Family trusts are a commonly used structure in Australia with many benefits. They can protect assets from creditors in the event of bankruptcy, reduce tax rates when distributed to beneficiaries, protect vulnerable family members who make poor spending decisions, and provide longterm financial support to future generations. However, in the event of separation or divorce, what happens to a family trust when dividing property? Are family trusts protected from a claim by an ex-spouse or partner?
What is a Family Trust?
Family trusts in Australia refer to discretionary trusts set up to hold a family’s assets or conduct a family business. They are usually established to protect assets and limit liability in relation to the business. It is an agreement between the key parties to the trust; the trustee, the beneficiaries, the settlor and the appointor.
Family trusts usually operate under the discretion of a trustee, the person who owns the assets and controls the business. The trustee can be an individual, several individuals or a company, and in most cases, the this role is usually a parent or a company that they own.
The trustee has the authority to distribute income and capital gains of the trust to the nominated beneficiaries. The beneficiaries are usually family members who may benefit from the trust, including parents, children and grandchildren.
In order to form a family trust, the settlor provides the trustee with the assets to be held for the benefit of the beneficiaries. The appointor can be seen as the ultimate controller of the trust and is responsible for appointing and replacing the trustee or trustees.
Are Family Trusts Included In the Asset Pool?
In Australia, there are two ways a family trust can be treated in property settlement cases. Depending on who controls the trust, it will either be considered an asset/property or a financial resource.
Under section 4 of the Family Law Act 1975, ‘property’ means:
a) in relation to the parties to a marriage or either of them—means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion; or
(b) in relation to the parties to a de facto relationship or either of them—means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.
What this means is a trust might be considered property if either party has influence or control over the trust as either the appointor or trustee. For example, if the Court finds that one party has control over the trust, this trust forms part of the asset pool of a marriage or de facto relationship and can be distributed.
Another example could be if one party is not listed as the appointor or trustee but indirectly control the trust through a ‘puppet’ or ‘alter ego’ trustee/appointor, the trust would form part of the asset pool for distribution.
A financial resource is not considered property like a car or house, but is an asset that has the ability to generate an income in the future, for example, an inheritance, or a beneficiary’s interest in a family trust. Parties generally cannot access this type of resource immediately.
If a party of the relationship is a beneficiary of a family trust and they expect to obtain distributions of the trust as income or capital, then that trust is considered a financial resource in Australia. The trust might not be included in the asset pool, but under section 75(2) of the Family Law Act, the Court will take it into account as a “future need” for one or both parties.
How Do the Courts Consider the Trust as Property?
When the Court considers whether or not a family trust should be considered part of a property settlement, the Court will take the following factors into consideration:
- Who is the trustee (one or both parties);
- If the trustee is a company, who controls the company;
- Who are the beneficiaries;
- Who is the appointee;
- How did the trust acquire assets;
- What are the contributions from each party to the property of the trust;
- How much income is distributed from the trust;
- Who is currently receiving income from the trust;
- Who has received income from the trust in the past;
- What are the terms of the trust.
Each family trust case in Australia is unique, so it is best to speak to a family lawyer about your situation as soon as possible.
Do You Have Questions About Family Trusts in Australia?
If you would like to know more about family trusts and how they might affect your property settlement in Australia, our team of family lawyers are highly experienced in all aspects of family law, from divorce & separation to property settlement and time with children. Please contact our team via email or by phone.