Are Trusts Protected in an Australian Divorce or De Facto Separation?
Many Australians use trusts for asset protection and tax planning. People often assume that trust assets automatically stay safe from property settlements in a divorce or de facto separation. However, if one or both parties control the trust, its assets and income may become part of the property settlement.
When Must You Disclose an Interest in a Trust?
During a separation, each party must fully disclose all assets, liabilities, and financial resources. This includes assets owned individually, jointly, or through companies and trusts.
If you are a trust beneficiary, you must disclose documents that confirm your interest. These documents may include:
- The trust deed (including any variations);
- Financial statements and tax returns for the three financial years before separation.
The requirement to provide these documents depends on your level of control over the trust.
How Do Courts Treat Trusts in Property Settlements?
A trust can fall into one of two categories in a property settlement:
- An Asset – If one party controls the trust, the court may treat it as an asset and include it in the property pool.
- A Financial Resource – If a party benefits from a trust but does not control it, the court may consider it a financial resource. While the trust won’t be directly divided, it may influence the settlement outcome.
Control plays a key role in determining how the court treats a trust.
When Does a Trust Become Part of a Divorce Settlement?
If the court views a trust as an asset, it will include its value in the total asset pool for division. This often happens when one party:
- Serves as the trustee or director of a corporate trustee;
- Acts as the appointor or principal (the person who can remove and replace trustees);
- Regularly receives distributions from the trust;
- Uses trust assets, such as living in a property owned by the trust or borrowing funds from it.
If one party set up the trust before the relationship and primarily funded it, they may receive credit for their initial contribution. However, this does not guarantee they will receive the full amount during the asset division.
When Can a Trust Be Excluded From a Property Settlement?
A trust is more likely to remain separate from the asset pool if:
- Neither party controls it;
- An independent third party serves as trustee and appointor;
- One party is a beneficiary but does not receive regular income or benefits.
Even if the court does not include a trust as an asset, if one party relies on its income, the other party may receive a greater share of other assets to compensate.
Proving Who Controls a Trust
A trust may appear controlled by a third party, such as a parent, accountant, or business associate. However, one party can argue that their ex-partner actually controls the trust. To prove this, they must show that the trustee or appointor follows the ex-partner’s instructions (often referred to as a ‘puppet’ trustee). Evidence might include:
- A history of receiving distributions from the trust;
- Making financial decisions related to trust assets;
- Living in a trust-owned property or using its assets personally.
If the court finds that one party controls the trust, it may classify it as an asset of the relationship.
Who Keeps the Trust in a Property Settlement?
If a trust is part of the asset pool, the court will decide how to allocate its value between the parties. The decision depends on:
- The availability of other assets for division;
- Whether it is practical to transfer trust assets or income to the other party;
- The tax consequences of transferring trust assets.
If the trust structure is complex, one party may agree to receive other assets or ongoing payments instead of a direct share in the trust.
Key Considerations for Trusts in Family Law Matters
If your family controls a trust and you are a beneficiary, consider how you use the trust’s assets and income during your relationship. If you regularly access these resources, the court may include them in a property settlement.
If your ex-partner has an interest in a trust, seek legal and accounting advice as soon as possible. Understanding the trust’s structure and financial position early on can help you determine your entitlements and negotiate a fair settlement.
Final Thoughts
If you are facing separation and your financial situation includes trusts, seek professional advice. An experienced family lawyer can guide you through financial disclosure and determine whether trust assets should be part of your settlement. Financial advisors can also help you manage tax implications and protect your financial future.
This is general guidance only and not legal advice. Do not take action based on this article without obtaining legal advice from an experienced lawyer.