Family Trusts and Relationship Breakdowns: What Clients and Advisers Need to Know

Family trusts have become a popular tool in Australian wealth management, offering flexibility, tax advantages, and preserving wealth across generations. However, when personal relationships break down—whether through divorce or separation—the role of family trusts becomes significantly more complex. This article explores how Australian courts treat family trusts during relationship breakdowns, the effectiveness of common asset protection strategies, and the ethical responsibilities of advisers in guiding clients through these challenges.

Legal Treatment of Trusts in Divorce

Under the Family Law Act 1975, courts are empowered to ensure that property settlements are “just and equitable.” While a trust is a separate legal entity, courts often look beyond the legal structure to determine who truly controls and benefits from the trust.

In the landmark case Kennon v Spry (2008), the High Court ruled that assets held in a discretionary trust could be included in the marital asset pool if one party had effective control. Courts consider:

• The identity and independence of the trustee
• The powers of the appointor
• The history of trust distributions
• Whether the trust supported the family’s lifestyle
• The timing of the trust’s establishment

Recent cases, such as Harris & Dewell [2018], reaffirm that courts will “look through” trust structures if there is evidence of de facto control.

Asset Protection: Strategies and Limitations

Common strategies used to protect trust assets include:

• Appointing independent trustees
• Drafting trust deeds that limit control and discretion
• Entering into Binding Financial Agreements (BFAs)
• Maintaining consistent and transparent trust administration

However, no structure is immune from scrutiny. Courts may still include trust assets in the property pool if they determine that one party has effective control or has benefited significantly from the trust.

As legal experts from Osborn Law note, “Even well-drafted trusts can be vulnerable if the Court finds evidence of de facto control.”

Ethical Considerations and the Role of Advisers

Using trusts to shield assets from former partners raises important ethical questions. While families have a legitimate interest in protecting intergenerational wealth, the Family Court’s role is to ensure fairness.

Financial advisers, lawyers, and accountants play a crucial role in helping clients understand both the technical and ethical dimensions of asset protection. Advisers are encouraged to:

• Be transparent about the limits of asset protection
• Promote open communication between partners
• Encourage proactive and ethical planning

As Movement Legal advises, “Advisers must be honest with clients about the likelihood of court intervention.”

Building Resilience in Wealth Planning

Resilience in wealth management involves more than just legal safeguards. It includes:

• Regularly reviewing trust structures
• Keeping detailed records of trust decisions and distributions
• Preparing for both prosperity and crisis
• Working with experienced legal and financial professionals

Philosopher Martha Nussbaum aptly states, “Resilience is not the absence of vulnerability, but the capacity to recover and adapt in the face of adversity.”

Key Takeaways

Substance over form: Courts prioritize control and benefit over legal structure.

No structure is bulletproof: Even the best-drafted trust can be scrutinized.

Plan proactively: Regular reviews and documentation are essential.

Ethics matter: Transparent and fair planning builds long-term security.

Seek expert advice: Professional guidance is crucial in complex family and financial matters.