so should your trust arrangements.

• Document Everything: Keep clear records of trust decisions and distributions.

• Seek Professional Advice: Engage experienced legal and financial advisers who understand both the technical and practical aspects of family law and trusts.

As academic commentary notes, “Asset protection is not about hiding assets, but about legitimate structuring and transparency” (Evans, 2021, UNSW Law Journal).

Philosophical and Ethical Dimensions: Fairness, Resilience, and the Adviser’s Role

The Tension Between Protection and Fairness

The use of trusts to shield assets from former partners raises important ethical and philosophical questions. On one hand, families have a legitimate interest in protecting intergenerational wealth and ensuring that assets are managed according to their wishes. On the other, the Family Court’s mandate is to ensure that property settlements are fair and equitable, taking into account the contributions and needs of both parties.

As Firstlinks points out:

“There is a tension between asset protection and the Court’s obligation to achieve a just and equitable outcome” (Firstlinks, 2024).

This tension is not merely legal-it is deeply philosophical. Should the law allow one party to walk away from a relationship with the lion’s share of assets simply because they were held in trust? Or should the court pierce the veil of legal structures to ensure fairness?

Resilience in wealth management means more than just protecting assets. It means building structures that can adapt to changing circumstances, fostering open communication within families, and preparing for both prosperity and crisis.

The Adviser’s Ethical Responsibilities

Financial advisers, lawyers, and accountants play a crucial role in helping families navigate these issues. Their responsibility is not only to provide technical advice, but also to help clients understand the limits of asset protection and the importance of ethical conduct.

Movement Legal emphasises: “Advisers must be honest with clients about the limits of asset protection and the likelihood of court intervention” (Movement Legal, 2023).

Advisers should encourage clients to plan for uncertainty, to be transparent with their partners, and to consider the long-term implications of their decisions-not just for themselves, but for their families and future generations.

Building Resilience

Resilience in wealth management means more than just protecting assets. It means building structures that can adapt to changing circumstances, fostering open communication within families, and preparing for both prosperity and crisis. As philosopher Martha Nussbaum argues, “Resilience is not the absence of vulnerability, but the capacity to recover and adapt in the face of adversity” (Nussbaum, 2011).

Conclusion: Navigating the Future – Practical Takeaways and Resilient Wealth Management

The intersection of family trusts and relationship breakdowns is fraught with complexity-but also opportunity. By understanding how courts approach trusts, recognising the limits of asset protection strategies, and embracing ethical and resilient wealth management, families and advisers can navigate these challenges with greater confidence.

Key Takeaways:

• Legal Reality Trumps Legal Form: Courts will look at who truly controls and benefits from trust assets, not just what the paperwork says.

• No Structure Is Foolproof: Even the best-drafted trust can be vulnerable if the court finds evidence of control or benefit.

• Plan Proactively and Transparently: Regularly review trust structures, document decisions, and communicate openly with all stakeholders.

• Seek Professional and Ethical Advice: Work with advisers who understand both the technical and human dimensions of wealth management.

• Build Resilience: Prepare for both good times and bad by fostering adaptability, fairness, and open communication.

As Osborn Law concludes:

“Ongoing review and adaptation of trust structures is essential in a changing legal landscape” (Osborn Law, 2023).

And as Firstlinks reminds us:

“Resilience in wealth management means planning for both prosperity and crisis” (Firstlinks, 2024).

By embracing these principles, Australian families can better safeguard their wealth-while ensuring that their legacy is both secure and just.

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References

Provided Articles

1. Firstlinks. (2024). Family trusts and relationship breakdowns.

2. Movement Legal. (2023). What happens with family trust at divorce?.

3. Osborn Law. (2023). Protecting trust assets in a relationship breakdown: Things just got more complicated. External References

4. Australian Bureau of Statistics. (2022). Marriages and Divorces, Australia.

5. Australian Bureau of Statistics. (2023). Trusts in Australia.

6. Family Law Act 1975 (Cth). Federal Register of Legislation.

7. Kennon v Spry (2008) 238 CLR 366. High Court of Australia decision.

8. Harris & Dewell[2018] FamCAFC 94. Family Court of Australia decision.

9. Evans, M. (2021). “Asset Protection and Family Law: The Limits of Trust Structures.” UNSW Law Journal, 44(2), 301-321.

10. Nussbaum, M. (2011). Creating Capabilities: The Human Development Approach. Harvard University Press.