Family Law Trusts – Do They Still Protect You In A Divorce Or Separation?

Family Trusts are widely used in Australia to hold property, operate businesses and manage family wealth. Many individuals believe that placing assets in a trust automatically protects them from a property settlement if a relationship breaks down. However, under the Australian Family Act, the reality is more complex.

While Family Trusts can support asset protection, they do not provide complete protection in a property settlement. Australian courts look beyond the structure and analyse who truly controls the trust and how it operates in practice.

We outline the different types of trusts, advantages, disadvantages and what this could mean for you in the event of a divorce or separation.

What is a family trust?

A family Trust typically refers to a discretionary trust, and is an agreement that has a person or a company hold or manage a family’s assets and investments whilst limiting liabilities. Family Trusts operate for the benefit of beneficiaries, typically family members.  A Trust Deed holds the operation of the trust and outlines the roles of each party to the trust.

The key roles include:

Settlor: Responsible for establishing the trust, naming the other key roles and transferring assets to the trustee.

Trustee: Legally controls and manages the trust assets.

Appointor: Has the power to remove and replace the trustee.

Beneficiaries: People or entities who may receive income or capital.

Family Trusts commonly hold property, shares, investments or business assets.  It is pertinent to note that while legal ownership can be separated from personal ownership in family trusts, it does not automatically mean protection when it comes to family law proceedings.

Advantages and Benefits of family trust

Family Trusts can be beneficial when set up and executed efficiently. for the following legitimate financial and legal reasons:

Asset Protection

Assets under a Family Trust are separate from an individual’s personal assets and as the beneficiaries are not the legal owner of assets within a Family Trust this can provide additional protection to the assets in legal or financial circumstances where a beneficiary’s personal assets may be at risk, such as bankruptcy. However, Family Trusts do not provide blanket protection and should not be treated as such.

Tax Advantages

Family Trusts are often used to reduce overall taxation, as the assets and income can be distributed among beneficiaries based on their individual tax circumstances.

Estate and Succession Planning

Family Trusts can also help preserve assets and wealth for future generations. Family Trusts can be useful with estate planning as they allow for control of the assets to be passed to one or more individuals, rather than giving the assets outright.  for the benefits for future generations.

Assets and business operations separation

Family Trusts can help manage risk and separate business operations and assets from personal ownership. In some cases, this may provide protection against personal creditors or lawsuits.

Despite the many advantages to a Family Trust, there are many potential disadvantages especially when taken into consideration in family law or property settlement matters.  These benefits do not override the power of the Family Court and the principles under Family Law Act often forcing Family Trusts to face heavy scrutiny, further complicating property settlement.

Types of trusts

Revocable trusts

In a revocable trust, the person who set up the trust (grantor) retains control and can change or cancel it. Because control remains with the grantor, this trust offers little protection in family law disputes and thus is unlikely to prevent the assets from being considered in a property settlement during divorce/separation.

Irrevocable trusts

An irrevocable trust involves the transfer of control away from the grantor. While this may offer some level of asset protection, courts still assess the reality of control and benefit. If a party can  influence decisions or receive regular benefits, protection in such cases may be limited.

Tips to set up a family trust

1.  The earlier the Family Trust is established the better. Use an independent trustee where appropriate.
2. Ensure the Trust Deed is clearly defined, this will be the guiding force for the Family Trust.
3. The Family Trust is not to be treated as  a personal bank account.
4. The ATO hold strict recording keeping requirements for Family Trusts, the trustee needs to maintain accurate track of finances. al
5. Legal and financial advice must be sought by any individual intending to set up a Family Trust to maximise protection and ensure compliance under Australian Law..

Always remember, even with careful planning, a Family Trust should be part of a broader risk management strategy, not your only line of defence.

Assets not included under family trusts

Holding assets or capital under a Family Trust does not provide automatic protection from consideration. The courts may still consider:

1. Income distributed to a spouse.
2. Personal expenses paid by the trust.
3. Loans made by the trust to a spouse.
4. Assets transferred into the Family Trust shortly before separation/divorce.

Did you know? Trusts also do not protect against obligations like child support and spousal maintenance.

Factors that influence asset protection in divorce

The court considers several factors while deciding how a Family Trust should be treated, namely:

1. Who is the trustee and appointor,
2. Whether a spouse controls a trustee or appointor,
3. The terms of the trust deed,
4. When the trust was established,
5. How trust assets were acquired,
6. Contributions made by each spouse,
7. History of trust distributions,
8. Whether trust assets funded the family lifestyle, such as vehicles, loans or paying expenses,
9. The state law related to property division in divorce proceedings.

Family trust assets are not automatically protected in divorce, so, if a spouse has significant control or receives consistent benefits, the Family Trust may be treated as part of the property pool. Depending on the level of control held over the Family Trust, If control is limited, the Family Trust may still be considered a financial resource, affecting how other assets are divided. Further, the Court also has power to set aside arrangements designed to defeat a spouse’s claim, meaning last-minute trust transfers are risky and often ineffective.

Family trusts still play an important role in wealth management and business structuring, but they do not guaranteed asset protection under the Australia Family Law Act. In any family law matter involving a Family Trust, the Courts will take care to determine the execution of a Family Trust and establish the control held and support received from the respective parties.

Family Trusts can have a large impact on separation, divorce and property settlements and tailored legal advice is essential. Our family lawyers at PCL Lawyers can provide support and guidance to navigate these complex structures and help you protect your financial future.

FAQs

Can my spouse claim assets in my family trust?

Possibly, yes. If you control the trust or regularly benefit from it, the court may treat the trust as property or a financial resource.

Can a trust be ignored by the court?

Yes, if a trust is found to be a sham or is created with the motive of hiding assets, the court has the power to set it aside.

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.