How Are Family Trusts Treated in Divorce and Property Settlements?

The Central Idea

Family law does not treat “a family trust” as a single category. The Court works through the legal and equitable rights of each party, the powers presently exercisable in respect of the trust, the history of how the trust has been used, the identity and practical influence of the controllers, and any third-party interests. From that analysis the trust assets, or some interest in or in respect of the trust, may be characterised as:

• property of a party (and so part of the pool);
• an existing legal or equitable interest in trust property (for example as a unit holder, loan-account creditor or holder of an unpaid present entitlement);
• a presently exercisable power or control mechanism that may be treated as property where it amounts in substance to ownership;
• an object's expectancy under a discretionary trust, which is generally not property but may be a financial resource;
• a financial resource taken into account under section 75(2) or section 90SF(3) of the Family Law Act 1975 (Cth);
• trust assets genuinely owned and controlled by an independent third party, which the Court will not ordinarily disturb without due process; or
• assets that have been improperly transferred or restructured in anticipation of separation, which may be set aside.

These are not interchangeable concepts. Collapsing them into a single “control test” misstates the law and leads to overconfidence on both sides.

The Property-Settlement Framework

Property settlement after separation is governed by the Family Law Act 1975 (Cth) and the Federal Circuit and Family Court of Australia (Family Law) Rules 2021. For married couples the substantive sections are sections 79 and related provisions; for de facto couples the equivalent is section 90SM and related provisions. The Court follows a structured analysis settled by High Court authority in Stanford v Stanford (2012) 247 CLR 108 and refined in subsequent Full Court jurisprudence.

The framework requires the Court to identify and value the existing legal and equitable rights and interests of each party (including liabilities), assess the parties' contributions (financial, non-financial, parenting and homemaking), assess current and future circumstances (under section 75(2) for married couples and section 90SF(3) for de facto couples) and consider whether any proposed order is just and equitable in all the circumstances. Recent amendments require the Court, where applicable, to consider the economic effect of family violence on a party's contributions and future circumstances. The four-step shorthand is convenient but the statutory language is what governs — and that language matters when trust questions are in issue.

For a deeper walk-through see The Four-Step Property Settlement Process.

Common Trust Structures and Why Labels Are Not Determinative

Australian families and businesses use many trust structures. The labels matter for tax and commercial purposes, but family law looks behind the labels at the actual rights, powers and history. The principal structures are:

Trustees may be individuals or corporate entities. Many family trusts add an appointor (sometimes called principal or guardian) with power to remove and replace the trustee. Succession provisions in the deed can transfer the appointor role on death or incapacity. None of these labels is determinative. The deed must be read, the actual operation traced and the practical control assessed.

Self-managed superannuation funds are a special case. SMSFs are trusts but are regulated by the Superannuation Industry (Supervision) Act 1993 (Cth) and are split for family law purposes under Part VIIIB of the Family Law Act 1975 (Cth), not by the analysis described in this article. See Superannuation Splitting in Divorce.

Trust Roles and Why They Matter

A family-law analysis of a trust requires precise identification of every role and right. The common roles and their potential significance are summarised below.

None of these labels is automatically decisive. The Court considers the legal power held, the practical influence exercised, the historical distributions, and whether the apparent controller has acted as the trust's alter ego.

Property, Financial Resource, or Neither?

The single most important distinction in trust cases is between “property” (step 1 of the analysis, and in the pool) and a “financial resource” (a section 75(2) or section 90SF(3) factor that bears on future needs). The Court may also conclude that a trust-related interest is neither property nor a financial resource, but is relevant in another way to the justice and equity of the outcome — or that it has no relevance at all.

The following table is a guide only. The categorisation in any particular case turns on the deed and the facts.

Two warnings. First, the Court will not state that all discretionary trust assets are matrimonial property merely because one spouse is a beneficiary, director of the corporate trustee, appointor, or historically involved in the trust. Second, the Court will not state that trust assets are protected merely because legal title is held by a trustee. The mistake on either side is to treat one factor as conclusive.

Kennon v Spry and What It Does and Does Not Decide

Kennon v Spry (2008) 238 CLR 366 is the leading High Court authority on family trusts in property settlement. The case concerned a trust established by the husband, in which he was trustee, had power to amend the deed, had power to advance capital and which had been used to hold family wealth to which both spouses had previously had access. On those particular facts the High Court held that the trust assets were property of the parties to the marriage for the purposes of section 79.

Kennon v Spry is regularly misread. It does not establish:

• that every discretionary family trust is automatically divisible;
• that being a discretionary beneficiary is enough to expose the trust assets;
• that holding the appointor role alone makes the trust property of the holder;
• that the Court will disregard genuine third-party ownership or independent trusteeship.

The case turns on the particular combination of powers held by the husband, the deed permitting their exercise in his own favour, and the family's actual use of the trust. Other appellate authority continues to assist with the conceptual framework of property, control, financial resources and third-party ownership in trust cases — including authorities such as Stanford v Stanford (2012) 247 CLR 108 on the just-and-equitable threshold, and a body of Full Court decisions on disclosure, joinder, and the relationship between beneficial interests and property of a party. Case names and citations must always be verified against current primary sources before reliance.

Evidence of Control and Benefit

Whether a trust will be characterised as property of a party, a financial resource, or otherwise relevant is ultimately an evidentiary question. The following categories of evidence are commonly examined:

• the trust deed and every deed of variation;
• trustee and appointor succession provisions, including transfer on death or incapacity;
• ASIC records for any corporate trustee — directors, shareholders, constitution, prior changes;
• trustee resolutions and minutes;
• financial statements and tax returns of the trust for several years;
• distribution histories and beneficiary ledgers;
• beneficiary loan accounts;
• unpaid present entitlements and their treatment;
• bank statements and supporting transactional records;
• records for trust-owned property, business and investments;
• communications with accountants, advisers and financial planners;
• who actually makes investment, borrowing and distribution decisions, and how those decisions are evidenced;
• the historical payment of family, household or personal expenses through the trust;
• indemnities, guarantees, and related-party dealings between the trust and connected entities or persons.

The valuation and accounting evidence informs the case; the legal characterisation is for legal advice and ultimately the Court. A forensic accountant does not determine whether the trust is property of a party.

Disclosure Obligations

Each party owes a duty of full and frank financial disclosure under Chapter 6 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021. The duty extends to documents that are relevant and within the party's control or possession. In trust cases this commonly requires production of the documents listed above, together with such third-party documents as the party can obtain.

Disclosure is not unlimited. The Court is not interested in every document of every remotely connected trust. Relevance, possession or control, procedural rules and any orders of the Court govern what must be produced. Subpoenas and notices to produce are available to address third-party records, including accountants, corporate trustees and banks. Non-disclosure attracts costs orders, adverse inferences, procedural consequences and damage to credibility.

Electronic and accounting records — emails, cloud-stored documents, accounting software backups — must be preserved. Destruction of records, deliberate or inadvertent, can be devastating in trust litigation.

Valuation and Accounting Issues

Where a trust holds substantial assets, those assets will normally require valuation. The principal valuation and accounting issues include:

• valuation of underlying assets — businesses, real property, investments — usually by a single expert jointly instructed under Chapter 7.1.5 of the Family Law Rules;
• treatment of minority or unit-holder interests, with appropriate discounts where supported by the deed and the facts;
• identification and treatment of liabilities, guarantees and contingent obligations;
• characterisation and valuation of related-party loans, both to and from the trust;
• tax liabilities, including current and deferred amounts;
• capital gains tax considerations on a notional realisation, including embedded gains and any available concessions;
• Division 7A interactions where companies are involved, particularly unpaid present entitlements;
• whether goodwill sits in a trust-owned business and how it is split between commercial and personal goodwill;
• avoiding double counting between a company, the trust, loan accounts and underlying assets — the same dollar must not be counted twice in different ledgers.

Tax outcomes are fact-specific. Family law orders do not automatically eliminate tax, duty, trust-law or corporate-law consequences. Specific advice from a Chartered Accountant or registered tax agent should accompany any settlement.

For a wider treatment of valuation see Business Valuation in Australia.

Third Parties

A trust commonly involves third parties whose rights cannot be disregarded. Among them:

• parents or relatives who established and control the trust;
• adult children and other beneficiaries;
• independent trustees;
• corporate trustees and their directors and shareholders;
• business partners and co-investors;
• secured lenders and other creditors;
• entities (companies, trustees) that may need to be joined as parties to the proceedings.

Where orders may affect third-party rights, procedural fairness requires participation. Sections 90AE (married) and 90SS (de facto) of the Family Law Act 1975 (Cth) give the Court power, in defined circumstances, to make orders binding third parties subject to statutory conditions. The Court will not disregard genuine third-party ownership without evidence and due process.

Restructuring and Asset Transfers After Separation

The temptation after separation to change trustees, amend deeds, remove a spouse as beneficiary, accelerate succession arrangements, make unusual distributions, forgive loans, move assets to another entity, create new trusts, transfer assets to relatives, backdate resolutions or destroy records is almost always counter-productive. The Family Law Act 1975 (Cth) empowers the Court to:

• set aside transactions made to defeat or reduce a property settlement claim under section 106B;
• make orders binding third parties under sections 90AE and 90SS where the statutory criteria are met;
• grant injunctions to preserve assets and prevent dissipation;
• draw adverse inferences from missing or destroyed documents.

Even where a particular transaction is technically permitted by the trust deed, executing it after separation typically damages credibility, inflames the proceedings, attracts costs orders and may be reversed. This article is not a guide to defeating a spouse's claim; it is a warning that post-separation restructures tend to make outcomes worse, not better.

Settlement Mechanisms

Trust issues are routinely resolved without trial. The settlement mechanisms commonly used include:

• negotiated settlement supported by full disclosure and expert valuation;
• mediation, often with a senior commercial or family-law mediator;
• Consent Orders made under the Family Law Act 1975 (Cth);
• Binding Financial Agreements under Part VIIIA (married) or Part VIIIAB (de facto);
• agreed changes to trustee, appointor or corporate control arrangements;
• transfer or redemption of units in a unit trust;
• repayment or assignment of beneficiary loan accounts;
• retention of the trust by one party with an offset from other pool property;
• sale of an underlying business or asset;
• changes to corporate trustee directors, shareholders and constitution;
• indemnities and releases between the parties;
• tax and implementation conditions to ensure orders actually achieve the intended commercial result.

Consent Orders and BFAs are not interchangeable. The choice between them depends on the complexity of the trust restructure, the availability of CGT and stamp duty relief, confidentiality preferences and the presence of children. Trust, corporate, tax and succession documents almost always need amendment to implement the family-law outcome.

Reading the Trust Deed: What Actually Matters

A useful trust analysis starts with the deed. Many arguments collapse the moment the deed is read carefully, because the deed determines what powers exist, who holds them, the conditions on their exercise, the class of beneficiaries, the rules of succession and the constraints on amendment. The clauses that typically drive the family-law analysis are:

• the definition of the beneficiary class — primary, specified, general and excluded;
• the trustee's powers of distribution, advancement and accumulation;
• the trustee's power to deal with capital, including streaming;
• the appointor or principal's power to remove and replace trustees;
• the guardian's consent powers, where applicable;
• the power to amend the deed, including any limits on self-benefit by the amending party;
• succession provisions on death or incapacity of the trustee, appointor and guardian;
• clauses requiring consent for the exercise of significant powers;
• the perpetuity period and the vesting day;
• indemnity and exoneration clauses protecting the trustee;
• clauses restricting the rights of a former spouse, where present.

Two deeds with the same trustee and the same appointor can produce very different family-law outcomes because their clauses on amendment, distribution and succession differ. The drafter's choices, made years before separation, can dictate the leverage each side has at settlement.

How the Court Approaches Control

The Court treats control as a factual question informed by the law. The analysis is not a checklist applied mechanically. The Court considers:

• who holds the legal title to the trust assets;
• who can presently exercise each significant power under the deed;
• who can presently change who holds those powers;
• what limits the deed imposes on the exercise of those powers;
• how those powers have been exercised in fact over the life of the trust;
• whether the alleged controller has treated the trust property as their own or as truly separate;
• the position of independent third parties and the extent to which the controller has accommodated their interests;
• any indicia of sham, alter ego, or designed-to-defeat conduct.

From that mix the Court reaches a characterisation. A spouse who has acted as the trust's alter ego — using trust assets and income as personal wealth, making distributions to themselves and their household consistently, exercising trustee powers as if they were unconstrained — is more vulnerable to a property characterisation than a spouse who has respected the trust as a separate vehicle with genuine multi-party interests.

Loan Accounts, UPEs and Division 7A

Many family trusts have substantial beneficiary loan accounts and unpaid present entitlements (UPEs). These are not theoretical entries — they are real receivables of the beneficiary and real liabilities of the trust. For family-law purposes:

• a beneficiary loan account in favour of a spouse is an asset of that spouse and a liability of the trust;
• a UPE in favour of a spouse is, broadly, an asset of that spouse and a liability of the trust, subject to proper characterisation and the impact of Division 7A of the Income Tax Assessment Act 1936 (Cth) where a corporate beneficiary is involved;
• the same balance must not be counted as both an asset of the beneficiary and a free-standing trust asset;
• repayment, assignment, set-off and forgiveness all have tax consequences and may trigger deemed dividends or other adverse outcomes;
• the Australian Taxation Office's evolving guidance on UPEs must be considered, particularly for UPEs in favour of a private company beneficiary.

Loan accounts and UPEs are an area where co-ordinated family-law, commercial and tax advice is essential. A settlement that ignores the tax consequences of unwinding a loan account or UPE can deliver a worse real outcome to the receiving spouse than a smaller headline number would have done with proper planning.

Stamp Duty, CGT and Implementation

A family-law trust settlement often requires asset movements — transfers of units, restructure of the trustee, change of beneficial holdings, distribution of assets in specie. Each movement raises potential stamp duty and CGT consequences. The principal points are:

• CGT roll-over relief under Subdivision 126-A of the Income Tax Assessment Act 1997 (Cth) is available for transfers of CGT assets between spouses under a Court order, BFA or arbitration award — but not every trust-related restructure falls within the section, and trust resettlement can crystallise gains in unintended circumstances;
• stamp duty relief is governed by State and Territory legislation — in Victoria, section 44 of the Duties Act 2000 (Vic) provides relief for transfers between spouses pursuant to defined family-law instruments, but technical compliance is unforgiving;
• transfers to related entities or third parties generally do not qualify for relief and may attract full duty;
• implementation timing matters — orders, transfers, trustee changes and registrations need to be sequenced correctly;
• advice from a Chartered Accountant or registered tax agent, and from a duty specialist in larger transactions, is part of the implementation team.

For broader context see Stamp Duty and Land Transfer Duty in Victoria Explained.

Confidentiality and Privacy

Trust documents are often commercially and personally sensitive. Section 121 of the Family Law Act 1975 (Cth) restricts publication of identifying material from proceedings. Within the proceedings, the parties remain obliged to disclose relevant trust documents but the Court can — and routinely does — manage how sensitive material is handled, including through restricted access arrangements where genuinely necessary. BFAs can be used as a confidential alternative to Court orders where the parties prefer to keep the structural detail out of the public record altogether.

Cross-Border and Foreign Trusts

Foreign trusts, foreign trustees and foreign beneficiaries add complexity. The Court's jurisdiction, the applicable law of the trust, recognition and enforcement of orders abroad, tax residency consequences, and the mechanics of obtaining disclosure across borders all need specialist attention. Cross-border trust issues warrant early engagement with lawyers experienced in both family law and international private law, and with tax advisers familiar with Australian residency and foreign-trust tax rules.

Bankruptcy and Insolvency

Bankruptcy of either spouse, or of a related entity, can transform the analysis. The Bankruptcy Act 1966 (Cth) and the Corporations Act 2001 (Cth) interact with the Family Law Act 1975 (Cth) in defined ways. Trustees in bankruptcy and liquidators may be entitled to be heard or to take steps that affect trust assets and distributions. See our companion guide on What Happens if My Former Spouse Becomes Bankrupt for the property-settlement context generally; insolvency issues in trust cases require specific advice.

Estate Planning and Succession Interaction

A property settlement involving a trust must be coordinated with estate planning. Common issues include:

• death or incapacity of a controller mid-settlement, with consequences for the appointor role and trustee succession;
• succession to the appointor or principal role under the deed's own provisions;
• wills and enduring powers of attorney that may presuppose continuing access to or control of the trust;
• the distinction between an inter vivos family trust and a testamentary trust established by will, and the different control and distribution dynamics each presents;
• the need to update wills, EPOAs, trust deeds and corporate documents at the same time as the settlement is implemented, so that the estate plan reflects the new structure.

See our companion content on Testamentary Trusts Explained and What Happens to a Family Trust When the Appointor Dies?.

Documents and Evidence Checklist

• Trust deed and every deed of variation, with execution evidence.
• Constitution and ASIC records of any corporate trustee.
• Trustee resolutions and meeting minutes.
• Financial statements and tax returns for the trust and trustee.
• Beneficiary loan account ledgers and UPE schedules.
• Distribution minutes and beneficiary statements.
• Bank statements and transactional records.
• Underlying asset valuations and supporting workings.
• Succession and incapacity documentation for trustee and appointor.
• Advice files from accountants, financial advisers and lawyers, subject to privilege.
• Records of any post-separation changes to the trust.

Step-by-Step Action Plan: Spouse Associated with the Trust

1. Do not change trustees, appointors, deeds, distributions or asset positions without legal advice.
2. Locate and preserve every trust document, including electronic records and accounting software backups.
3. Engage a lawyer with combined family-law, commercial and trust experience at the earliest opportunity.
4. Coordinate with your accountant on disclosure, valuation and tax implications.
5. Identify all third parties — co-beneficiaries, lenders, business partners — whose rights or interests may be affected.
6. Develop a settlement strategy that addresses control, valuation, tax, implementation and estate-planning consequences as a single package.

Step-by-Step Action Plan: The Other Spouse

1. Engage a lawyer experienced in trust cases at the earliest opportunity — do not accept assurances that “the trust is irrelevant”.
2. Request comprehensive disclosure, including the trust deed, financial statements, distribution minutes, loan accounts, ASIC records and tax returns.
3. Consider subpoenas and notices to produce to third-party document holders where direct disclosure is incomplete.
4. Obtain expert valuation of underlying assets where substantial value is at stake.
5. Carefully analyse the deed and the history with your lawyer to assess whether the trust is likely to be property, a financial resource, or otherwise relevant.
6. Consider injunctive protection if there is a real risk of dissipation, restructure or document destruction.

Step-by-Step Action Plan: Genuine Third-Party Trustee or Controller

1. Take legal advice on procedural fairness, joinder, and the protection of independent third-party interests.
2. Avoid acting in a way that suggests collusion with the spouse who established or benefits from the trust.
3. Preserve and produce relevant documents in accordance with proper procedure and any order of the Court.
4. Consider whether independent legal representation, and perhaps separate accounting advice, is necessary to protect the trust's position and that of other beneficiaries.

Worked Scenarios (Illustrative Only)

The following scenarios are illustrative hypotheticals only. Each describes facts that require investigation; none states a guaranteed result. They are not derived from actual Parke Lawyers files.

Scenario 1 — Sole Director, Sole Appointor

One spouse is sole director and shareholder of the corporate trustee and is also sole appointor of the trust. The trust holds the family business and an investment property. Distributions have historically been split between the spouses to optimise tax. The deed allows broad amendments and distributions to a wide class. The Court will examine the deed, the history of actual use, whether the spouse has acted as the alter ego of the trust, and whether the assets are properly characterised as property of the spouse. Settlement is likely to involve a combination of retention, structural change and compensating adjustment.

Scenario 2 — Joint Control, Single Appointor

Both spouses are directors of the corporate trustee but only one is the appointor. The trust holds investment assets accumulated during the marriage. Joint control invites consideration of how the trust will be restructured for the future, including new trustee and appointor arrangements, deed amendments and the allocation of investment assets between the parties.

Scenario 3 — Parent-Controlled Trust

Parents established the trust before the marriage and continue to act as trustees and appointor. The spouse is one of many discretionary beneficiaries and has occasionally received modest distributions. The Court will be slow to characterise the trust assets as property of the spouse, but the distribution history and the spouse's realistic expectation of future benefit may support treatment of the trust as a financial resource.

Scenario 4 — Regular Distributions, No Formal Control

One spouse has received substantial regular distributions from a trust controlled by relatives. The spouse holds no formal trustee, director or appointor position. The Court is likely to treat the trust as a financial resource relevant to future needs and may give it real weight depending on the strength and duration of the distribution pattern.

Scenario 5 — Fixed Unit Trust

A spouse holds units in a fixed unit trust used to hold an investment portfolio with unrelated co-investors. The units are property in the pool. Valuation focuses on the trust's net assets, the rights attaching to the units and any deed provisions affecting transfer and redemption. Co-investor consent may be relevant to implementation.

Scenario 6 — Trust Owning the Family Business

The family business is conducted in a discretionary trust controlled by the operating spouse. Valuation is conducted by a single expert; the trust is restructured as part of the settlement, with the operating spouse retaining control and compensating the other from other pool property or by a structured payment. See also Can I Keep My Business After Separation?

Scenario 7 — Post-Separation Control Change

Shortly after separation one spouse changes the appointor, removes the other spouse as a beneficiary and makes unusual distributions. The Court is likely to view the changes with suspicion, may set them aside under section 106B and is likely to draw adverse inferences. The conduct typically damages the credibility of the party who acted and increases costs and disclosure burdens.

Scenario 8 — Testamentary Trust from a Deceased Parent

The spouse is a discretionary beneficiary of a testamentary trust established by a deceased parent. An independent trustee administers the trust and distributions have been modest. The trust is unlikely to be characterised as property of the spouse but may be a financial resource depending on the deed and distribution history.

Scenario 9 — Loan Accounts and Unpaid Present Entitlements

The trust has substantial beneficiary loan accounts and UPEs in favour of the spouses. The accounts and UPEs are property of the relevant spouse and liabilities of the trust. Tax considerations, particularly Division 7A, require careful planning. Repayment, assignment or offset arrangements form part of the settlement.

Scenario 10 — Incomplete Records

The trust has incomplete records, missing financial statements and no documented distribution minutes. The Court is likely to draw adverse inferences against the party with control over record-keeping. Reconstruction of records through accountants, banks and third parties may be required.

Common Mistakes

• Treating Kennon v Spry as a general rule that every trust is divisible.
• Treating any trust as “bulletproof” merely because legal title is held by a trustee.
• Changing trustees, appointors, deeds or distributions after separation without advice.
• Failing to preserve electronic and accounting records.
• Under-disclosing trusts, loan accounts or UPEs.
• Confusing property, financial resources and contingent expectancies.
• Assuming CGT roll-over and stamp duty relief will apply automatically to any trust restructure.
• Settling informally and failing to formalise the outcome in Consent Orders or a BFA.
• Ignoring the position of independent third parties and the need for procedural fairness.
• Coordinating the family-law settlement separately from the estate plan and corporate documents.

When Urgent Legal Advice May Be Required

Take urgent advice if you become aware that a trustee, appointor or corporate controller is about to change trustees, amend the deed, make unusual distributions, sell or encumber substantial assets, or transfer property to related entities. Injunctive relief and preservation orders are available in appropriate cases and the urgency may be real. Family violence, risk to children or risk of dissipation of assets always warrants immediate legal advice and, where appropriate, engagement with police and protective services.

How Parke Lawyers Helps

Parke Lawyers acts for spouses, controllers, trustees and third parties in trust cases across Family Law, Commercial Law, Trusts, Companies and Tax under one roof. Reviewed by Jim Parke, Lawyer & Chartered Accountant. See our service pages: Family Law and Commercial & Business Law.

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