Family trusts are often seen as a reliable way to protect assets and plan for the future, but they may not offer the level of protection people expect during a relationship breakdown. In a recent article for The Sydney Morning Herald, BN's James Steel explores how family trusts can become central to legal disputes when couples separate. He outlines the powers of the family courts to scrutinise trust structures, the implications of control and beneficiary arrangements, and how trust assets may be treated as shared property in financial settlements.
If you have a family trust, it's natural to assume it offers robust protection for the assets of the trust, even in the case of relationship breakdown.
Don't assume your trust is an impenetrable shield, as family courts in Australia have significant powers to look behind a family trust's structure.
Family trusts are a common feature in many people's financial lives, to manage wealth, protect assets and plan for the future across generations.
Whether established long before a relationship began, during it, or by parents and grandparents as part of their estate planning, family trusts are usually designed with deliberate intentions.
Treasury's 2024 Tax Expenditures and Insights Statement (TEIS) indicates more than one in 10 Australians lodging a tax return report that they are receiving trust-fund income.
So, it's important for people to be fully informed if they plan to establish a family trust.
Family trusts, also known as discretionary trusts, are a legal arrangement where a trustee agrees to hold assets on behalf of beneficiaries. Trusts can provide asset protection and legitimate tax minimisation.
However, when a relationship breaks down, these seemingly protective structures can take centre stage in family law.
Suddenly, that trust established to shield assets from potential claims or to preserve wealth for your children's children can significantly impact how property is divided and who gets what in a financial settlement.
The courts can peel back the layers, looking closely at why the trust was set up, how the trust has been administered historically and how it will affect a just and equitable division of assets.
It's not uncommon for trust assets to be included in a property settlement if one of the separating parties has effective control over the trust.
Navigating these complexities is crucial to ensuring a just outcome for everyone involved.
In the messy aftermath of a relationship breakdown, be warned the courts are not shy about tackling family trusts. They can effectively treat trust assets as shared property for division, overturn trust structures designed to avoid settlements, and custom-design solutions to ensure fairness.
When relationships end, family trusts can throw a huge spanner in the works, significantly complicating how assets are divided and who's responsible for what financially.
There are two key areas judges meticulously examine when navigating the complex world of family trusts during a separation: the impact of one party's control over trust assets and the complexities introduced by beneficiaries who aren't the direct parties to the legal proceedings.
On the first issue of control, is one person from the separating couple effectively pulling the strings? This would raise significant legal and equitable considerations.
Control can manifest in various forms, such as being the trustee or having the power to appoint or remove trustees (known as principal or appointer).
The degree of control a party exercises over the trust assets can influence the court's decision on asset division and spousal support.
Second, things get even trickier when there are additional beneficiaries involved - think children, children from other marriages, parents, or other relatives - who aren't directly part of the family law proceedings.
If the court faces the challenge of dividing trust assets where the trust has, for example, multiple beneficiaries, including the parties' children and other relatives, it may ultimately decide to exclude certain trust assets from the marital pool to preserve the interests of the non-party beneficiaries.
When one party involved in family law proceedings is a beneficiary of a family trust, this can make things more complicated for their proceedings too, even if they do not have control over the trust's assets.
This is especially true if the trust has regularly given money to its beneficiaries in the past.
Parents and grandparents who give regular distributions to their children or grandchildren through a family trust should keep this in mind.
For anyone navigating a relationship breakdown, understanding how family trusts are handled by the courts can feel like untangling a complex knot.
It's rarely straightforward. Proactive legal advice is essential to understand the real risks and plan accordingly for unforeseen future events.
The crucial takeaway for anyone considering or holding a family trust is this: they often fall short of providing the asset protection people expect in family law, whether for intergenerational wealth transfer or a single generation's savings.
View James' original article on The Sydney Morning Herald website here.
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.
