Trusts are a concept we hear about frequently, and news reports often feature stories about them — for example, a certain entrepreneur setting up a large offshore trust to mitigate risk. In recent years, family trusts and similar financial products have attracted significant attention in China as well. Today, we will look at whether, in Australia, a trust can be brought into the asset pool and divided as joint property when a couple divorces.
What is a trust?
Although we often hear the word “trust”, most people probably do not really understand what a trust actually is. The subject is genuinely complex and can be difficult to grasp. Here we will give a brief introduction to help clarify what a trust is.
The Chinese word for trust translates to the English word “Trust”. As the name suggests, a trust is a legal relationship founded on trust. The definition of a trust can be summarised as follows: the settlor, based on their confidence in the trustee, entrusts property rights to the trustee, who then holds the property in their own name and manages and disposes of it for the benefit of beneficiaries or for a specified purpose, in accordance with the settlor’s wishes. This definition may leave many readers no clearer than before, so to help you follow the rest of the article, we will briefly outline how trusts developed.
The modern trust system originated in England and was further developed in the United States. You may be surprised to learn that one of the earliest and most important uses of trusts was actually to avoid estate tax. Some Western countries impose an estate tax, meaning heirs must pay a heavy tax when they inherit assets. This means heirs effectively lose part of the estate to tax, and for wealthy families the amounts involved can be very substantial. Trusts offered a workable way to avoid estate tax: before their death, wealthy person A would transfer all of their assets into the name of trustee B, with an agreement that B would hold and manage the assets, and then pass those assets — along with any income generated during the period of management — to heir C in instalments.
From this model you can see that A transferred ownership of the assets to B, and B later transferred them to C. No inheritance actually occurred during this process, and the assets never formed part of A’s estate, so no estate tax arose. Put more simply: before A died, A gave all of their assets to B and said, “please look after this property for me and pass a portion to my child C each year.”
This model is in fact the classic trust relationship — exactly the definition given above: settlor A, based on their confidence in trustee B, entrusts property rights to trustee B, who holds the property in B’s own name and manages and disposes of it for the benefit of beneficiary C or for a specified purpose, in accordance with A’s wishes.
Characteristics of a trust
From the example above, we can see that the key feature of a trust is the transfer of ownership of the assets. When A entrusts B to manage the property, this is not simply a management agreement — ownership of the assets is actually transferred to B. This means that, once the trust is established, in theory A no longer owns that property.
This feature of transferred ownership raises an obvious question: if one spouse has set up a trust, and ownership of the trust property has in theory already been transferred to the trustee, can the trust still be included in the asset pool and divided if the couple divorces?
How is a trust divided?
Some might think that because ownership has been transferred, trust assets obviously cannot be divided as joint marital property on divorce. In fact, the issue is quite complex: some trusts cannot be divided by the other party, but other trusts can form part of the asset pool and be included in a property settlement. Let’s look at a well-known case.
Ian Spry was a renowned tax expert. In 1968, he established a family trust, with beneficiaries being the descendants of his father and their spouses.
In 1978, Spry married. Spry and his wife Helen had four daughters, all of whom were adults by the time the dispute arose.
In 1983, Spry, who had been the sole trustee of the trust, stepped down as trustee and appointed Helen as trustee. However, Spry retained the power to appoint and remove trustees.
In 1988, when the marriage was in difficulty, Spry again varied the trust, excluding both himself and Helen from the class of beneficiaries.
In 2001, the couple separated. Within three months, Spry divided the trust property into four parts, to be distributed equally among four separate trusts he established for each of his daughters. Spry and each daughter were jointly responsible for appointing and removing the trustee of each of those trusts.
In 2003, the couple divorced. The effect of the divorce was that Helen was no longer a beneficiary of the trust and could no longer benefit from it.
Helen argued that the trust property was joint marital property and should be divisible between the parties. She asked the court to hold that Spry’s exclusion of himself and Helen from the beneficiaries, and his transfer of the trust property into the daughters’ trusts, should be set aside.
The court ultimately found in Helen’s favour, ordering Spry to pay Helen more than two million Australian dollars. In other words, the court accepted that the trust could form part of the asset pool under family law and be divided on divorce.
Trust assets are typically treated as “property” under family law, even though, strictly speaking, ownership has changed. In this case, the court allowed the family trust to be included in the asset pool because the judge found “certain facts in this case establish a strong connection between the trust assets and the husband”. In other words, the trust property did not operate entirely independently of Spry.
Conclusion
In summary, trusts are a particularly special and complex form of property under family law. Whether and how a trust can be divided on a property settlement must be assessed case by case, and there is no standardised, one-size-fits-all formula. In Australia, setting up a family trust — whether for tax or other reasons — is a common arrangement. If you are considering establishing a trust, it is essential to consult a lawyer in advance about the relevant issues, including the purpose of the trust, the process, the types of property involved, the roles within the trust, and how the trust would be treated if your marital circumstances were to change in the future.
