Family trusts are a commonly used structure in Australia for tax benefits and/or for asset protection purposes. They may be used as a tool for protecting  assets from creditors in the event of bankruptcy; protecting vulnerable family members (such as a child with special needs or an adult with a gambling or drug addiction; or older parents who are retired) who may make unwise financial decisions if they controlled assets in their own names; providing greater flexibility in tax planning; operating a business either for investing or for trading; avoiding challenges to a Will.

It is important for everyone who has a trust structure to understand how the Federal Circuit and Family Court of Australia treats trust assets in property settlements in the event of separation or divorce.

What is a Family Trust?

Family trusts (often refer to discretionary trusts) are usually set up by a family member for the benefit of member(s) of the ‘family group’ to hold a family’s assets and/or conduct a family business. They serve the purpose of protecting family assets and limit liability in relation to the business. The key players in a trust agreement are the trustee who manages/administers the trust and must always act in the best interests of the beneficiaries; and the appointor who is the most important person as he or she controls the trust by being able to remove the trustee and appoint another trustee.

The beneficiaries of the trust usually have no defined entitlement to the assets of the trust. Each year, the trustee decides which beneficiaries are entitled to receive the income and how much they should get. Hence, discretionary trusts are favoured by many people in family tax planning.

What approach do the Courts take to dealing with the matrimonial asset in a family trust?

There are two ways in which a family trust is treated by the Court. It can either be treated as an asset being included in the matrimonial asset pool or a financial resource.

An Asset or a Financial Resource?

Where family trusts become relevant in Family Law is whether they are considered to be part of the asset pool available for distribution between the parties in a relationship breakdown.  What needs to be determined is whether the trust forms an asset of either of the parties. Please refer to our Property Settlements page if you are interested in the’ four-step process’ approach adopted by the Court in determining a just and equitable division of the matrimonial asset pool.

The relevant step for the purpose of this article is step 1- identifying and valuing both parties’ assets…

The definition of ‘property’ is a broad one.  ‘Property’ is defined under section 4(1) of the Family Law Act 1975(Cth) (Act), as ‘property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.’ Although it is never straightforward to identify the parties’ assets and liabilities, the landmark case of Kennon & Spry (2008) 238 CLR 366; [2008] HCA 56 (Kennon &  Spry) may shed some light on whether an interest in a family trust falls within the category of ‘property’/’asset’.

Kennon & Spry

The High Court in Kennon & Spry considered whether the assets of a family trust could be considered as property of the parties to a marriage; thus could be subject to a property adjustment under section 79 of the Act. It should be noted that the family trust in question included the matrimonial home and other assets.


In that case, the husband, in 1968 established the ICF Spry trust (the Trust) of which he was the sole settlor and trustee. The parties then married in 1978. There are four children of the marriage. In 1981, the Trust Deed was executed and stamped nominating all the beneficiaries being the husband, his siblings, his and his sibling’s children and the spouses of all of them to the exclusion of the wife (1981 Instrument). In 1983, the husband executed an instrument to exclude himself as a beneficiary of the Trust. In 1998 prior to the parties’ separation, the husband varied the trust deed to exclude himself and the wife as capital beneficiaries of the Trust so that the capital could not be distributed to him or the wife (1998 Instrument). The parties separated in 2001.  The husband also started to move assets from the Trust into other trusts for his children. In 2002, the wife commenced proceedings seeking Orders for property settlement, maintenance, and section 106B Orders to set aside the 1998 instrument.


The fundamental issue for determination was whether either party had any remaining interests in the Trust that could be considered ‘property of the parties to the marriage’ for the purpose of section 79 of the Act.


After a five-day hearing in August 2005 in the Family Court at Melbourne, Strickland J delivered judgment on 30 November 2005 setting aside the 1998 Instrument. His Honour ordered that on or before 28 February 2006 Dr Spry pay his wife the sum of $2,182,302.

Following the necessary appeal procedures which are not material for present purposes,  the High Court concluded that the assets of the family trust, coupled with Dr Spry’s power to appoint them to his wife and her right to due consideration, were, until the 1998 Instrument, the property of the parties to the marriage for the purposes of section 79 of the Act. Gummow and Hayne JJ in their joint judgment highlighted that the fact that Dr Spry removed himself as a beneficiary by the 1983 Deed did not affect that conclusion.

The majority of the High Court ultimately determined that the trust assets were to be included as property because the husband had the liberty to utilise the income and the capital of the family trust. The Court reversed those transactions pertaining to the 1998 instrument. French CJ opined that property of such a nature held under a non-exhaustive discretionary trust with an open class of beneficiaries by a party to the marriage did not necessarily lose its character as property of the parties to the marriage if:

  1. Such property was acquired by or through the effort of that party or his or her spouse, whether before or during the marriage.
  2. A party to the marriage is the trustee of the trust; and
  3. The trustee can, under the terms of that trust, distribute the property away to other family or extended family members at his or her discretion.
Takeaways from Kennon & Spry

The key principle of determining whether the assets in a family trust should be included in the matrimonial asset pool is who has control over the trust and the extent of that control. The Court would have to be satisfied that the trust is not a ‘puppet’ to defeat the other party’s property claim as to the matrimonial assets. 

The following elements are relevant when making a decision relating to whether the trust assets should be included in the asset pool:

  1. Whether either party is the appointor of the trust;
  2. Who is the trustee; who are the beneficiaries;
  3. If either party is the trustee or director of the company that is a corporate trustee;
  4. If either party has been receiving regular distributions from the trust; if so, how much income is distributed from the trust;
  5. How the assets of the trust were initially acquired;
  6. Whether the trust was established by one or both parties;
  7. Did both parties accumulate the trust assets while they were in a relationship and have control.

It is noteworthy that in circumstances where trust assets are not held to form part of the matrimonial assets that are available for division between the parties, it may still be regarded as a ‘financial resource’ which may be taken into account by the Court when considering section 75 (2) of the Act as a ‘future need’ for one or both parties.

How can a Family Trust be excluded from a Family Law property settlement?

This question would be more appropriately answered by your accountant in conjunction with seeking legal advice. As Genesis Edge Law Group is not a financial advisor and cannot give financial advice, we would be happy to refer you to a suitable financial advisor and/or a tax specialist.

As a guide, the ruling in Kennon & Spry suggests that a family trust should not be used to disadvantage a spouse’s rightful claim under the Act. A trust is more likely to be outside the reach of the Family Law Courts if neither of the parties have control of the trust. Trust assets are unlikely to be excluded from a Family Law property settlement if the structure is such that individuals are receiving assets from the trust or an income from the family trust if it is intended that the family trust should not be included in the matrimonial asset pool available for distribution in any potential property settlements as a result of a relationship breakdown.

Our recommendation

When you seek accounting/tax advice on changing a trust in the event of a separation, we recommend that you ask your accountant to get in contact with us, so they are aware of the possible effect of varying a trust deed and/ or transferring trust assets.  Suffice to say, whether a trust asset will form part of the matrimonial assets available for distribution or whether it will be outside of the reach of a property settlement claim in the context of Family Law will depend on your specific circumstances.

Family Law cases involving family trusts are highly technical. Each family trust case is unique, it is important that you speak to one of our highly qualified and experienced family lawyers at Genesis Edge Law Group about your specific situation as soon as possible. Please contact us to arrange a consultation.