Can a Trust Protect an Inheritance From Your Child’s De Facto Partner?

Can a trust protect an inheritance from your child’s de facto partner?

A testamentary trust or discretionary trust may assist with succession planning and asset control, but it does not automatically keep an inheritance outside a de facto property settlement. The structure, the trust deed, who controls the trustee and appointor powers, how the trust is administered and the family’s actual conduct can all matter.

This issue commonly arises where parents want to leave a home, investments, business interests or family wealth to an only child, but are concerned that the child’s de facto partner could obtain a benefit if the relationship later breaks down. The answer is rarely achieved by simply making the child the sole appointor, sole controller and sole beneficiary. In some cases, concentrating every important control in the child can make the trust more exposed, not less.

The short answer: control matters as much as title

A trust separates legal ownership from beneficial enjoyment. The trustee holds the trust property, while beneficiaries may receive income or capital under the trust deed. That separation can be important, but family-law courts look beyond labels.

The practical question is often: who can make the important decisions? A person who can appoint or remove the trustee, control the trustee company, direct distributions or enjoy the trust fund may have an interest that is highly relevant in a property settlement. The High Court’s decision in Kennon v Spry demonstrates why effective control and the practical benefit available through a discretionary trust can be central to the analysis.¹

A trust may be treated differently depending on whether it is property available for division, a financial resource, or neither on the particular facts. The outcome is not determined merely by calling the structure a ‘family trust’ or a ‘testamentary trust’.

What happens to an inheritance after separation?

An inheritance is not automatically excluded from consideration simply because it came from a parent. The timing of the inheritance, the length of the relationship, the parties’ contributions, the use made of the inherited property, each person’s future needs and the overall justice and equity of the outcome can all be relevant.

For example, an inheritance received shortly before separation and kept separate may be treated differently from an inheritance received early in a long relationship, used to purchase the family home, mixed with joint funds or used to support the family. A future expected inheritance may also be relevant as a financial resource in some circumstances, even though it is not presently owned.

The family-law question is therefore broader than ‘whose name is on the asset?’ It is necessary to understand the whole financial relationship and the legal structure through which the inheritance is held.

What is a testamentary trust?

A testamentary trust is created by a will and begins after death. Instead of giving an asset directly to a child, a will can direct that the asset be held by trustees for the child and other beneficiaries on terms set out in the will.

A properly designed testamentary trust may offer benefits such as:

• Flexibility about when income or capital is distributed.
• Protection for a beneficiary who is young, vulnerable, financially inexperienced or at risk of exploitation.
• A framework for managing a family business, investment portfolio or property.
• Potential tax and succession-planning benefits in appropriate circumstances.
• Greater control over how and when capital is made available.

However, the trust’s effect depends on its design and administration. A testamentary trust is not automatically immune from family-law scrutiny merely because it was created by a parent’s will.

Why a sole appointor and sole beneficiary can create risk

A common proposal is to make the only child:

• The sole appointor or principal.
• The sole trustee, or sole director of a corporate trustee.
• The sole person able to appoint and remove trustees.
• The main or only beneficiary.
• The person who effectively decides whether income or capital is distributed.

That arrangement may be administratively simple, but it can concentrate practical control in the child. If the child can effectively obtain the trust assets, change the trustee or direct distributions, the structure may be vulnerable to being characterised as property or at least as a financial resource in a family-law dispute.

The title given to a role is less important than the power it carries. A person described as a ‘guardian’ may have very significant control if their consent is required for trustee decisions. Conversely, a trustee may have limited practical freedom if the appointor can remove them at will.

What changes if there are other children or trusted relatives?

The analysis may change where there are other children, adult grandchildren, trusted relatives or genuinely independent people able to hold a real governance role. A structure may be more robust if the child cannot unilaterally control the trustee or obtain capital whenever they choose.

Possible design features to discuss with an estate-planning solicitor include:

• An independent trustee, or a corporate trustee with genuinely independent directors.
• A trusted co-appointor or successor appointor who is not simply acting at the child’s direction.
• A broader class of discretionary beneficiaries, such as other children, grandchildren, charitable entities or remoter descendants where appropriate.
• A protector or guardian role with carefully defined powers and succession provisions.
• Distribution provisions that require trustee discretion rather than giving one beneficiary an immediate right to the capital.
• A staged or purpose-based distribution approach for a family home, education, medical needs or business participation.
• Clear replacement and succession provisions for trustees, directors and appointors.

These measures do not automatically decide the family-law result. The court may examine whether independence is genuine, whether trustees make their own decisions, who has received distributions historically, who has access to trust accounts and whether the child can control the structure in substance.

Is a discretionary trust better than a testamentary trust?

Neither structure is automatically better. A discretionary trust established during life may suit some business, investment and succession arrangements. A testamentary trust is created under the will and can be tailored to the assets passing on death.

The better question is: what does the family need the structure to do? The answer may differ where the estate includes a family home, a farming enterprise, a professional practice, a share portfolio, superannuation death benefits, minor children, vulnerable beneficiaries or competing family interests.

A structure built solely around the idea of excluding a partner can create other problems, including cost, complexity, tax consequences, family conflict and poor succession. It should form part of a considered estate plan rather than a last-minute asset-protection response.

Can a binding financial agreement provide better protection?

A binding financial agreement, often called a BFA or ‘prenup’, can directly address how property and financial resources are to be dealt with if a relationship breaks down. For de facto couples, the Family Law Act 1975 (Cth) provides for agreements before, during and after a de facto relationship under ss 90UB, 90UC and 90UD respectively.²

A financial agreement can be drafted to address present assets, future acquisitions, inherited property, interests in trusts and financial resources. It can be a more targeted instrument than relying on a trust alone, but it must be properly prepared and executed.

A financial agreement is not a standard form. It must be in writing, meet the applicable statutory requirements and be supported by independent legal advice for each party. It may be vulnerable to challenge or being set aside in the circumstances identified by the legislation, including fraud, material non-disclosure, impracticability and other relevant conduct.³

What if the de facto couple later marries?

This is an important planning point. A financial agreement prepared only for a de facto relationship may not address the relationship in the same way after marriage. Where marriage is contemplated, advice should address whether complementary or replacement arrangements are needed under the marriage provisions of the Family Law Act.

Do not assume that an agreement remains suitable simply because the couple’s relationship has continued. The legislation, the agreement wording and the couple’s changing circumstances should be reviewed before a major life event.

Other options to consider

A trust and BFA are not the only possible tools. The right approach may involve more than one document or structure.

Do not create sham loans, artificial arrangements, backdated records or rushed restructures after separation to defeat a partner’s claim. Such steps may create significant legal and evidentiary problems.

Timing and family conduct matter

Estate planning is strongest when it is done early, reviewed regularly and implemented consistently. A structure created only after a relationship has deteriorated, or operated in a way that contradicts the documents, may attract close scrutiny.

Parents should also consider the human side of the plan. A structure that leaves an adult child entirely dependent on a sibling or relative may cause conflict even if it appears protective. The right balance often involves independence, clear succession and flexibility rather than absolute control by one person.

Questions to ask before choosing a structure

• Who will control the trustee after my death?
• Can my child remove the trustee or appoint themselves as sole controller?
• Who will be eligible to receive income and capital?
• Is a corporate trustee appropriate, and who will be its directors?
• Are proposed independent decision-makers genuinely independent and willing to act?
• What happens if the child marries, separates, becomes bankrupt, loses capacity or dies?
• Is a BFA appropriate for the child’s present or anticipated relationship?
• Are there other children, grandchildren, relatives or charitable interests to consider?
• Does the estate include a home, business, farm, superannuation benefit or asset requiring specialist treatment?
• When should the will, trust deed and related documents be reviewed?

Common questions

Can I stop my child’s partner from ever making a claim?

No structure can guarantee that a child’s partner will never make a claim or that a family-law court will ignore the inherited wealth. The court’s analysis depends on the legislation, the relationship, the assets, the trust powers and the surrounding facts. A parent cannot unilaterally contract out a person who is not a party to the proposed arrangement.

Should my only child be the sole appointor?

That requires tailored advice. Sole appointor powers may give the child substantial control over the trustee and therefore the trust property. This may work against an asset-protection objective, particularly if the child is also trustee, director and main beneficiary.

Can a BFA cover a future inheritance?

A financial agreement may deal with property or financial resources acquired later, including future inheritance or trust interests, if it is properly drafted under the relevant statutory framework. Its effectiveness depends on its wording, execution, disclosure and the circumstances in which it was made.²

Is adding my other children as beneficiaries enough?

Not necessarily. Adding other children or relatives may broaden the beneficiary class, but the key issue remains who has actual control and how the trust operates. A broad class of beneficiaries is less helpful if one child can direct every distribution and replace the trustee at will.

What if there are no relatives I can trust to act independently?

An independent professional trustee or corporate-trustee solution may be worth considering, depending on the estate size, complexity and costs. The appropriate option depends on the family, the assets and the child’s needs.

Related resources

• Read more about family law and property matters .
• Explore wills and estates planning .
• See our information on commercial law and business structures .
• Contact Bell & Senior Lawyers for advice tailored to your circumstances.

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