How Are Family Trust Assets Treated in Property Settlement?

Trust assets are not automatically in or out of the property pool, and the answer turns on control. Where a party effectively controls the trust, the assets may be treated as property of that party. Where control is not made out, the interest may still be relevant as a financial resource.

This page expands the existing two stage test to explain when a trust is treated as property, what the control test looks at, what disclosure is needed and when a third party trustee should be joined.

When a trust is property

Trust assets may be treated as property of a party if the party effectively controls the trust, for example as trustee, appointor and beneficiary, so that the assets are in substance theirs. If not, the interest may be treated as a financial resource relevant to future needs under s 79.

Kennon v Spry [2008] HCA 56; (2008) 238 CLR 366 is the key High Court authority on discretionary trusts in family law property proceedings. The decision focuses on whether the trust is in substance the party’s property, not merely whether the party is named as a beneficiary.

Relevant indicators of control include.

• Who is trustee, including whether the party is trustee or director of the corporate trustee.
• Who holds the power to appoint or remove the trustee, often called the appointor or principal, and whether that power has been exercised.
• Distribution history, including whether distributions have been made regularly to the party or at the party’s direction.
• The deed’s terms, including who can benefit, who can be added or removed, and what powers the trustee actually has.
• Whether the trust has been treated as a personal bank account, such as using trust funds for personal expenses without proper trust processes.

No single factor is decisive. The court looks at the substance of the control in the round.

Evidence, disclosure and joining the trustee

Disclosure duties extend to trust documents, financial statements and distribution minutes where the party has control or access. Where a party claims no control, the other side will still seek those documents to test that position. Incomplete disclosure tends to lead to an inference that the documents would not have helped the party withholding them.

Third party trustees may need to be joined to proceedings so orders can bind them. If the trustee is not a party, an order that requires the trust to act may not be effective. Joining the trustee allows the court to make orders that the trust must meet, where the trust is found to be property or where the financial resource is taken into account.

Example

A husband is sole director of the corporate trustee and appointor. The wife is a beneficiary. The trust owns an investment unit. The husband has directed distributions to himself, the trust has paid personal expenses, and the deed lets the appointor replace the trustee. On those facts, the court may treat the unit as property of the husband and include it in the pool, with disclosure of the deed, financial statements and minutes and, if necessary, the corporate trustee joined so the order can be enforced. If the husband had no role, no power and no distribution history, the interest would more likely be treated as a financial resource for future needs.

See Also

• Trust assets in the property pool
• Power of appointment and trust property
• Legal Matters Ep 24: trusts and property settlement
• Testamentary trusts in Queensland

This page provides general legal information only; it is not personal legal advice. Everyone’s situation is different, so please seek independent legal advice for your own circumstances.