Family Trusts in Divorce: Control and Tracing

When Trust Assets Count as Property

Trust assets can count as property of a party, or of the parties, where the trust’s legal structure and the party’s powers support that conclusion. A discretionary beneficiary usually has no fixed share of the whole trust fund. That starting point does not end the property inquiry under the Australian Family Law Act 1975.

In Kennon v Spry [2008] HCA 56, the High Court upheld orders involving a discretionary family trust. French CJ’s reasoning combined the husband’s legal title and power to appoint the fund to his wife with her right to due administration. Gummow and Hayne JJ also examined the wife’s rights and the husband’s powers. Kiefel J relied on the separate settlement power in s 85A.

The decision supports looking beyond the statement that a spouse “owns nothing”. It does not make every discretionary trust the property of whichever spouse receives a distribution. The deed, enforceable rights and powers must support the proposed treatment.

Does a family trust protect assets in a divorce?

A family trust often provides little protection from a property claim where a spouse controls access to its wealth. Where a spouse benefits without owning the fund, the benefit can still affect the settlement as a financial resource. A parent-controlled trust can stand differently if the spouse cannot direct distributions or replace the trustee.

Even then, a history of regular support can establish a financial resource. If the spouse has neither relevant property rights nor a sufficiently supported expectation of benefit, the fund may fall into neither category. Identify the legal interest separately from any expectation of future support.

Older property decisions discuss financial resources through the former s 75(2) framework. Under the amended property framework, s 79(5)(c) expressly addresses income, property and financial resources. Section 75(2) remains relevant to spousal maintenance. The official reform guidance explains the transitional exception for proceedings whose final hearing had already commenced when the amendments took effect.

A financial resource affects the assessment of current and future circumstances. It is not automatically an asset available for transfer. A family trust can continue after divorce, with settlement orders dealing with particular interests or assets instead of terminating the trust. Estate succession requires a separate assessment from the separation-specific property inquiry.

What if the family trust excludes the wife?

Excluding a wife from the beneficiary class does not by itself determine the property settlement. Read the exclusion’s terms and examine each spouse’s powers, enforceable rights and financial benefit. A wife need not be a beneficiary for the court to examine her spouse’s property interests or financial resources.

In Kennon v Spry, the court upheld setting aside an instrument that excluded the spouses from capital benefits, alongside later dispositions. The decision does not invalidate every spousal exclusion. Assess the particular deed and any basis for setting aside a variation before relying on that result.

Indicators of Control

Control depends on the powers a person holds and how the trust actually operates. Read the original deed with every variation and appointment instrument. A current deed alone may conceal an earlier power or the change that removed it.

Build a record of the people who hold the relevant positions:

• The trustee holds legal title and exercises the deed’s distribution powers.
• Directors of a corporate trustee make the company’s decisions, subject to its governance arrangements.
• The appointor may have power to remove and replace the trustee. Read the conditions and any requirement for another person’s consent.
• Other power holders may control deed variations, beneficiary changes or consent to distributions.

A title alone proves little about the scope of a power. For a corporate trustee, obtain the company records showing directors, shareholders and changes in those roles. For an appointor, identify succession provisions and any joint appointment requirements.

Compare those documents with instructions to the accountant, trustee resolutions and bank access records. Ask who requests payments, approves distributions and decides which family expenses the trust meets. A spouse’s access to online banking is evidence about operation, but does not itself establish ownership of the fund.

If a trust carries on a business, keep the control inquiry separate from business valuation in divorce. A business valuation answers how much an interest is worth. It does not establish who has the legal power to use the trust’s assets.

What Trust Bank Statements Show

The trust’s statements identify payments to beneficiaries and record the timing of transfers. Payments for a spouse’s private expenses can support evidence that the trust funds their life. School fees or home-loan repayments become more informative when they recur and match that spouse’s instructions.

Match each payment with its accounting treatment and supporting document. A payment might be a distribution, loan, reimbursement or trust expense. The description on a bank statement rarely determines which one it is.

Trace distributions from the trust account into the beneficiary’s personal account. Where money passes through a company first, match both legs and explain the company’s role. Keep beneficiary loan repayments separate from income distributions so the same cash movement is not counted twice.

An unpaid present entitlement is an amount allocated to a beneficiary but not yet paid. It may appear in a resolution or the trust’s accounts without a corresponding bank transfer. Reconcile the entitlement with the beneficiary ledger and later payments. Its legal treatment depends on the documents establishing the entitlement.

A Hypothetical Payment Trail

Suppose a trust pays $18,000 to a school and transfers $30,000 to a related company during the same quarter. The company then pays $30,000 into the spouse’s personal account. Matching the company’s debit with the personal credit establishes the cash route.

The school invoice identifies whose fees the trust paid. The distribution resolution and company loan ledger explain whether the other payment was income, a loan or repayment of an existing balance. Together, these records test the spouse’s account of how the trust supports them.

FinTrace saves hours of statement review by tracing transfers across supplied trust, company and personal accounts. Its searchable Excel ledger and clear findings report put the payment trail together, with each finding tied to its source PDF filename and page. That gives the lawyer and forensic accountant the supporting evidence at hand for the control inquiry.

Transfers Around Separation

Moving assets into a family trust shortly before or after separation can be undone where the statutory test is met. Under s 106B, the court can set aside or restrain a disposition intended to defeat an existing or anticipated order. The power also covers a disposition likely to defeat such an order, irrespective of intention.

Separation timing alone does not establish that test. Date each transfer from the debit and matching credit, then compare the chronology with deed changes and communications. Record the property transferred and the recipient’s interest. Section 106B requires protection of bona fide purchasers and other interested persons.

Joining Third Parties and Making Orders

Join the trustee or another affected person when the orders sought require their participation or would affect their rights. A corporate trustee is a separate legal person from its directors. Family members with competing interests may also need to be parties so they can respond to the proposed orders.

Part VIIIAA of the Family Law Act permits property orders that bind third parties. Section 90AE(2) allows orders directing a third party to act regarding a party’s property. It also allows alteration of third-party rights, liabilities or property interests in relation to the marriage. Depending on the established interests, this can support an order requiring a trustee to transfer or distribute assets.

Section 90AE does not provide an automatic right to take a trust’s assets. Under s 90AE(3), the court must satisfy each applicable condition:

• The order is reasonably necessary, or reasonably appropriate and adapted, to divide property between the spouses.
• For an order concerning a spouse’s debt, non-payment in full must not be foreseeable when the order is made.
• The third party has received procedural fairness.
• The order is just and equitable in all the circumstances.
• The order takes account of the matters in s 90AE(4).

Those matters include tax effects on the spouses and third party, social security effects on the spouses and the third party’s administrative costs. They also cover repayment capacity for debt orders, the third party’s capacity to comply and matters raised by that third party. The court can consider any other relevant matter.

Prepare the evidence for those conditions before seeking a transfer or distribution order. Obtain the deed history and company records, identify other beneficiaries’ interests and establish available assets and liabilities. Add evidence about tax consequences and the trustee’s practical capacity to carry out the proposed order. Explain the particular property division the order will achieve.

Section 90AC lets a valid Part VIIIAA order operate despite a conflicting trust deed. Section 90AG binds a successor trustee where the order binds the current trustee in that capacity. Neither provision removes the conditions for making the order.

Use subpoenas for trust and accountant records where the necessary documents are held outside the parties’ disclosed material. Present the payment chronology with the deed powers and the proposed orders. That connects evidence of control and benefit to the relief your client seeks.