Family trusts in family law - when assets are at risk

In our earlier article, we explored the role that discretionary family trusts play in succession planning. For many families, these structures are seen as a cornerstone of long‑term wealth preservation, providing a degree of protection from external claims.

The recent appellate decision of the Full Court of the Federal Circuit and Family Court of Australia in Caldwell & Caldwell [2026] FedCFamC1A 81 serves as an important reminder that this protection is not absolute. The case confirms that even well‑established family trust structures may be vulnerable in family law proceedings where control and an ability to benefit exists.

A renewed focus on effective control

As outlined in our prior article, the central question in Caldwell was whether three discretionary family trusts, established by the husband’s father as part of a long‑standing family business structure, could be treated as “property” of the husband for the purpose of section 79 of the Family Law Act 1975 (Cth).

At first instance, the factual setting appeared favourable to asset protection for the husband, with the primary judge finding that the trusts, or their assets, were not property of the parties to the marriage. In making this finding, the primary judge considered the following relevant:

• the trust assets of the trusts had been accumulated over generations, not by the spouses themselves;

• the trusts were established for the exclusive benefit of direct lineal descendants of the husband’s father and the husband’s powers over the trusts were constrained by the proper purpose rule;

• the husband had not historically received distributions from the trusts; and

• perhaps most significantly, the husband was not the sole controller of the trusts (with his sons also being appointors of the trusts and directors of the trustee companies), although the husband did have the ability to remove the co-controllers. However, there was no evidence to indicate that the husband intended to exercise sole control of the trusts.

The Full Court allowed the appeal of the primary decision on the basis that the primary judge conflated the task of determining whether the trusts were property of the parties to the marriage, or either of them, with the task of determining whether the wife should receive an adjustment in her favour from the trust assets.

Despite the factors taken into account by the primary judge, the majority of the Full Court concluded that the trusts were the husband’s “property” for family law purposes.

The reasoning to include the trusts as the husband’s “property” turned squarely on the husband’s ability to exercise effective control. He held powers to remove co‑appointors, influence or determine the identity of the trustee, and ultimately cause the trust assets to be applied for his own benefit. The Court emphasised that it was not necessary for him to have actually exercised these powers, it was enough that he could do so.

Distinguishing matrimonial ‘property’ pool from a determination to alter interests in property

A key aspect of the Full Court decision was the clarification that identifying trust assets as “property” of the spouses is a separate issue from determining how those assets should be treated in the ultimate property division.

The Full Court was critical of the approach taken by the primary judge, where the analysis as to whether the trusts were “property” had been influenced by whether it would be appropriate to adjust the trust assets in favour of the wife. In doing so, the primary judge had effectively merged two separate stages of the section 79 determination.

The Full Court made clear that the first step is simply to identify the existing legal and equitable interests of the parties as to property. Whether those trust assets should ultimately be redistributed is a separate question from whether the trust assets will be included as part of the matrimonial property pool available for division between the spouses.

This distinction is important in practice. A finding that trust assets form part of the property pool does not necessarily mean that those assets will be divided or transferred. It does, however, put those trust assets at risk of a redistribution between the spouses.

In Caldwell’s case, the question of whether the wife will ultimately receive a share of the trust assets is now open for further Court determination.

The limits of ‘common’ safeguards

Caldwell demonstrates that a number of commonly relied‑upon “asset protection” features do not prevent trusts from being characterised as property in family law proceedings.

The Court made it clear that the specified purpose of the trust and the origin of the trust assets, including the fact that they had been built up over multiple generations, was not decisive at the classification stage. Instead, this factor may only be considered relevant to contributions and fairness, rather than to whether the trust formed part of the asset pool.

Similarly, provisions in the trust deeds restricting benefits to lineal descendants, and excluding spouses, did not alter the outcome. Nor did the absence of any historical distributions to the husband. The Court’s focus was not on what had happened in practice, but rather what the husband was capable of doing under the terms of the trust.

Even arguments based on the “proper purpose rule” were unsuccessful. The Court held that questions about whether powers could properly be exercised to benefit a spouse were not determinative of whether the trust constituted property of the husband.  

These considerations may become relevant later, in respect of whether trust assets should ultimately be redistributed, but they do not prevent the initial classification of the trust as matrimonial property.

Looking ahead – implications for succession planning

Caldwell reinforces the Court’s position that while discretionary family trusts remain a powerful planning tool, they are not a complete shield against family law claims.

The key lesson is that the building up of family wealth in a trust alone is not enough. The way in which control of the trust is allocated, and the extent to which a party can benefit from trust assets, will be central to how the trust is treated in the event of a relationship breakdown.

Ultimately, where a party can realistically control and benefit from a trust, the Courts are likely to treat that trust as part of their property regardless of the origin of the trust assets or stated purpose of the trust.

The question of whether trust assets should ultimately be redistributed is distinct from whether those assets form part of the matrimonial property pool available for division between the spouses. However, if the trust is characterised as property of the spouses, those assets may then be exposed to redistribution between them.

For families with significant wealth held in trust, this decision highlights the importance of proactive, integrated planning. Trust structures should be reviewed not only from a tax and succession perspective, but also through the lens of asset protection.

Author: Stephanie Flegg

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.