Are Family Trusts Protected From Property Settlements?

It is a common misconception that a family trust can protect assets from divorce and property settlement proceedings. Under the Family Law Act 1975, property is any asset that a person has an entitlement to, whether in possession or reversion. By this definition, a family trust is treated as either property, or as a “financial resource”. This page looks at whether family trusts are protected during divorce and property divisions.

What is a family trust?

A family trust is a commonly used financial structure in Australia. It operates under the discretion of one or more trustees, who legally own the assets and have control over any business interests. A trustee can be an individual or a company, although a family trust is most often controlled by one or both parents. Trustees have the authority to distribute income or capital gains from the trust to the designated beneficiaries. Beneficiaries of a family trust are usually family members, such as the children and grandchildren of the trustees.

A family trust is a discretionary vehicle to protect assets and limit liability. The word discretionary in this context means that the people running the trust have the discretion to decide who should benefit from the trust and how much they should each receive.

What are the benefits of a family trust?

A family trust can effectively shield assets from bankruptcy. It can also reduce taxation liability, and protect vulnerable beneficiaries from poor spending habits. Family trusts are often set up to provide long-term financial support to future generations.

Is a family trust part of the asset pool?

In cases where spouses separate or divorce, and one person is the beneficiary of a family trust, it can raise questions about whether the assets of the trust should be included in the asset pool. In fact, many people start family trusts believing that property held by a trust is untouchable during a divorce. However, this is not always the case.

Whether a discretionary trust forms part of the asset pool in a property division depends on each spouse’s interest in the trust. In order to classify a trust as an accessible asset, it is generally not sufficient for a spouse to be a beneficiary eligible for distributions from a trust. Rather, the spouse must have some degree of control over the trust. The court determines whether a spouse has control over a trust depending on several factors, including:

• the terms of the trust deed;
• the identity of the appointer and trustee;
• the degree of influence that the spouse has over the trustee or appointer;
• the identity of the beneficiaries;
• the history of distributions from the trust;
• how the trust assets were acquired;
• any contributions by either spouse to the trust assets; and
• benefits derived from the trust, such as vehicles, loans or payment of expenses.

Each case depends on its own circumstances. The spouse who wants to include the trust in the asset pool must compile relevant documentation supporting their claim.

When a spouse has no control over the trust, and is simply a beneficiary, the trust probably will not be treated as an asset in the property pool. Instead, when a spouse expects future distributions from a family trust, and there has been a history of distributions from the trust, it is most likely to be considered a “financial resource”. A financial resource is not property like a vehicle or house: rather, it is something that can generate income in the future. This means that while the trust may be excluded from the asset pool, the court will consider the likelihood of distributions when determining the future needs of the separating spouses.

Setting aside trusts

Unfortunately, spouses will sometimes go to great lengths in an effort to conceal or disguise assets that rightfully belong in the asset pool. The Federal Circuit and Family Court of Australia has powers under section 106B of the Family Law Act to set aside a trust that was created to defeat a spouse’s claim to matrimonial assets. This legislation gives the court the power to look behind the “veil” created by the trust to see whether it is really just an “alter ego” for one of the spouses. If the trust is merely an alter ego, the court can exercise its just and equitable jurisdiction to ensure that property that should rightfully be included in the asset pool is not allowed to escape via a family trust.

You should see the specialists at Go To Court Lawyers if you are thinking of establishing a trust for wealth protection purposes. Our family law specialists can advise whether a family trust structure fulfils your intention and whether a financial agreement is a better fit for your needs. Please get in touch on 1300 636 846 today for experienced and helpful advice.

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