Family Trusts and Family Law: What You Need to Know

Family trusts—often referred to as discretionary trusts—are commonly used in Australia to manage family wealth, protect assets, and assist with tax planning. However, when a marriage or de facto relationship breaks down, these trusts can become a central issue in property settlement negotiations.

This article explains how family trusts are treated under Australian family law, why control of a trust matters, and what clients should be aware of when a trust forms part of their financial picture.

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How Family Trusts Are Treated in Family Law

Under the Family Law Act 1975 (Cth), assets held in a discretionary trust may be considered either:

• Property of the parties, or
• A financial resource

The distinction is important, as it affects whether trust assets can be included in the property pool that is divided between separating partners.

Property vs Financial Resource

Property includes anything a party is legally or beneficially entitled to. However, a beneficiary of a discretionary trust does not automatically “own” trust assets—they only have the possibility of receiving distributions, not a guaranteed right.

For this reason, trust interests will only be treated as “property” if a party is found to have effective control over the trust.

If they do not have control, their interest may instead be treated as a financial resource, meaning the court can consider it when assessing future needs and adjusting the property settlement accordingly.

The Importance of Control

The level of control a party has over a trust is often the deciding factor in family law cases. A person may be considered to have control if they:

• Are the trustee,
• Are the appointor (i.e., hold the power to appoint or remove the trustee),
• Can influence how trust distributions are made, or
• Effectively control the trust through family or business structures.

In the leading High Court case Kennon v Spry, the court held that trust assets could be included in the property pool because the husband, through various roles, had effective control of the trust—even though it was a discretionary trust. This principle continues to guide courts in determining whether trust assets should be available for division.

Asset Protection and Family Trusts

While discretionary trusts can offer some asset protection benefits, they are not immune from family law scrutiny.

The court has wide powers to:

• Include trust assets in the property pool if a party controls the trust,
• Treat the trust as a financial resource,
• Make orders that bind third parties (including trustees), and
• Set aside transactions or amendments to a trust if they appear designed to defeat a potential family law claim.

This means that even carefully structured trusts may be examined in detail during a separation—particularly if changes were made around the time of relationship difficulties.

Key Takeaways for Clients

• Having an interest in a family trust does not automatically mean the assets will be shared in a separation.
• Control is the crucial factor: the more influence a party has over the trust, the more likely its assets will be included in a property settlement.
• Trusts may still be relevant as a financial resource, even if they are not classified as property.
• Courts have broad powers to look beyond the trust structure and examine how it operates in practice.
• Proper structuring, clear trust deeds, and early legal advice can reduce risk—but cannot guarantee that trust assets will be exempt from family law proceedings.

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Conclusion

Family trusts are valuable tools for wealth management, but they can become complex in the context of a separation. Every situation is different, and the treatment of a trust will depend on its terms, how it is operated, and who truly controls it.

If you or your family are involved with a discretionary trust and are navigating a separation—or planning ahead—it is important to seek legal advice early. Our Family Law Team can help you understand your position and ensure your interests are protected. Reach out to our experienced Sutherland Shire Solicitors today on 8525 2700 or click on the Book Now button below. Our experienced Family Law Solicitors include Riccarda Stock, Nicole Quirk, Shweta Kumar, and Nikita Ward.

Article by Riccarda Stock
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