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Family Law / Trusts

Trusts and Family Law in Victoria

Discretionary trusts sit at the centre of many high net worth family law disputes. The question is rarely whether a trust exists. It is whether the trust is treated as property of one party or as a financial resource only, and how the Court approaches trustee control and beneficiary entitlements. Pentana Stanton acts on trust questions in family law matters across Victoria, including the structures that survive separation and the structures that do not.

Key takeaways

  • The threshold question is whether a discretionary trust is property under section 79 of the Family Law Act 1975 (Cth) or a financial resource only. The answer turns on control, not on labels.
  • Kennon v Spry remains the leading High Court authority. Where one spouse effectively controls the trust, trust assets can be treated as that spouse's property for property settlement purposes.
  • Trustee decisions taken during a separation are subject to scrutiny under Karger v Paul principles and may be set aside where the discretion has been exercised in bad faith or for an improper purpose.
  • Resettlements, vesting events, and major distributions during a separation expose trustees to clawback under section 106B and to personal claims for breach of trust.
  • Testamentary trusts created in a will offer some protection from a beneficiary's future divorce, but the protection depends on drafting, control architecture, and the conduct of the trustee after the testator's death.
i.

What this practice area covers

This page anchors our work on trust questions in family law matters. It covers the treatment of discretionary trusts in property settlements, the Kennon v Spry control test in practical application, beneficiary rights to information and to challenge trustee decisions, sham trust arguments where the trust is alleged to be a vehicle of one party rather than a genuine arrangement, and the intersection between separation and the client's broader estate planning.

The cluster sits across two practice areas. From a family law perspective, trust treatment can determine whether a particular pool item is in or out, how it is valued, and how it is realised. From an estate and succession perspective, separation can disturb a long-standing structure that was built around tax efficiency and intergenerational transfer rather than divorce risk. We act for trustees, beneficiaries, settlors, and family members who sit in more than one of those positions at once. The work often runs alongside corporate restructuring and trustee removal applications.

We are comfortable working with the trust deed, with corporate trustees and their constitutions, and with the surrounding documents (settlement deeds, deeds of variation, memoranda of wishes) that often determine outcomes more than the headline trust deed itself.

ii.

The legal framework in Victoria and Australia

Trust treatment in family law is governed primarily by section 79 of the Family Law Act 1975 (Cth), interpreted through a body of authority focused on control and benefit rather than legal title. State trust law also matters. The Trustee Act 1958 (Vic) governs trustee duties and powers in Victoria, including the powers of investment, the duties of impartiality, and the regime for judicial advice. Trustee duties under general law continue to apply in parallel.

The threshold authority is Kennon v Spry (2008) 238 CLR 366. The High Court held that where one spouse is the trustee or otherwise effectively controls a discretionary trust, and is also a beneficiary or has the power to appoint themselves a beneficiary, the trust property can be treated as property of that spouse for the purposes of section 79. The decision is fact specific and turns on control, the deed, and the practical history of distributions. It is not an automatic rule that all family trusts fall in.

Where a trust is not treated as property, it may still be treated as a financial resource of one party under section 75(2). This is a meaningful distinction. A financial resource is taken into account in the Court's assessment of future needs, but it is not subject to division. The strategic question in many matters is which side of the property/resource line a particular trust falls on, and what evidence is needed to push it one way or the other.

Trustee decisions are subject to Karger v Paul [1984] VR 161, which set out the principles by which a Court will review the exercise of a trustee's discretion. The Court does not substitute its own view, but it will intervene where the trustee has acted in bad faith, has failed to give real and genuine consideration to the exercise of the discretion, or has acted for an improper purpose. Karger v Paul is regularly cited in family law matters where one spouse alleges that distributions or resettlements made during the separation were designed to defeat their claim.

Harris & Dewell and Anor [2018] FamCAFC 94 illustrates how the Full Court applies Kennon v Spry in practice. The husband exercised effective control over a discretionary trust, and the trust assets were brought into the section 79 pool on that basis. The decision is a working example of the control test, and a reminder that the analysis is fact specific rather than driven by the labels in the deed.

Pre-separation trust restructures are exposed to section 106B in the same way as corporate restructures. Resettlements, vesting elections, and material variations to deeds during a separation should be treated as live evidence in any future proceedings, regardless of how they are characterised at the time.

iii.

How we work across this area

Trust questions in family law cannot be answered without reading the deed carefully, alongside every variation, every settlement document, and every material trustee resolution. This is the first piece of work in any trust-affected matter that runs through our practice. We do not start with submissions or with strategy. We start with the documents.

From there, the analysis turns on control. We map the appointor, the trustee composition, the relationship between trustee and beneficiary, and the practical history of distributions and decisions over the relevant period. In matters involving corporate trustees, we work through the constitution, the director composition, and any shareholder agreements. The control map drives the strategic options on both sides.

We work alongside corporate counsel, accountants, and estate advisers as a default, particularly where the trust sits inside a broader structure or carries succession implications. Where trustee removal or judicial advice is required, we run those applications in parallel with the family law matter rather than after it. Sequencing matters: a trustee decision taken before formal proceedings begin may be exposed under section 106B, but it is also harder to challenge once the trust has been administered consistently with it for an extended period.

Frequently asked

Questions clients ask about trusts in separation

Sometimes. It depends on whether one spouse effectively controls the trust. Where the controlling spouse is the trustee, or holds the power of appointment, or otherwise determines who benefits, the High Court accepted in Kennon v Spry that the trust property can be treated as property of that spouse for the purposes of section 79 of the Family Law Act 1975 (Cth). Where the trust is genuinely independent, with multiple beneficiaries and an arms-length trustee, it is more likely to be treated as a financial resource only, taken into account under section 75(2) but not divided. The analysis is fact specific and turns on control, the deed, and the history of distributions, not on the label on the deed.
Kennon v Spry (2008) 238 CLR 366 is the High Court decision that established the modern approach to discretionary trusts in family law property settlements. The substance of the test is that where one spouse has effective control over a discretionary trust and is also able to benefit from it, the trust assets can be treated as property of that spouse under section 79 of the Family Law Act. The decision examined the trustee's power, the appointor's power, the deed, and the practical use of the trust. It is not a bright-line rule. Each matter requires its own analysis of who really controls the trust and how it has been used.
A trustee's primary duty is to the beneficiaries, exercised in accordance with the deed and trust law. A trustee cannot protect trust assets by taking steps that breach those duties, and trustee decisions made during a separation are subject to scrutiny under Karger v Paul principles. Resettlements, large distributions, and deed variations made during the separation period are also exposed to clawback under section 106B of the Family Law Act. The right approach for a trustee facing a beneficiary's separation is to obtain independent advice early, document the basis for any decisions taken in the ordinary course, and avoid steps that could be characterised as attempts to defeat the claim.
A testamentary trust offers some protection where it is properly drafted, particularly where the beneficiary spouse does not control the trust and where distributions have been administered consistently with that. The protection is not absolute. Where the beneficiary effectively controls the trust, or where distributions have been used to fund family expenses in a way that suggests the trust is operating as that spouse's property, the Court can apply Kennon v Spry reasoning to a testamentary trust as readily as to an inter vivos trust. The drafting of the deed, the choice of trustee, the appointor structure, and the conduct of the trust after the testator's death all matter. Testamentary trusts should be designed for divorce risk at the will-drafting stage, not retrofitted later.
Sham arguments are difficult to make out and rarely succeed. The legal threshold is that the trust documents do not reflect the parties' true intentions, and that the trust was never intended to operate as a genuine trust at all. In family law matters, the more common and more effective argument is the Kennon v Spry control argument, which does not require the trust to be a sham. Where a sham is established, the consequence is that the assets are treated as belonging to whoever the Court finds the true beneficial owner to be, which can have significant tax and creditor consequences beyond the family law matter. Sham allegations are usually pleaded in the alternative to the control argument rather than as a primary case.
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Read the deed first. Then strategy.

We act on trust questions in family law matters across Victoria, working alongside corporate, tax, and estate advisers where the structure requires it. Initial consultations are confidential and run by senior practitioners.

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See also: Estate Planning, Property Settlement, Will Disputes.