Estate planning and pre-existing discretionary trusts

Discretionary trusts are commonly used by Australians as an effective vehicle for managing family wealth, offering asset protection benefits and flexibility in passing trust assets between generations. When a marriage or de facto relationship ends and the parties are negotiating a property settlement a question arises: when examining the parties’ financial positions, do assets held in a discretionary trust for one of the parties form part of the asset pool? This article looks at when the Court is likely to consider assets held in a trust as part of the asset pool and what that means for wills and estate planning.

The Court’s starting position for the separation of assets

The Court has jurisdiction under the Family Law Act 1975 (Cth) (Act) to make orders for the division of property when a marriage or de facto relationship ends. That power is not open-ended. Before the Court can alter anyone’s property interests, it must first be satisfied that doing so is just and equitable. The Act makes it clear that in every case:

“The Court must not make an order under this section unless it is satisfied that, in all the circumstances, it is just and equitable to make the order.”^[1]

In practice, the Court needs a principled reason to interfere with the rights each party already holds.^[2]The first step is for the Court to identify the parties’ existing legal and equitable rights and interests in property.^[3] This requires an assessment of what assets and liabilities exist, who has an interest in them and whether those interests form part of the property pool which is available for division. The Court then weighs the contributions made by each party and their current and projected future circumstances, including any financial resources available to them.^[4]

For relationships that have endured for many years, identifying and valuing the property pool is rarely straightforward. Assets may be acquired, inherited, transferred through trusts, held in companies, or otherwise structured in ways that obscure the nature and extent of the person’s interest.

Are the assets in or out of the pool – three (3) options

When the Court examines a trust in a property dispute, it can deal with its assets in one (1) of three (3) ways:

Property available for division: If one party has direct or indirect absolute control over the trust assets and is a beneficiary, the trust fund does not “necessarily lose its character as property of the parties to the marriage” under section 79 of the Act.^[5] The property is evaluated as being equivalent to the value of the trust assets and added directly into the matrimonial pool to be valued and split.^[6]

Financial resource: If a party benefits from a trust but does not control it (for example they receive distributions but cannot unilaterally appoint trustees or modify the trust deed), the trust assets are not included in the pool. Instead, the Court treats the trust as a financial resource under section 75(2)(b) of the Act.[7] While the trust assets remain outside the pool, their existence justifies an adjustment in the division of the remaining property to account for the disparity in the parties’ prospective financial positions.^[8]

Neither: If a party is merely a discretionary beneficiary with no legal or practical control over the trust and where the likelihood of receiving a benefit is entirely speculative or uncertain, the Court may conclude the party’s interest is a “mere expectancy or hope” that is too remote to impact the final property settlement.^[9]

The Court is concerned with the reality of who exercises control over a trust, not just what the deed says. Three (3) considerations drive this analysis: control, benefit and source of wealth.

An authority on how those considerations play out is the case of Kennon v Spry (2008) 238 CLR 366 (Kennon v Spry). In this case, Dr Spry was the sole trustee of a family discretionary trust. As his marriage to Mrs Spry broke down, he amended the trust deed and transferred its assets valued at approximately $4.7 million into four (4) separate discretionary trusts for his children.^[10] The High Court of Australia (High Court) found that Dr Spry’s dealings with the trust, including the transfer of assets to the children’s trusts were intended to defeat or diminish Mrs Spry’s anticipated claim to a property settlement.^[11] The High Court held (by 4:1 majority) that Mrs Spry’s right to the due administration of the trust, together with Dr Spry’s power as trustee to appoint the whole of the trust fund to her, constituted property of the parties to the marriage for the purposes of section 79 of the Act.^[12] In reaching this conclusion, at paragraph 62 of the judgement the Court emphasised:

Dr Spry’s legal title as sole trustee;
his power to appoint the whole fund to Mrs Spry; and
Mrs Spry’s equitable right to be given due consideration as a potential beneficiary of the trust.^[13]

Four (4) principles

The following principles came out of Kennon v Spry:

Control alone is not enough: After 1983, Dr Spry retained control of the trust but had excluded himself as a beneficiary. The High Court recognised that trust assets do not become a party’s property merely because that party exercises control over the trust. However, the position is different where control is coupled with a capacity to benefit.^[14]

The origin of the assets matters: Assets acquired through the efforts of a party or spouse do not necessarily lose their character merely because they are held in a trust.^[15] In Kennon v Spry, the trust held assets that had largely been accumulated through Dr Spry’s efforts during the marriage. The High Court recognised that assets do not necessarily lose their connection to the parties simply because they are held in a trust and contrasted that position with a trust holding assets “foreign” to those acquired by the parties, where a different conclusion may be reached.^[16]

Powers and rights can be property: Dr Spry had the power to appoint the whole of the trust fund to Mrs Spry, and Mrs Spry had a right to due consideration as a beneficiary. The High Court held that these rights and powers, together with Dr Spry’s legal title as trustee, constituted property of the parties.^[17]

The Court takes property as it finds it: The High Court reaffirmed that the Family Court cannot disregard the legal and equitable interests of third parties when assessing a party’s property interests. Those interests must be recognised and taken into account, although they will not necessarily prevent the Court from making orders affecting the property. French CJ explained at paragraph 68, citing Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337:^[18]

“Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it. The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.”^[19]

[Bold is our emphasis]

Recent decisions confirm the principles

Recent decisions continue to demonstrate that the Court’s focus remains on practical control rather than formal trust structures. In Caldwell & Caldwell [2026] FedCFamC1A 81 (Caldwell & Caldwell) the Full Court held at paragraph 53 that a trust may constitute a party’s property where that party has the present ability to exercise effective control over the trust, even if formal steps are required to exercise that control. The Full Court stated:

“As we sit here – the husband may vote in a manner which gives him effective control. No more is required.”

By contrast, in Barrett & Winnie [2022] FedCFamC1A 99 (Barrett & Winnie) the trust assets remained outside the property pool because the trust was not controlled or treated by the spouse as her own property. At paragraph 137 the Full Court noted that the trust “had never operated as or been treated as the alter ego of the [wife]“. Significant third-party interests and contributions were also relevant, and the trust assets were ultimately treated as a financial resource rather than property of the marriage.^[20]

These cases demonstrate that the Court’s focus is not the trust structure itself, but the practical realities of control, benefit and ownership. Those same considerations are equally relevant when designing estate planning structures intended to preserve family wealth for future generations.

When trust assets are most vulnerable to property spousal property settlements

From an asset protection perspective, trust assets may be more vulnerable to inclusion in the matrimonial property pool where the party associated with the trust:

is the primary beneficiary of the trust;^[21]
is the trustee and can distribute trust income and capital to themselves;^[22]
holds rights or powers that confer effective control of the trust, even though those powers have not yet been exercised;^[23]
treats the trust assets as their own assets, such that the trust operates as their alter ego or personal wealth vehicle;^[24]
has accumulated trust assets through wealth generated by the efforts of the parties during the relationship (does not apply to testamentary trusts).^[25]

When viewed collectively, these factors place effective control and beneficial enjoyment in the hands of the party, increasing the likelihood that the trust property will be treated as being available for division in family law proceedings.

When trust assets are more likely to be treated as a financial resource:

By contrast, where a party can be considered for distributions but does not control the trust or the trustee, the trust assets are less likely to be treated by the Courts as their property.

Factors suggesting a trust may be treated as a financial resource, rather than property, include where the party associated with the trust:

is merely one (1) discretionary beneficiary among several;
is not a trustee or appointor of the trust and cannot compel distributions;
has historically received benefits but does no longer controls the trust; and
the party may receive future benefits from the trust, but has no ability to control or compel those benefits.^[26]

The likelihood of a trust being treated as a financial resource may also increase if the trust assets originated from a parent, grandparent or other family source outside of the marriage (for example, through a testamentary trust. n these circumstances, the trust assets may remain outside the matrimonial property pool. However, the Court may still take the trust into account as a financial resource when determining an appropriate division of the parties’ other assets.

When trust assets are most likely not to form part of the asset pool

The strongest asset protection position generally arises where control, benefit and ownership are deliberately separated. Factors favouring exclusion from the property pool include:

is one (1) of many beneficiaries;
has no ability to direct decisions of the trustee;
has no fixed entitlement;
does not control the administration of the trust;
has only a remote or speculative prospect of receiving future benefits from the trust.^[27]

The further a party is removed from practical control of the trust, the more difficult it becomes to characterise the trust assets as their property.

What does this mean for estate planning?

The principles discussed above apply not only to inter vivos (living) trusts but also to testamentary discretionary trusts. When assessing an interest in a trust, the Court looks beyond the title of trustee to where practical control lies. Whether trust property is in reality the property of a party:

“is a matter dependent upon the facts and circumstances of each particular case including the terms of the relevant trust deed.”^[28]

Accordingly, when structuring a testamentary discretionary trust, careful consideration should be paid to:

who is the trustee;
who holds the power to appoint the trustee;
who can benefit from the trust;
whether trust powers are concentrated in one (1) person; and
whether the trust genuinely operates for the benefit of multiple beneficiaries.^[29]

Passing control of existing trusts under a will

Assets held in an existing discretionary trust generally cannot be gifted under a will, because they are owned by the trust. The trustee only holds the legal interest in them. Subject to the terms of the trust deed, a will can usually pass the appointor role to a chosen successor. Whoever holds that role may ultimately determine who receives the benefit of the trust assets and who controls their future distribution. Accordingly, the same considerations of control and benefit discussed above apply.

Key takeaways

Where a single individual exercises substantial control over a trust, there is an increased risk that its assets will be treated as property of the relationship in family law proceedings.^[30]

Control and benefit are considered as well as legal title.^[31]
Concentrating trustee, appointor and beneficiary powers in one (1) person significantly increases risk.^[32]
Independent decision-makers and genuine separation of powers may strengthen asset protection arguments.^[33]
The most effective trust structures generally separate control, benefit and ownership rather than concentrating them in a single beneficiary.^[34]

Legislation

Family Law Act 1975 (Cth)

Cases

Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337

Barrett & Winnie [2022] FedCFamC1A 99

Caldwell & Caldwell [2026] FedCFamC1A 81

Kennon v Spry (2008) 238 CLR 366

Further information

If you need advice on estate planning to protect inter-generational wealth or making a testamentary discretionary trust will, contact us for a confidential and obligation‑free discussion.

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au

Disclaimer

This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Family Law Act 1975 (Cth) ss 79(2), 90SM.

[2] Stanford v Stanford [2012] HCA 52 [42].

[3] Family Law Act 1975 (Cth) ss 79(3), 90SM(3).

[4] Family Law Act 1975 (Cth) ss 79(3)–(5), 90SM(3)–(5).

[5] Family Law Act 1975 (Cth) ss 79.

[6] Kennon v Spry (2008) 238 CLR 366 at [65]–[66].

[7] Family Law Act 1975 (Cth) ss 75(2)(b), 79(5)(c).

[8] Kennon v Spry (2008) 238 CLR 366 at [5], [55].

[9] Kennon v Spry (2008) 238 CLR 366 at [160].

[10] Kennon v Spry (2008) 238 CLR 366 at [2] [13], [20],[32], [47].

[11] Kennon v Spry (2008) 238 CLR 366 at [28]-[29].

[12] Kennon v Spry (2008) 238 CLR 366 at [46]-[48].