When a marriage breaks down, dividing assets can be one of the most complex and stressful aspects of the property settlement process. If a family trust is involved, things become even more complicated. Many people assume that assets held in a trust fund are protected from divorce settlements, but that's not always the case.
Under Australian family law, the Family Court has the power to examine a family trust deed and determine whether trust assets should be included in the property pool. Factors such as who controls the trust, how trust income is distributed, and whether the trust was used for managing family assets all play a role in deciding whether a trust is up for division.
If you have a family trust and want to understand how it may be affected by a relationship breakdown, or if you are separating and believe your former spouse is using a trust to shield assets, it's important to get legal advice early. In this article, our family and divorce lawyers break down how family trusts work, whether they can really protect assets, and what happens when the court considers them in a divorce settlement.
What is a family trust?
A family trust is a legal structure used to hold and manage assets on behalf of a family group. It is commonly used in Australia for asset protection, tax advantages, and ensuring wealth is passed down to future generations.
At its core, a family trust operates under a trust deed, which sets out the rules for how the trust fund is managed. A trustee controls the trust—which can be an individual or a corporate trustee—who is responsible for managing the trust assets and distributing trust income to the beneficiaries. The trust's beneficiaries are usually family members, including minor children, a primary beneficiary, and sometimes other beneficiaries, such as a family business or investment entities.
One of the key benefits of a family trust is asset protection—the trust assets are technically owned by the trust rather than by individual family members. However, when a relationship breakdown occurs, the Family Court may still consider these assets as part of the matrimonial pool, depending on how the trust is structured and controlled.
Many people set up family trusts believing they will automatically protect assets from a divorce settlement, but the reality is more complex. Whether a trust in Australia is treated as a separate legal entity or part of the property settlement depends on several factors, which we will talk about shortly.
Are trusts protected from divorce settlement claims?
If you're wondering whether a family trust is protected from a divorce settlement, the short answer is, not always. Under the Family Law Act 1975, the Family Court has the power to include trust assets in the property pool if one spouse has control over the trust or has benefited from it during the marriage. However, a well-structured trust can still offer some level of asset protection, depending on how it is managed.
Many people set up trusts in Australia to safeguard family assets, reduce income tax, and provide for future generations, but when a marriage ends, the court will scrutinise the trust's purpose, control, and use.
When a family trust may offer protection
- It operates as a separate legal entity – If the trust assets are clearly distinct from personal property and genuinely benefit other beneficiaries, the court may not consider it part of the property settlement.
- It was established before the marriage – Trusts created well before the relationship began—and not used to support the couple's lifestyle—are more likely to remain protected.
- It has independent control – A properly structured discretionary trust, with an independent trustee company making distribution decisions, is harder to challenge in court.
When a family trust won't protect assets
- A spouse controls the trust – If one party is a trustee or has influence over trust income and distributions, the Family Court may treat the trust as personal wealth.
- The trust was used for personal expenses – If trust income was used to cover family expenses, mortgage payments, or investments that benefited both spouses, it may be included in the property settlement.
- It appears to be a way to hide assets – The court will investigate whether a trust was set up or manipulated to shield assets from a former spouse.
A family trust isn't a foolproof way to protect assets from divorce. The Family Court will look beyond the trust deed and assess whether the trust was genuinely intended for long-term financial planning or simply a tool to prevent asset division.
Types of trusts
Not all family trusts are treated the same way in a divorce settlement. The structure of the trust in Australia plays a key role in whether the Family Court includes it in the property pool.
- Discretionary trust – The most common type of family trust, where the trustee decides how trust income is distributed. If a spouse is both a trustee and a beneficiary, the court is more likely to treat it as a marital asset.
- Fixed trust – In this setup, each beneficiary receives income in set proportions. Since distributions aren't flexible, a spouse's share is usually treated as a financial asset rather than discretionary income.
- Testamentary trust – A trust established through a will maker to pass assets to future generations. These are typically protected from property settlements, as they are designed for inheritance rather than personal use.
Understanding the type of trust fund involved can help determine whether it may be at risk in a relationship breakdown.
Factors that influence asset protection in divorce
Whether a family trust is included in a property settlement depends on several factors. The Family Court considers the following when deciding if trust assets should be divided:
- Who controls the trust? If a spouse is the trustee or has influence over the trust deed, the court may treat the trust as a personal asset rather than a separate entity.
- How was the trust used? If the trust was used to fund family expenses or support a family business, it may be considered part of the matrimonial pool.
- Who benefits from the trust? If a spouse was a regular recipient of trust income, the court may view it as a financial resource, even if they don't directly control it.
- When was the trust created? A trust established before the marriage with independent trustees is more likely to be excluded from a property settlement than one created during the relationship.
The key takeaway? A family trust isn't always a guaranteed way to protect assets in a divorce settlement—it depends on control, timing, and how it was used.
When are family trusts included or excluded from divorce property settlements?
A family trust isn't automatically part of a divorce settlement, but it also isn't automatically protected. The Family Court will look at how the trust operates, who controls it, and how it has been used during the marriage.
If a spouse is the trustee or has the power to manage the trust assets, the court may decide that the trust is just an extension of their personal wealth and include it in the property settlement. This is especially true if the trust income was regularly used to cover family expenses, mortgage repayments, or other financial needs of the marriage.
On the other hand, if the trust was created long before the relationship and has independent trustees making distribution decisions, it may be treated as a separate entity. Trusts that are clearly intended for future generations or were established through an inheritance, such as a testamentary trust, are also more likely to be excluded from divorce proceedings.
Ultimately, the court looks beyond just the trust deed—it examines how the trust was actually used and whether it was a genuine financial structure or simply a tool to shield assets.
How courts determine whether a trust interest is an asset or a financial resource
In a divorce settlement, the Family Court doesn't just look at whether a spouse is listed as a beneficiary of a family trust—it assesses whether their interest in the trust should be classified as an asset or a financial resource.
If a spouse has direct control over the trust assets—for example, as a trustee or through a corporate trustee—the court is more likely to treat it as an asset and include it in the property settlement. This means it could be divided between both parties just like any other family assets.
However, if a spouse is only a beneficiary with no control over distributions, the court may view the trust as a financial resource instead. In this case, while the trust itself may not be divided, the court could still consider the trust income when determining the overall division of assets or future spousal support obligations.
This distinction is crucial because assets are typically split between parties, while a financial resource may simply impact other financial considerations in the settlement, such as the future needs of that person.
If the trust is an asset, who keeps it?
If the Family Court determines that a family trust is an asset, the next question is: who gets to keep it?
This depends on the overall property settlement and how the couple's assets are divided. If one spouse has full control over the trust fund—for example, they are the trustee and the primary decision-maker—the court may allow them to retain it, but it could affect how other assets are split. The other spouse might receive a larger share of the property pool to balance out the value of the trust.
If both spouses were involved in managing the trust assets, the court may order changes to the trust deed, appoint a new trustee, or even distribute part of the trust's value as part of the settlement. In cases where the trust was used for a family business, the court may also consider the impact on family members who rely on it.
Because every divorce settlement is different, legal advice is essential in negotiating a fair outcome when a family trust is involved.
Case studies: The Murdoch Family Trust and other examples
High-profile divorces often highlight how family trusts can play a role in asset protection. One of the most notable examples is the Murdoch Family Trust, which was carefully structured to prevent assets from being divided in a divorce settlement.
Rupert Murdoch, the media mogul, has been married multiple times, yet his vast business empire remained intact through each relationship breakdown. This was largely due to his family trust, which controlled shares in his companies. While his spouses may have received significant financial settlements, they had no claim to the trust assets, as the trust was structured to limit individual control.
Closer to home, Australian case law shows that courts take a detailed approach when assessing trusts in divorce. In some cases, where a spouse had clear control over the trust fund, the Family Court has ruled that the trust in Australia should be included in the property settlement. In others, where the trust had independent trustees and was established long before the marriage, it has been excluded from division.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
