Family Trust and Divorce in Australia: How Trusts Are Treated in Property Settlements

You set up a family trust years ago — maybe on your accountant's advice for tax planning, maybe to hold an investment property or run a business. Now you are separating, and the question is whether those trust assets are "yours" for the purpose of a property settlement. The answer is more complex than most people expect.

Under the Family Law Act 1975, the court has broad powers to include trust assets in the property pool. But whether it will — and how — depends on the type of trust, who controls it, and how it has been used during the relationship.

The Court's Power Over Trust Assets

The starting point is Section 79 of the Family Law Act, which gives the Federal Circuit and Family Court the power to alter property interests. The court defines "property" broadly — it includes any legal or equitable interest, including interests held through corporate structures and trusts.

The key question is whether a party has a sufficient interest in the trust to make it part of the asset pool. This is not always straightforward.

Discretionary Trusts

Most family trusts in Australia are discretionary trusts, where the trustee has the power to decide how income and capital are distributed among the beneficiaries. The beneficiaries have no fixed entitlement — only a hope of receiving distributions.

Despite this, courts routinely treat the assets of a discretionary family trust as part of the property pool when:

• One spouse is the sole or controlling trustee and has the practical power to distribute trust assets to themselves
• The trust was established to benefit the family and distributions have been used for family living expenses, mortgage payments, or school fees
• The trust holds assets that were acquired using family funds — such as an investment property purchased with income earned during the marriage

The landmark case Kennon v Spry (2008) confirmed that the High Court will look through a trust structure to the practical reality. If one party controls the trust and can direct distributions, the trust assets are effectively theirs for settlement purposes.

Fixed Trusts

Fixed trusts give beneficiaries a defined entitlement — for example, a 50% interest in a specific property held by the trust. These interests are easier to identify and value, and are routinely included in the asset pool as a financial resource of the beneficiary spouse.

Third-Party Trusts

If the trust was established and controlled by someone outside the marriage — such as a parent's family trust where one spouse is merely a discretionary beneficiary — the analysis changes. The court is less likely to treat the assets as part of the couple's pool, though it may still consider distributions received during the relationship as financial contributions by that spouse.

How Trust Assets Are Valued

Valuing a trust for property settlement purposes typically requires:

1. The trust deed — to understand the trustee's powers, the class of beneficiaries, and any restrictions on distribution or winding up
2. Three years of financial statements — balance sheets and profit and loss accounts showing the trust's net asset position
3. A specialist valuation if the trust holds business interests — a forensic accountant may need to assess goodwill, business value, and the marketability of trust-held assets

The trust's net asset value (assets minus liabilities) is the starting point, but the court may apply a discount if the assets are illiquid (such as commercial property or private company shares that cannot be easily sold).

What the Court Can Order

The court has several options for dealing with trust assets:

• Order the trustee to distribute trust property to one or both parties as part of the settlement
• Vary the trust deed to alter the beneficial interests
• Restrain the trustee from disposing of trust assets pending the settlement
• Factor trust assets into the overall split — for example, if one party controls a trust worth $500,000, the court may award the other party a larger share of the non-trust assets to compensate

If the trustee is a third party (not one of the separating spouses), the court must give them procedural fairness — meaning the trustee must be formally notified of the proposed orders and given the opportunity to be heard.

Strategies People Try (That Usually Fail)

Transferring assets into a trust before separation. If a spouse moves personal assets into a trust in anticipation of separation, the court can reverse the transaction under its powers to set aside dispositions that defeat a spouse's claim. Pre-separation asset shuffling is treated very seriously.

Arguing the trust is "separate" from the marriage. If the trust was established during the relationship, funded with relationship income, and controlled by one spouse, this argument rarely succeeds. The court looks at substance over form.

Refusing to disclose trust documents. Both parties have a duty of full and frank financial disclosure. This extends to trusts and companies in which either party has an interest. Failure to disclose trust financial statements can result in adverse inferences (the court assumes the worst), costs orders, and contempt proceedings.

Practical Steps If Your Settlement Involves a Trust

1. Obtain the trust deed and amendments — understand who the trustee is, who the beneficiaries are, and what powers exist
2. Gather three years of financial statements — the trust's accountant can provide these
3. Identify distributions made during the relationship — bank records showing trust distributions used for family expenses
4. Engage a forensic accountant if the trust holds business interests or complex investments
5. Consider whether the trust assets should be split or offset — sometimes it is simpler to leave the trust intact and adjust the non-trust asset division accordingly

The Tasmania Divorce Financial Split Guide includes a commingled assets chapter and contribution assessment worksheets that help you document how trust-held assets were funded, used, and controlled — the key factors courts evaluate when deciding whether to include trust property in the pool.

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