Many families use discretionary trusts to hold property, investments and business assets. These structures are often established with asset protection in mind, including protection from claims arising after a relationship breaks down.
A recent Full Court decision is an important reminder that placing assets in a trust does not necessarily place them beyond the reach of the Family Court.
The real question is not simply whose name appears on the trust deed. It is who has the power to control the trust.
What Changed?
In Caldwell and Caldwell, the Court considered three discretionary trusts containing wealth accumulated by the husband’s family over several generations.
The husband had never received a distribution from the trusts. He also shared certain positions of control with his adult sons. At first instance, the Court found that the trusts were a financial resource available to the husband, but that their assets were not his property and therefore did not form part of the property pool.
The wife appealed.
By majority, the Full Court overturned that decision and declared the trusts to be property of the husband for the purposes of the property settlement.
The critical issue was the husband’s ability to take control of the trusts. Among other things, he had powers that could enable him to:
It did not matter that the husband had never exercised those powers. What mattered was that he had the present ability to do so.
Control Matters More Than Labels
The decision builds on the approach taken by the High Court in Kennon v Spry, where trust assets were treated as property available for adjustment because of the husband’s effective control over the trust.
The practical lesson is straightforward. A Court will look beyond the names and titles recorded in the trust documents and examine how the structure operates.
A person may have effective control where they can:
Control does not need to have been exercised. The existence of the power may be enough.
Does This Mean Every Family Trust Is at Risk?
No. The outcome will depend on the wording of the trust deed, the powers held by each person and the way the trust has been administered.
A person who is merely one of several potential beneficiaries will not necessarily be treated as owning the trust assets. Similarly, a genuinely independent trustee or appointor may support the position that the assets are not controlled by either spouse.
However, placing family members or advisers into formal positions will not necessarily protect the trust if one spouse retains the practical ability to replace them or direct the trust’s affairs.
The Court will examine the substance of the arrangement, not merely its appearance.
What Does This Mean for Existing Trusts?
If your family holds significant assets through a discretionary trust, it may be time to review:
Any restructuring must be carefully considered. Changes made shortly before or after separation can attract scrutiny and may be set aside. They may also have taxation, duty, succession and commercial consequences.
Planning Before a Dispute
Discretionary trusts remain valuable structures for holding and managing family wealth. However, they are not a guaranteed shield against a family law property claim.
The effectiveness of the structure depends on where control actually sits.
Talk to Our Team
If your trust was established many years ago, has undergone changes in control or now holds substantial family or business assets, Zervos Lawyers can review the structure and advise on its family law, estate planning and succession implications.
Anthony Ghabrial | Partner
E anthonyg@zervoslawyers.com.au
Disclaimer This article is intended to provide general information only and does not constitute legal advice. It should not be relied upon as a substitute for tailored legal advice from a qualified professional. Please contact Zervos Lawyers to discuss your specific circumstances.
