Trusts in Family Law Matters

Why trusts are different

A trust is not a legal person. It is a relationship between a trustee, a beneficiary, and trust property. In Australian law, a beneficiary's interest in a discretionary trust is famously described as a mere expectancy — not a present entitlement to any particular asset. This creates a fundamental question for family law: how can a beneficiary's interest in a trust be reached when the beneficiary has no proprietary interest in the trust assets?

The Family Court's approach is pragmatic. It looks past form to substance. Where a spouse has effective control of a trust, the trust assets may be treated as property of the marriage. Where control is genuinely shared with third parties — other beneficiaries, independent trustees, family members — the trust may instead be treated as a financial resource, relevant to the section 75(2) factors but not part of the divisible pool.

This article addresses both treatments, the leading case of Kennon v Spry, and the practical implications for spouses involved in trust structures.

The Kennon v Spry framework

The leading authority is the High Court's decision in Kennon v Spry [2008] HCA 56. In that case, the husband was the sole trustee and a beneficiary of a discretionary trust. The trust held substantial assets accumulated during the marriage. The High Court held that the trust assets were property of the marriage capable of being divided under section 79 of the Family Law Act 1975 (Cth).

The reasoning has been refined in subsequent cases, but the core proposition remains: where a spouse has effective control of a discretionary trust, the trust assets can be treated as property of the marriage, even if neither spouse has a proprietary interest in the conventional sense.

Three considerations are central to the analysis.

Identity of the trustee

If the spouse is the sole trustee, the case for treating the trust as property of the marriage is at its strongest. If the trustee is a corporate entity controlled by the spouse, the analysis is similar. If the trustee is a third party with genuine independence — an unrelated professional trustee, a relative who has historically acted independently — the analysis becomes more complex.

Identity of the appointor

The appointor (sometimes called the principal or guardian of the trust) holds the power to appoint and remove the trustee. Effective control of the appointor role often determines control of the trust as a whole, because a trustee can be replaced if it does not act as the appointor wishes. Where one spouse holds the appointor power alone, the case for control is strong.

Pattern of distributions

A long history of distributions to the spouse and the broader family unit may evidence control. Sporadic or formal distributions to a wider class of unrelated beneficiaries may evidence genuine independence. Trust accounts and tax returns over the life of the relationship are often the most reliable evidence of how the trust has actually been used.

Property of the marriage versus financial resource

A trust may be treated in three different ways in family law proceedings.

Property of the marriage

Where the trust is controlled by one spouse, its assets are valued and added to the property pool for division under the four-step process. Orders may include the spouse retaining the trust assets and paying compensation through other property, the sale of trust assets, or in some cases the dissolution of the trust itself.

Financial resource

Where the trust is not controlled by either spouse, but one spouse is a beneficiary who has historically received distributions, the trust may be treated as a financial resource. It is not part of the divisible pool, but it is relevant to the section 75(2) factors — the parties' future needs, earning capacity, and access to financial support. A spouse with a financial resource of substantial value will typically receive a smaller share of the divisible pool than they would otherwise.

Not relevant

Some trusts are treated as not relevant to the property settlement at all. A trust where neither spouse is a beneficiary, where distributions have never been made to either spouse, and where neither spouse has any reasonable expectation of distribution may be set aside from the analysis entirely.

The line between these three treatments is contested. The same trust may be characterised differently depending on the pattern of past distributions, the likelihood of future distributions, the relationship between the trustee and the spouse, and whether the spouse can compel distributions.

The control test in practice

Australian family law jurisprudence has developed a "control" test for trusts. The Court asks: who, in substance, controls the trust? The analysis is broader than legal title. It includes:

• Who acts as trustee, and how independent is the trustee?
• Who is the appointor, and how have they exercised the power?
• Who has historically made decisions about distributions, investment, and trust property?
• Who has the practical ability to compel or prevent distributions?

A trust nominally controlled by an independent trustee can still be treated as controlled by a spouse if the trustee acts at the spouse's direction, if the spouse has the practical ability to remove and replace the trustee, or if the structure exists to obscure rather than separate control.

Conversely, a trust where decisions are genuinely made by independent trustees, where distributions go to multiple unrelated beneficiaries, and where the spouse has limited practical influence is more likely to be treated as a financial resource — or in some circumstances not relevant at all.

Common scenarios

The family business held in a trust

A discretionary trust holds a business that generates income for the family. One spouse is the sole director of the trustee company and the appointor of the trust. This is the paradigm Kennon v Spry case. In most circumstances, the trust assets will be treated as property of the marriage, and the value of the business will be added to the property pool.

The inherited family trust

A trust established by a parent or grandparent, holding intergenerational family wealth, with one spouse as one of multiple beneficiaries. If the parent or grandparent (or another relative) acts as appointor and makes independent decisions, the trust may be treated as a financial resource rather than property of the marriage. The analysis is highly fact-specific and depends on the operation of the trust during the marriage.

The asset-protection trust

A trust established for asset-protection reasons. If the spouse retains practical control through trustee or appointor positions, the trust will likely be treated as property of the marriage, regardless of its stated purpose. If genuine independence exists — with independent trustees, multiple unrelated beneficiaries, and arms-length decision-making — the position is more complex.

The post-separation distribution

A trust controlled by one spouse makes distributions, after separation, to the controller or to entities under their control. These distributions are vulnerable to challenge under section 106B of the Family Law Act. The Court can set aside or order an account of such distributions, and the controlling spouse's credibility may be damaged in the process.

What to do if a trust is involved

Identify the structure carefully

The first step is documenting the trust structure: trustee, appointor, beneficiaries, default beneficiaries, and the history of distributions. Trust deeds, deeds of variation, and minutes of trustee resolutions should be obtained and reviewed. The structure as described in the deed is sometimes different from how it has operated in practice; both need to be examined.

Obtain trust accounts and tax returns

A long-running trust generates a paper trail of distributions, capital movements, and accounting entries. This documentation is often the most reliable evidence of who controls the trust and how it has been used. Family lawyers will typically request several years of accounts and tax returns as part of the disclosure process.

Consider third-party interests

Where a trust has multiple genuinely independent beneficiaries, those interests must be respected. Joining third parties — other trustees, beneficiaries, or family members — to family law proceedings is common and can complicate negotiations. Early engagement with affected third parties often produces better outcomes than late-stage joinder.

Be careful about post-separation distributions

Trustees, even controlled trustees, owe duties to all beneficiaries. Post-separation distributions to the controller or related entities draw the most scrutiny — both from the Court and from the other spouse's lawyers. Routine distributions consistent with prior practice are usually unproblematic; extraordinary distributions, distributions that have not previously occurred, and capital distributions all require careful legal advice before they are made.

Consult specialists early

Trust analysis in family law is one of the most complex areas of the practice. A family lawyer with experience in trusts and corporate structures, working alongside accountants and tax advisors, is often necessary to assess the position and develop a strategy. The cost of getting this analysis right early is almost always less than the cost of getting it wrong.