By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)

A common question for anyone generating a degree of wealth is how can I protect my assets from divorce and can trusts protect assets from divorce.

The short answer is the assets of a standard form of trust are almost always available on divorce (the reasons are set out below).  However, with special advice and the use of particular forms of trust, assets can be protected from divorce.


On divorce or breakdown of a de facto partner relationship, the court follows a four step process in determining the property split:

  1. Step 1 – Calculate the net asset pool by reference to assets, liabilities and financial resources of the parties;
  2. Step 2 – Evaluate the contributions of each party;
  3. Step 3 – Assess various factors in Section 75 (2) of the Family Law Act predominately concerned with age, financial capacity, commitments and responsibilities;
  4. Step 4 – consider what is just and equitable.

In calculating the asset pool, apart from liabilities, there are two components that increase the amount of the pool:

  1. Property of the parties to the marriage;
  2. Financial resources (being items that do not comprise property, but from which the parties benefit).

After determining the pool (made up of the property and financial resources) the court then decides an allocation based on a number of factors, one of which is the financial contributions of the parties to the property. The allocation (Step 4) is within the total discretion of the court.

Importantly, the order of the Court in Step 4 is limited to what is property, the court does not have the power to make an order against financial resources (even though those items increase the amount of the asset pool).

For example, if the property of the parties were $1 million and financial resources $5 million, and the court considered it just and equitable to make an allocation of 50% each, even though 50% comprises $3 million the court could only make an order against the property of the parties to the marriage ($1 million).

Therefore, to prevent assets from being available on divorce/breakdown of the de facto relationship, the objective is to structure them in a manner that they are not considered property of the parties to the marriage.

Property will clearly include items that one of the parties to the marriage owns in their personal names.  In addition, where a party to the marriage has a fixed interest in a company or trust (such as holding a unit in a unit trust, or some other fixed interest in another form of trust) the fixed interest will be Property.

The starting point in avoiding assets from being available on divorce is utilising a trust in which all beneficiaries are discretionary beneficiaries, but that alone is not sufficient.

Are the assets of a trust Property?

In 2008, the High Court decision in Kennon v Spry outlined principles for determining whether the assets of a trust are Property. The two principals coming from the case are:

  1. Principle 1 – where the husband and partner both have control of the trust and are beneficiaries, the assets of the trust will be considered Property. It is only necessary for one of them to occupy the position, and it need not be the same person;
  2. Principle 2 – where a party to the marriage has contributed to the trust property, and has the enjoyment/use of the trust property, the assets of the trust may be considered Property.

Principle 1 is the clear principal coming from the case.  Principle 2, whilst not decided by the majority, comes out of some of the judgements and has been adopted in subsequent Family Law cases.

The result of the decision in Kennon v Spry is that assets held within a trust, including one that is described as a Bloodline Trust, or any other form of trust, are not excluded on a divorce or relationship breakdown merely because they are held in a trust. It depends upon whether the terms of the trust are such as do not satisfy Principle 1 and the circumstances do not satisfy Principle 2.

Where a Trust fails to satisfy both Principles 1 and 2, the property of the Trust will not be considered property of the parties to the marriage and the Family Court will not be able to make an order to adjust property interests in respect of that property.

In the usual case, the husband, the wife or the husband and the wife are the trustees or sole directors of a corporate trustee, or the appointor/principal with the power to change trustees, and are also the beneficiaries, the assets of the trust will be Property that is available to be split by the Family Court.

It is not simply a matter of appointing your accountant, other professional adviser or trusted friend to be the trustee, director or appointor/principal.  If that person is a mere puppet that acts in accordance with your directions or wishes, you will be considered to control the trust even though you are not a trustee, director, or appointor/principal.

The means to avoid this result (that is, satisfy Principle 1) is to sever the link between the controller of the Trust and Beneficiaries of the Trust. 

The options are:

  1. One: Formulate the control positions in the trust such that the parties to the marriage are not alone able to implement decisions – this option requires specialist advice as to whether the control positions cause a severance of the link between control and beneficiaries;   
  2. Two: Exclude the parties to the marriage as beneficiaries, so that a party to the marriage is not in the dual position of controller and beneficiary – this option is rarely practical since the parties will want to enjoy the financial benefits generated by the trust;
  3. Three: Incorporate special provisions under which the parties to the marriage will cease to be beneficiaries in certain defined events.  Such a provision causes a severance of the link between control and beneficiaries.  It is of an effective option but is subject to the risk that a court may consider it against public policy as an attempt to oust the jurisdiction of the court.
  4. Four: The best approach, and the approach most suited to estate planning, is the adoption of a special form of Portioned Trust which will provide:

4.1     A fixed interest to the family of each principal beneficiary (e.g., each child);

4.2     Within the group comprising the family of a principal beneficiary, interests are discretionary;

4.3     Control of the trust shared between the principal beneficiaries, with no one principal beneficiary able to pass decisions or control the trust;

4.4     Certain assets can be allocated for the benefit of a particular principal beneficiary’s family, but this is not necessary;

4.5     The balance of the trust is shared amongst the principal beneficiary’s families in proportion to the determined fixed interests, which can be equal and is consistent with a person’s estate planning objectives.

Importantly, this form of trust is supported by decisions of the Family Court.