Does a Family Trust Fund Protect Assets in a Divorce?

Family trusts are often established for various reasons, including asset protection, tax and estate planning. One common question that arises is whether a family trust fund can protect assets in the event of a divorce.

Understanding Family Trusts

A family trust, also known as a discretionary trust, is a legal arrangement where a trustee holds and manages assets for the benefit of the beneficiaries. The trustee has the discretion to decide how the trust income and capital are distributed among the beneficiaries. The person who establishes the trust is known as the settlor, and the person who has the power to appoint or remove trustees is referred to as the appointor.

Family Trusts and Divorce

In the context of a divorce, the Family Court of Australia has broad powers to alter property interests between parties to a marriage or de facto relationship. The Court’s primary objective is to achieve a just and equitable division of property. When considering the assets of the parties, the Court can look beyond the legal ownership of assets and consider the reality of the parties’ financial circumstances.

Factors Considered by the Court

1. Control and Beneficial Interest: The Court will examine the level of control a party has over the trust and whether they have a beneficial interest in the trust assets. If a party has significant control over the trust (e.g., as a trustee or appointor) and is a beneficiary, the Court may treat the trust assets as part of the matrimonial property pool.
2. Intention and Purpose: The Court will consider the intention behind the establishment of the trust and its purpose. If the trust was established primarily for asset protection in anticipation of a divorce, the Court may scrutinise it more closely.
3. Contributions: The Court will assess the contributions made by each party to the trust assets, including financial and non-financial contributions. This includes contributions made before, during, and after the relationship.
4. Financial Resources: The Court will consider the trust as a financial resource available to the parties. This means that even if the trust assets are not directly included in the property pool, the income and benefits derived from the trust may be taken into account when determining the financial resources of each party.

Several cases have demonstrated the Court’s approach to family trusts in divorce proceedings. In the case of Kennon v Spry (2008) 238 CLR 366, the High Court of Australia held that the assets of a family trust could be considered part of the matrimonial property pool if one party had effective control over the trust and could benefit from its assets.

Strategies for Protecting Assets

While family trusts can offer some level of asset protection, they are not foolproof in the context of a divorce. However, there are strategies that can be employed to enhance the protection of trust assets:

1. Independent Trustee: Appointing an independent trustee who is not a party to the marriage can reduce the perception of control and influence over the trust.
2. Clear Documentation: Clearly documenting the purpose of the trust and the intentions behind its establishment can help demonstrate that the trust was not created solely for asset protection in anticipation of a divorce.
3. Regular Reviews: Regularly reviewing and updating the trust deed and ensuring compliance with trust formalities can strengthen the trust’s integrity.
4. Prenuptial and Binding Financial Agreements: Entering into prenuptial or binding financial agreements can provide additional protection by clearly outlining the division of assets in the event of a divorce.

While a family trust can offer some degree of asset protection, it is not an absolute safeguard in the event of a divorce. The Family Court has the power to look beyond the legal structure of the trust and consider the reality of the parties’ financial circumstances. Therefore, it is essential to seek legal advice and implement strategies to enhance the protection of trust assets. Proper planning and documentation can help mitigate the risks and ensure that the trust serves its intended purpose.

If you would like to discuss your separation and how your assets are split, please speak with our team of Sutherland Shire Lawyers at Solari and Stock on 02 852 2700 or click here to request an appointment with one of our experienced Family Law Team; Riccarda Stock, Nicole Quirk, Nikita Ward, Kirstin Attard, Shweta Kumar.

Article by Nikita Ward
Photo by Vitaly Gariev on Unsplash