What Happens to Family Trusts on Divorce

The courts in Australia have the power to include the assets within a trust in a matrimonial asset pool.

When the Court is deciding on whether or not a family trust is considered property they will the following into consideration:

• The trustee – who is it? (one or both parties);
• When was the trust formed?
• If the trustee is a company, who controls the company?
• Who are the beneficiaries, who is the settlor and who is the appointee?
• How did the trust acquire assets?
• What are the contributions from each party?
• How much income is distributed from the trust / who is currently receiving income from the trust?
• What are the terms of the trust?

It is essential to address family trusts when undergoing divorce proceedings, as family trusts may be included in a property settlement.

Family Trust Definition

If you are a trustee or beneficiary of a family trust, you will want to know what happens to family trusts on divorce.

Family trusts are common legal structures used in Australia with a multitude of benefits.

Under the Family Law Act 1975 (Cth), Family Trusts could be considered property and are thus liable to be divided between parties to a divorce.

The ‘legal owners’ of the trust are known as trustees and are in charge of managing and administering assets for the benefit of the beneficiaries.

Certain assets can include money, investments, shares and property that can be held within a family trust.

To form a family trust, the settlor provides the trustee with the assets to be held for the beneficiaries.

The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee, and the appointor.

The appointor is the person who has the power to change the trustee and is responsible for appointing and replacing the trustee or trustees if need be.

The beneficiaries are usually family members who may benefit from the trust, such as parents, children and grandchildren.

In the event of bankruptcy family trusts can protect assets from creditors, reduce tax rates and protect vulnerable family members from poor spending decisions.

They can also provide long-term financial support to future generations, however, in the event of divorce things can get complicated.

Family Trusts in Property Settlement

In property settlement cases, a family trust could be considered an asset/property or a financial resource. Under section 4 of the Family Law Act 1975 (Cth),  property is defined as;

a) in relation to the parties to a marriage or either of them—means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion; or
(b) in relation to the parties to a de facto relationship or either of them—means property to which those parties are, or that party is, as the case may be, entitled, whether in possession or reversion.

A trust might be considered property if either party has control over the trust as the appointor or trustee.

So, what happens to family trusts on divorce?

If the Court finds that one party influences the trust, the trust will then become part of the asset pool of a marriage or de facto relationship and can thus be distributed accordingly.

If one party is not listed as either the appointor or trustee but is indirectly controlling the trust, the trust could still form part of the asset pool.

A trust may also be referred to as a ‘financial resource.’

This is because a financial resource is an asset that will generate income in the future, such as an inheritance or a beneficiary’s interest in the trust.

Parties can not access this immediately but if there is intent to obtain distribution from the trust as income or capital then the trust will be considered a financial resource in Australia.

Once considered a financial resource, under section 75(2) of the Family Law Act 1975 (Cth), the Court will take the trust into account as a potential future necessity for one or both parties of divorce.

Justice Family Lawyers has extensive experience in family trust and divorce law, and are committed to safeguarding our client’s rights and interests. In this article, we’ll explain the role of family trusts in divorce, and discuss how best to factor them into any property settlement arrangement.

Divorced Couple’s Property Settlement

The court considers various factors when determining how to divide a family trust in the event of a divorce.

You may be seeking to exclude a family trust on divorce, and if so, you would need to convince a court that you are not in control of the trust.

The size of the trust, its assets, where it was established, and the expectation of the trustees in terms of the control each beneficiary is entitled to over the trust, are taken into consideration.

If the family trust has been determined to be included in the divorce property settlement, it’s recommended that you seek legal advice.

There are numerous ways in which trust assets may be distributed between the parties, including by way of payment, loan or transfer of asset shares, and a lawyer experienced in family trust law can determine the best option in each case.

Trust Protection From Divorce

Whether or not assets in a trust are protected from divorce is a complex question that depends on a multitude of factors. Here’s a breakdown to help you understand the issue:

Types of Trusts

• Revocable Trusts: Assets in a revocable trust, where the grantor (person who set up the trust) retains control, are generally considered part of the marital estate and thus subject to division in a divorce.
• Irrevocable Trusts: Assets in an irrevocable trust, where the grantor gives up control, can offer some degree of protection in a divorce, but it depends on several factors outlined below.

Factors That Influence Asset Protection in Divorce

• Timing of Trust Creation: Trusts created before marriage are more likely to be considered separate property and shielded. Trusts established during a marriage might be viewed with suspicion as an attempt to hide assets.
• Beneficiary: If you are the beneficiary of a trust created by someone else (e.g., a parent), and you’re not the grantor, the assets within the trust are usually protected from your divorce. However, if you are both the grantor and the beneficiary, protection levels vary.
• Type of Irrevocable Trust: Some irrevocable trusts are designed explicitly for asset protection in divorce or from potential creditors.
• State Laws: Each state has laws governing property division in divorce proceedings, and how those laws treat trusts can differ.

Important Considerations:

• Income from Trusts: While the assets within a trust might be protected, income distributions from the trust can potentially be considered marital property, influencing factors like spousal support (alimony) calculations.
• Commingling Assets: If you mix marital assets (like salary from a job) with assets held in a trust that would otherwise be separate, you risk complicating the classification of those assets within the divorce proceedings.

Quick Summary

• Family trusts fall under Family Law Act 1975 (Cth), meaning they could potentially be divided between parties in a divorce.
• It’s essential to address family trusts when undergoing divorce proceedings, as they can be included in a property settlement.
• The court will consider various factors when dividing a family trust in the event of a divorce, including the size of the trust, assets, establishment location, and the beneficiaries’ entitlements.
• It is recommended that legal advice is sought when the family trust is due to be included in a divorce property settlement, as there are numerous ways in which trust assets may be distributed between the parties.

At Justice Family Lawyers, we have significant experience in family trust law, especially in the context of divorce.

We know how complicated this area of law can be and are committed to helping our clients understand their rights and what needs to be done in each specific case.

ontact us today for a free initial consultation and to discuss how to protect your family’s trust in the event of a divorce.