People often set up a family trust believing it will keep the business or the investments safe if the marriage ends. Sometimes it does. Often it doesn't, because family law asks a different question from bankruptcy law. A creditor asks "who owns it?". The family court asks "who really controls it, and who has benefited from it?".
This guide explains how trusts are treated when a couple separates, why control decides most cases, a 2026 Full Court decision that every family with an inherited trust should know about, and the practical steps (binding financial agreements, loans from parents, trust deed design) that make a real difference. We're accountants, not family lawyers. Use this to understand the issues, and see a family lawyer for advice on your situation.
Are family trusts protected from divorce?
Not automatically. It depends on who controls the trust and how it's been used.
| Your situation | How the court is likely to look at it |
|---|---|
| You (or your spouse) are the appointor and the trustee or director of the trustee company | Trust assets can be treated as your property and included in the pool |
| You share control with someone else (for example as co-appointor) | Can still be treated as your property; see the 2026 Caldwell decision below |
| The trust is your parents' and they control it; you're one of many beneficiaries | More likely treated as a "financial resource" you may benefit from, rather than property to divide |
| The trust owes you money (unpaid distributions, a loan account) | That debt is your property and goes into the pool |
| You've regularly received large distributions | Supports an argument that the trust is a resource, or your property, even if someone else controls it |
The rules apply to marriages and, in most of Australia, to de facto relationships. The relevant powers are in the Family Law Act 1975, including the power to set aside transactions made to defeat a claim.
What if the family home is in a trust?
The same control test applies. If the couple, or one of them, controls the trust that owns the home they lived in, expect the home to be treated as part of the pool. Holding the home in a trust may have helped against creditors, but it rarely changes the outcome in a separation between the people who live in it and control the trust. If the home is moved out of the trust to one spouse as part of the settlement, check the CGT position (a trust-owned home usually has no main residence exemption) and whether a family law duty exemption applies in your state. Our guide to protecting the family home explains the trade-offs of trust ownership.
Why does control matter so much?
A discretionary trust beneficiary owns nothing until the trustee decides to distribute. That's why a trust protects well against a beneficiary's creditors. But if one spouse can hire and fire the trustee (as appointor) and is also the trustee, they can effectively direct the trust's assets to themselves whenever they choose. The family court looks at that reality, not the legal form.
The roles to check in your deed:
- Appointor (or principal): can remove and replace the trustee. The most important power.
- Trustee: makes the distribution decisions. If it's a company, look at who the directors and shareholders are.
- Guardian: some deeds require their consent to certain decisions.
- Beneficiaries: who can receive income and capital. A spouse who's a beneficiary has an interest worth arguing about.
Our family trust explainer covers these roles in more detail.
What did the 2026 Caldwell decision decide?
In Caldwell & Caldwell [2026] FedCFamC1A 81, decided on 11 May 2026, the Full Court of the Federal Circuit and Family Court treated three family trusts that the husband had inherited an interest in as his property in the property settlement. The key consideration was his capacity for control as a co-appointor. He didn't have to control the trusts alone.
The practical lesson for parents passing wealth down through trusts:
- If your child will hold the appointor role, alone or jointly, assume the trust may be treated as their property if they separate.
- If the goal is to protect the next generation's inheritance from their future relationship breakdown, control should sit with people other than that child: independent co-appointors and trustees, or a carefully designed succession of control.
- That design has to balance protection against your child's ability to actually use the wealth. It's a solicitor's drafting job, informed by the family's tax position.
It's why we now raise appointor and succession clauses whenever we review an intergenerational trust.
Can you change trust control to protect it?
Only if the deed allows it, and only for the right reasons at the right time.
- The deed's wording decides. In a WA case decided in 2015 and upheld on appeal in 2016, a variation changing the appointor failed because the deed's variation power only allowed the trustee to vary "the trusts", which the court held didn't extend to the appointor clause. A second deed with wider wording worked. Before any change, a trust solicitor must read the exact words.
- Timing matters. A change made when the relationship is already in trouble can be set aside by the family court as a transaction designed to defeat a claim, and it may be treated as evidence of control rather than removing it.
- Tax and duty. Most variations made under a valid power don't create a new trust for tax purposes, but some can, and some states charge duty where a variation changes beneficial interests in land. We check the tax side before your solicitor drafts.
How do binding financial agreements work with trusts?
A binding financial agreement (BFA) is a contract between partners about how property, including interests in trusts, companies and super, will be divided if they separate. It can be made before marriage or cohabitation, during the relationship, or after separation.
What makes them work:
- Each partner gets independent legal advice and the lawyer signs a certificate. Without that, the agreement isn't binding.
- Full and accurate disclosure. The agreement is only as good as the financial picture behind it. An agreement based on incomplete or misleading figures is vulnerable.
- Clear identification of every entity: each trust, company, SMSF, loan account and the assets in each, with values.
- Review when things change: a new business, a large inheritance, children.
BFAs can be set aside in limited circumstances, such as fraud, non-disclosure or a material change in circumstances relating to children. For many families they're the most effective tool available, and they are drafted by a family lawyer. Our job is the schedule: every entity, every asset, every loan account, with values and tax consequences, so the lawyer has accurate figures.
We usually raise a BFA when a client with a family business or trust is entering a new marriage or de facto relationship, when wealth is being brought into the family for an adult child, or when a second marriage brings blended-family questions.
How should parents lend money to adult children?
"Bank of Mum and Dad" money is one of the most common sources of dispute in a child's separation. If parents give $300,000 towards a house and the child separates two years later, a gift is usually treated as part of the couple's property pool. An informal "loan" with no paperwork, no repayments and no intention of ever being called up is often treated the same way.
To keep the advance recoverable:
- Decide whether it's a gift or a loan before the money moves, and be honest about it.
- Have a solicitor prepare a written loan agreement setting out repayment, interest (if any) and what happens on separation, death or sale.
- Register a mortgage over the property where practical, so the loan is secured.
- Act like a lender. Keep records, issue statements, and enforce the terms if needed. A loan nobody ever expected to collect looks like a gift.
- Consider lending from a trust rather than personally, and think about how the loan is dealt with in your own will.
If the money comes from a family trust or a company, check the tax side as well. A loan from a private company to a family member needs to be on Division 7A terms; see our Division 7A guide.
What are the tax consequences of a separation?
Family lawyers focus on who gets what. The tax cost of getting there can change the real value of a settlement.
| Issue | What to know |
|---|---|
| CGT on transfers between spouses | Transfers under a court order or a binding financial agreement can often use the marriage or relationship breakdown rollover, so no CGT is payable now. The receiving spouse takes over the original cost base, so the tax arrives when they sell |
| Assets moving out of a company or trust to a spouse | The rollover can apply in some cases, but not all. Model it before agreeing terms |
| Money paid from a private company to a spouse | Can be treated as a dividend under Division 7A, even if paid under a family law order |
| Stamp duty | Most states provide an exemption or concession for transfers under family law orders or agreements. Conditions vary |
| The main residence | The exemption follows the home's use. If one spouse moves out, the timing of any sale matters |
| Trust distributions after separation | The trustee must still consider beneficiaries properly. Cutting a beneficiary out, or favouring one, can be challenged |
| Family trust election | Check who remains inside the trust's family group before distributing to new partners or their entities |
| Super | Can be split by agreement or court order. Splitting doesn't trigger tax at the time; the split amount stays in super |
Our CGT agent works through the CGT on each proposed transfer and our Division 7A agent checks any payments out of a company. A qualified accountant reviews both and explains them to you and your lawyer.
What should you do if you're separating and have a trust?
- Get a family lawyer early. We'll refer you to one if you don't have one.
- Don't change the deed, the appointor, the trustee or the distribution pattern without legal advice.
- Gather the documents: the original trust deed and every variation, the last three years of financial statements and tax returns for each entity, loan account balances, minutes and resolutions.
- Have the accounts brought up to date so every loan account and unpaid entitlement is right. Wrong figures are expensive to argue about.
- Get tax advice on the proposed settlement before it's signed, so the split reflects after-tax values.
- Keep running the entities properly: BAS, payroll, tax returns and the 30 June resolution still need to happen. Our guide to trust distributions and section 100A covers the resolution.
Mistakes we see
- Assuming the trust is safe because the assets aren't in anyone's name.
- One spouse as sole appointor and director of every entity, with no thought for what that means if the relationship ends.
- Large unpaid distributions owed to one spouse, building up for years.
- Gifting children house deposits with no paperwork.
- Changing control after things have started to go wrong.
- A BFA signed without full disclosure of the business and trust values.
- Settling on pre-tax values, so one spouse ends up with the asset and the hidden CGT bill.
How BPAG helps
We don't give family law advice, and we don't take sides in a separation. What we do:
- Before anything goes wrong: review trust control and succession clauses, help design structures where control won't sit with one at-risk family member, and prepare the entity and valuation schedule a family lawyer needs for a BFA. Our trust deed agent summarises each deed and flags who holds control; your accountant checks it.
- If you're separating: bring the accounts up to date, reconcile loan accounts, and model the tax consequences of settlement options so both lawyers are working from the right numbers.
- After settlement: restructure entities, process rollovers and keep the remaining structure compliant.
Legal documents, including BFAs, loan agreements, mortgages, deed variations and wills, are prepared by solicitors. For broader planning, see our succession and estate planning service and our guide to asset protection strategies. For an inheritance you want to protect for your children, read about testamentary trusts.
Frequently asked questions
Can I change the appointor of my trust before separating to protect it?
Changing control shortly before or during a separation is one of the transactions the court can set aside if it was done to defeat a property claim. It's also likely to be treated as evidence that you really controlled the trust. Changes to control should be made for genuine reasons, well before any relationship difficulty, and only if the deed allows them.
What happens to my beneficiary loan account in a separation?
An amount the trust owes you, such as an unpaid distribution or money you lent it, is your property and goes into the pool. These balances are often large in family business groups because distributions were declared but never paid out. Your accountant should reconcile them before any negotiation starts.
Does a testamentary trust protect an inheritance from my child's divorce?
It can help a lot, particularly if your child doesn't control the testamentary trust alone. Inherited assets held in your child's own name are usually treated as their property. A testamentary trust with independent or shared control makes it harder to treat the assets as the child's, but nothing in family law is guaranteed.
Can the family court order a trustee to make a distribution?
Where a party controls the trust, the court can make orders against that party that effectively require the trust's assets to be dealt with. Where the trustee is genuinely independent of both parties, the court's power to reach the trust is more limited, but it can still take the trust into account when dividing other property.
Do binding financial agreements work for de facto couples?
Yes. The Family Law Act has separate provisions for de facto financial agreements, which can be made before, during or after the relationship. Western Australia is different for de facto couples, because their property matters are dealt with under WA law, so a WA family lawyer should advise.
Will separating trigger tax on our trust or company?
Transfers under a court order or a binding financial agreement can often roll over for CGT, so the tax is deferred until the asset is sold later. But money paid out of a private company to a spouse can still be caught by Division 7A, and stamp duty depends on the state. Get tax advice on the settlement terms before they're finalised.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.