Family Trust and Divorce Australia: What the Law Says

Divorce proceedings in Australia become legally complex where family trusts are concerned. These vehicles are widely used for tax planning, asset protection, and intergenerational wealth transfer. In family law, however, their protective function is limited. The Family Court examines not only legal ownership but the degree of control and benefit one or both parties exercise over the trust. This article analyses the statutory framework, leading High Court and Federal Circuit and Family Court (FCFCOA) decisions, and the consequences for property division, spousal maintenance, taxation, and estate planning.

Statutory Framework: How the Family Law Act Applies to Trusts?

Under the Family Law Act 1975 (Cth), the Court has wide powers to deal with assets held in family trusts during divorce:

• Section 79 – allows the Court to alter property interests to achieve a just and equitable outcome, including assets inside a trust.
• Section 90AE – empowers the Court to make orders binding third parties, such as trustees, to transfer or distribute trust property.
• Section 106B – enables the Court to set aside transactions designed to defeat a spouse’s claim (e.g., moving assets into a trust to hide them).

In practice: if a spouse controls or benefits from a trust, the Court may treat those assets as property of the marriage; if not, the trust interest may still be treated as a financial resource when assessing future needs.

Judicial Approach: Landmark Authorities

Australian case law defines how family trusts are treated in divorce:

• Kennon v Spry (2008) HCA – The High Court ruled that trust assets could be included in the marital pool where a spouse exercised effective control, despite the trust being discretionary.
• Rigby & Kingston (No 4) [2021] FamCA – A testamentary trust created by the wife’s father was excluded from the property pool because she lacked control; her interest was deemed a mere expectancy.
• Woodcock v Woodcock (No 2) [2022] FamCA – Trusts under the husband’s effective control were included in the divisible pool.

The principle is straightforward: control equals inclusion; lack of control equals a financial resource.

Inclusion of Trust Assets in the Property Pool

When considering property division, the Court undertakes the four-step process established in Hickey v Hickey (2003) FLC 93-143:

1. Identify the existing legal and equitable interests of the parties.
2. Assess contributions (financial, non-financial, homemaking).
3. Evaluate future needs (s.75(2) FLA factors).
4. Consider whether the outcome is just and equitable.

Where one spouse is trustee, appointor, or exercises de facto control, trust assets are regularly treated as part of step one – the property pool. Conversely, if a party is only a discretionary beneficiary without control, the trust is more commonly dealt with at step three, as a financial resource.

Implications for Inheritance and Estate Planning Trusts

Family trusts often hold intergenerational wealth or testamentary bequests. Australian courts generally respect the settlor’s intent, particularly where control is vested in third parties. In Rigby & Kingston, explicit wording in the father’s will excluding spouses as beneficiaries assisted the Court in excluding the trust from the marital pool. However, if a spouse has historically accessed income or capital for family purposes, the Court may consider that pattern of benefit as evidence of matrimonial property.

Maintenance, Child Support, and Trust Income

Family trusts cannot shield parties from statutory duties of support. Spousal maintenance assessments under s.72 FLA and child support calculations include income or financial resources derived from trusts. Even undistributed trust income may be attributed to a party if they control distributions. Attempting to divert funds into a trust to avoid obligations risks adverse orders and enforcement.

Taxation Consequences in Trust Settlements

Dividing trust assets can trigger capital gains tax (CGT) and stamp duty. Relief provisions apply:

• Subdivision 126-A of the Income Tax Assessment Act 1997 grants CGT rollover relief for asset transfers under Family Court orders or binding agreements.
• State legislation provides stamp duty exemptions for such transfers.

The High Court in Sandini Pty Ltd v FCT (2018) confirmed that strict compliance with Court orders is necessary to obtain relief. Deviation from the order can invalidate the rollover, creating significant tax liabilities.

Litigation Challenges

Three recurring challenges arise:

• Valuation: discretionary entitlements lack ascertainable market value, making actuarial evidence necessary but uncertain.
• Third-party interests: other beneficiaries may need to be joined, complicating proceedings.
• Disclosure: failure to provide trust deeds and accounts breaches the duty of full and frank disclosure and may attract adverse inferences or costs orders.

These are a common legal problem in family trusts, particularly when trust documents are incomplete, outdated, or deliberately withheld in the context of family disputes.

Practical Considerations for Clients

• High-net-worth individuals should consider Binding Financial Agreements to clarify treatment of trust assets.
• Independent trustees or corporate trustees reduce arguments of unilateral control.
• Blended families should structure trusts to protect children’s inheritance while minimising exposure to family law claims.

High-net-worth individuals should consider Binding Financial Agreements to clarify treatment of trust assets. Independent trustees or corporate trustees reduce arguments of unilateral control. Blended families should structure trusts to protect children’s inheritance while minimising exposure to family law claims. Professional legal and accounting advice is essential in both structuring and litigating family trust issues. Importantly, similar issues arise in cases of bankruptcy, where courts also scrutinise trust control and transparency to determine whether assets can be accessed.

FAQs: Family Trusts and Divorce in Australia

When family trusts are involved in separation, clients often raise recurring questions about whether assets are protected, how the Court classifies trust property, and what tax or compliance risks may arise. The following FAQs address the most common issues, providing concise answers grounded in Australian family law.

Can a family trust protect assets from divorce?

Only if neither party controls the trust. Where one spouse acts as trustee or appointor, assets are likely included in the property pool.

Are family trust assets marital property?

Yes, if a spouse has control. Otherwise, they are treated as financial resources under s.75(2) FLA.

What are the tax implications?

Transfers ordered by the Court generally qualify for CGT rollover and stamp duty exemption, provided compliance is strict.

Can trust terms be challenged?

Yes. The Court may set aside transactions under s.106B FLA or bind trustees under s.90AE FLA where necessary to achieve justice.

How are discretionary trusts valued?

Valuation is difficult. Courts focus on control and history of distributions, often treating the interest as a resource rather than as divisible property.

Conclusion

Family trusts remain a double-edged instrument in Australian family law. While valuable for estate planning, they provide limited protection in divorce. The decisive factor is control. Courts, guided by the Family Law Act 1975 and cases like Kennon v Spry, will pierce the trust structure where necessary to ensure a just and equitable settlement. Early legal structuring and independent advice are indispensable for those seeking to safeguard trust assets in the family law context. If you are unsure of how to find a good family lawyer, Legal Finda can connect you with trusted professionals who specialise in family trusts and divorce matters.