What Is A Family Trust And How Does It Work In Australia

What is a family trust? A family trust is a legal arrangement and a powerful financial tool. It involves three key parties; the settlor, trustee, and beneficiaries. Its primary function is to manage the assets for the benefit of the chosen beneficiaries. It’s important to understand what a family trust is and how it can serve various purposes, from tax planning to asset protection and estate planning. Keep reading to find out what happens to a family trust in the instance of divorce.

How Is A Family Trust Created

At its core, a family trust is created when the settlor transfers assets to a trustee. These assets are then held on behalf of the beneficiaries by the trustee. Crucially, the settlor retains control over both the identity of the beneficiaries and the extent of their entitlements unless otherwise specified in the deed.

The Use Cases of Family Trusts:

Here are some of the potential use cases for family trusts in Australia.

1. Tax Planning: Family trusts can be a potent tool for reducing tax liabilities on both income and capital gains.

2. Asset Protection: Shielding assets from creditors and ex-spouses in cases of bankruptcy or divorce is another compelling use of family trusts.

3. Estate Planning: Ensuring the seamless transfer of assets to desired beneficiaries upon the settlor's passing is a key aspect of family trust utility.

What Are The Downsides of a Family Trust?

Family trusts indeed offer a spectrum of advantages, including their flexibility in tax optimisation, asset safeguarding capabilities, and estate planning benefits. However, they are not without risks. Family trusts can sometimes lead to disagreements and disputes among beneficiaries, especially if there are differences in expectations or misunderstandings about the trust's terms and distributions. It's crucial to carefully weigh these risks against the potential advantages before embarking on the family trust journey. At Pullos Lawyers we recommend seeking legal counsel to help guide you through any process you wish to undertake relating to your family trust, including dispute resolution.

Family Trusts and Divorce

Divorce is a life-altering event that can introduce significant complexities when it comes to family trusts. In Australia, Family Law courts have the authority to scrutinise and, in some cases, make orders related to family trusts during divorce proceedings. Here's how family trusts can be affected during divorce:

Disclosure and Valuation:
During divorce proceedings, both parties are required to provide full disclosure of their assets, including any interests in family trusts. This entails a thorough valuation of the trust's assets, liabilities, and financial transactions. The court will assess the trust's financial standing to determine its relevance to the property settlement.

Trust Control and Beneficiaries:
Courts may examine the level of control the divorcing parties exert over the family trust. If one party has substantial control over trust decisions, including the ability to distribute income or appoint and remove trustees, the court might consider the trust's assets as a financial resource available for division.

Trust Distributions:
The court can examine trust distributions made during the marriage, especially if they were used to benefit one party over the other. If distributions are deemed excessive or strategic, the court may adjust the property settlement accordingly.

Third-Party Interests:
If third parties, such as family members, are beneficiaries of the family trust, their interests can be impacted during divorce proceedings. The court may order adjustments to ensure a fair settlement for both spouses.

Trust Assets as Marital Property:
Family Law courts have the authority to classify trust assets as "marital property" if they are determined to be a financial resource that either party has benefited from during the marriage. This means trust assets may be included in the overall property pool for division.

Binding Financial Agreements:
In some cases, couples may have established Binding Financial Agreements (pre-nuptial or post-nuptial agreements) that specifically address the treatment of family trusts in the event of divorce. These agreements can influence how trusts are dealt with during property settlements.

Seeking Legal Counsel:
Navigating the intersection of family trusts and divorce in Australia is a complex endeavour. Always consult with a skilled family lawyer who understands the intricacies of mediation and the implications of family trusts in divorce proceedings. In addition to your accountant, a lawyer can provide tailored advice and strategies to protect your interests and ensure a fair resolution.

Contact Pullos Lawyers For Questions About Your Family Trust

At Pullos Lawyers, we recognise the significance of family trusts and their potential impact during divorce. We can offer you expert guidance to help you navigate your family trust, protecting your financial future and ensuring the best possible outcome during divorce proceedings. Our blog can answer other questions you might have, pertaining to topics such as, LGBTQ+ Law, Child Support and Financial Agreements. Get in touch with us by calling us on (07) 5526 364 or through our online form.