What happens to a family trust on divorce?

On divorce or separation, a family trust will be considered an asset of the property pool to be divided between the couple.

A family trust can be an important asset in a relationship, and hence it is important to understand how such a structure may be affected during a divorce. Essentially, assets within a family trust will be included in the property pool to be split between you and your ex partner. This will be dependent on the interests and control that each party exerts over the trust and other circumstances surrounding its creation and purpose within the family relationship. 

What is a family trust? 

A family trust is an agreement that allows a person or company (known as the trustee) to hold assets and property for the benefit of a family member (the trustor). Trusts are founded on a fiduciary relationship, which means that the trustee must act in the trustor’s best interests and put these interests over their own. A family trust is also sometimes called a discretionary trust. 

Family trusts are normally established to protect the trustor’s property and benefit family members economically. For example, they may offer additional financial benefits for family members that may be appointed as beneficiaries of the trust.

Family trusts can also offer some legal protection of assets owned, as generally creditors will not be able to access a trustee’s personal assets. They can also be used to protect assets from other relationship breakdowns. 

Hence, to ensure that the trust is able to continue achieving its purpose, it is important to understand how it may be affected if a relationship breakdown occurs. 

How is a family trust treated in a family law proceeding? 

In Australian family law, the Court identifies all assets owned by the parties in the relationship in a process called property settlement. The assets that are identified in this process can extend to family trusts that may be held by both parties. As mentioned above, whether or not the assets within a family trust are considered as part of the overall asset pool to be split will depend on the nature of a party’s interest and their degree of control over the trust. 

In determining whether a party has control over a trust, the court can consider factors that is considers relevant, which can include: 

• The terms stipulated in the trust deed
• Who the trustee is
• If the trustee is not the partner, the degree of control that the partner has over the trustee
• Who the beneficiaries of the trust are
• What assets are held within the trust
• How these assets were acquired 
• The contributions by one or both parties to the trust
• What benefits each party gains from the existence of the trust 

Generally, trusts will be considered as part of the property pool to be split between both parties. To determine the amount of assets each party gets, the court will have regard to: 

• The contributions of each party to the relationship 

This will include considerations of both financial and non-financial contributions such as salary and domestic activities conducted at home. 

• The future needs and obligations that each party needs to meet in the future 

This will include factors relevant to caring for children, the future earning capacity of each individual and any other future financial obligations. 

The court will take all these considerations into account to ensure that the result of the property settlement is just and equitable in all the circumstances of the case. 

In what circumstances will a family trust not be considered a financial resource? 

Where one party is simply a beneficiary of a family trust created by their parents, who are both the appointor and trustee, the court will likely not take this into account as part of your asset pool to be split during a divorce. However, it is important to note again that each case turns on its own circumstances. As the Family Court strives to provide individualised justice to every case, they will not use a set formulae and thus it is difficult to generalise certain facts. 

Whilst family trusts are normally not the contentious issue raised in Court, we recommend that you seek legal advice if there are any complex issues raised by your trust. This will ensure that you take the best steps available in protecting your wealth in the event of a divorce. 

If you need any assistance regarding a property settlement following separation, including advice around how family trusts can be dealt with, feel free to reach out to us.