Family and discretionary trusts have long been used as a layer of asset protection, but recent decisions in the Family and Supreme Courts have significantly changed how much protection they actually provide.
The Common Assumption
Many families hold wealth, often built up across generations, inside discretionary trusts. The structure is popular for good reason: it offers flexibility in how income and capital are distributed, and it is widely believed to keep that wealth outside the reach of a divorcing spouse’s property settlement. A recent Full Court decision shows that belief needs updating.
The Legal Starting Point: Kennon v Spry
The modern test traces back to the High Court’s 2008 decision in Kennon v Spry. Dr Spry had set up a discretionary trust years before marrying, then amended it to remove his wife as a beneficiary shortly before the couple separated. The High Court found that because Dr Spry, as trustee, retained effective control over the trust and had used it to benefit the family, the trust assets counted as property of the marriage under section 79 of the Family Law Act 1975 (Cth). The removal of his wife as a beneficiary was undone.
The lesson from that case has held for nearly two decades. What matters is not who is named trustee, appointor or beneficiary on paper, but who can actually direct what happens to a trust’s assets, and who has actually benefited from them.
Caldwell and Caldwell: The Case That Changed the Picture
That principle was tested again, and significantly clarified, in Caldwell and Caldwell.
The case concerned three discretionary family trusts set up by a husband’s father, holding wealth built up across multiple generations of the family. At first instance, the trial judge found the trust assets were a financial resource of the husband, relevant to how the couple’s remaining property should be divided, but stopped short of finding they were property in their own right. On that reasoning, the trusts stayed outside the divisible pool altogether.
The wife appealed. In May 2026, the Full Court overturned that finding. It declared the trust assets were property of the husband under section 79, meaning they were now available for division between the parties.
What tipped the balance was not how the husband had actually behaved, but what he was able to do. He could remove his adult sons as coappointors or principals of the trusts. He held voting rights over the shares in the trustee companies. And the trust deeds allowed distributions to him personally. He had never used any of these powers, but the Full Court held that the mere ability to control the trusts, to decide who runs them and who benefits from them, was enough on its own. The family’s original intention to preserve wealth across generations did not change that outcome.
Why This Matters More Than It Used To
Caldwell 2 is now the current law, and it sits in real tension with older commentary written before the appeal, much of which still circulates and still assumes the earlier, more favourable outcome. A trust survives scrutiny only where control has genuinely and structurally been given away. It is not enough that the wealth originally came from a parent’s estate, or that family history frames the money as belonging, in substance, to someone else.
Put simply, the question a court now asks is not whether control was ever exercised, but whether it existed at all.
A Different Angle: Who Gets to See Inside a Trust
A related question came up in Smorgon v ES Group Operations, a Victorian Supreme Court decision that continues to be cited today. It was not a divorce case. Following the death of Robert Smorgon in 2019, his daughter sought access to years of financial records across eighteen associated discretionary trusts, in order to prepare a family provision claim against his estate. The trustees resisted, arguing that a discretionary beneficiary has no proprietary interest in trust assets and therefore no automatic right to see how they are managed.
The court disagreed. It held that the right to disclosure does not depend on owning a share of the trust. It comes from the court’s own supervisory jurisdiction over how trusts are administered. A trustee can be ordered to produce documents to a beneficiary, even one with no proprietary interest at all, if disclosure is necessary to check that the trust is being properly run.
Read together, Caldwell and Smorgon send a consistent message from two different directions. Controlling a trust does not make it untouchable. Having no control over a trust does not make you shut out of it either. Courts look past the labels on a trust deed to how it actually operates in practice.
What This Means For You
If your family holds wealth inside a discretionary trust, a few practical points are worth acting on now.
Talk To Us
Discretionary trusts remain a valuable and flexible way to hold family wealth, but they are not a set and forget structure, and they are no longer a guaranteed shield in a property settlement. If your family’s trust was established some time ago, or you are unsure who currently holds the power to control it, our family law and estate planning teams can review the structure with you well before it becomes an issue in a separation or a dispute over an estate.
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.
