Trusts on Trial: When the Family Court Breaks the Shield

An appealing feature of discretionary testamentary trusts is that they can offer protection against creditors, and in some cases, even in the event your child goes through a family law settlement with their spouse. However, this protection from the Family Court is not as straight forward as you might think. The Family Court has the power to pierce the veil of a family trust, including a testamentary trust. Below we explore what features and circumstances are important if you are considering making a testamentary trust predominantly for this reason.

The Family Court will look at the specific operation of the trust. It also looks at who has effective control or expectation of benefit from the trust. If the distributions of the trust have been consistently the same to each beneficiary over some time, then the Court might consider the beneficiary has a defined share and can declare it as part of the asset pool of the child who his separating.

Powers of the Family Court

Under the Family Law Act, the court can:

• Alter property interests (s 79, s 90SM)
• Bind third parties (Part VIIIAA)
• Set aside transactions (s 106B)
• Appoint or remove trustees (s 80)
• Issue injunctions (s 114)

An example, the leading case of Kennon v Spry [2008] HCA 56

The High Court’s decision in Kennon v Spry remains the seminal authority on the treatment of family trusts in divorce proceedings. Dr Ian Spry, a barrister, created the ICF Spry Trust with himself as trustee and his family as beneficiaries. Amid marital breakdown, he altered the trust to exclude himself and his wife and later transferred assets to new trusts for his children.

The Court held that:

• The trust assets were part of the matrimonial property under section 79 of the Family Law Act.
• Dr Spry retained effective control over the trust, despite formal exclusions.
• The variations were made to defeat anticipated claims and were set aside.

This case established that control and benefit, not just legal title, determine whether trust assets are vulnerable to division.

Even though this case concerned an inter vivos trust, i.e. a trust that was established during the lifetime of the person who created it, the same principle applies to a testamentary trust. For example, if you create a testamentary trust with your son as only beneficiary and you appoint him as trustee, the Family Court will view the trust as part of your son’s marital asset pool if he was to be involved in a family law property settlement.

An example of will successfully offer protection

A recent case example of when a family trust did hold up and offered protection, is the case of Caldwell v Caldwell [2025] FedCFamC1F 506. In this case, Mr Caldwell was a beneficiary of a number of trusts established by his family. Ultimately the Court decided that the trust assets were not included in the matrimonial property pool, because Mr Caldwell had no informal control of the trusts, and the trusts were set up with a clear purpose of facilitating a family business and to benefit the lineal descendants of the founder of the trust. The wife had never received any benefit from the trust, and Mr Caldwell had not used distributions to support the lifestyle of him and his wife, nor to accumulate personal wealth. A further consideration the Court made was that there was enough other property available for a fair division without accessing the trust assets.

Tips for trustees

If you are trustee of a discretionary testamentary trust, there are a few things to keep in mind when you exercise your discretion in administering the testamentary family trust, if protection in family law proceedings is at the top of the priority list:

1. Avoid early distributions. If possible, delay discretionary distributions to beneficiaries who are involved in family law proceedings.

2. Scatter distributions, to that the trust may be considered a financial resource rather than divisible property.

3. Avoid predictable or regular distributions as that could imply beneficial ownership.

4. Maintain proper documentation. Keep clear records of trustee decisions, reasons for making or withholding distributions and correspondence with beneficiaries. This will help proving the trust’s independence, if it is challenged in Court.

5. Seek legal advice before distributing.

6. Avoid having a beneficiary as trustee – if you are a trustee and beneficiary, consider handing over the baton to someone who is independent, for example a professional trustee.

It is important to note that the trustee first and foremost needs to comply with the terms of the trust, and their fiduciary duties owed to the beneficiaries generally, but there may be some flexibility to ensure the best protection.

While family trusts offer legitimate benefits, they are not immune from scrutiny in family law. The courts prioritise substance over form, focusing on control, benefit, and intent. For individuals relying on trusts for asset protection, robust legal advice and transparent structuring are essential — especially in the face of potential relationship breakdowns.

If you have questions about discretionary testamentary trusts, contact Solari and Stock and speak with one of our Sutherland Shire Estate Planning Team on 8525 2700, alternatively click here to request an appointment, or use the Book Now button below.

Article by Nicole Commandeur
Image created in Canva