04 Mar Family trusts, companies and divorce – how the Family Court really treats ‘protected’ assets
When relationships are ending, one of the most common questions we hear from our clients is: ‘But that’s in a trust – surely it’s protected?’
The assumption is understandable. Many couples, and extended families, have spent years working with accountants and advisers to structure their affairs carefully. They may have put in place trusts, companies and self-managed super funds (SMSFs), to help manage their tax, business and succession planning. And once those are in place, it’s easy to expect that those ‘protected’ assets are, actually, protected, even when it comes to dividing up property in a divorce.
But family law operates with a different lens.
To understand how the Family Court really treats ‘protected’ assets during a divorce, we spoke with Anita Cunningham, Forensic Commercial Director at Vincents, about her real-world experiences.
The misconception of ‘asset protection’ in family law
In tax and business planning, structures such as companies, trusts and SMSFs can work really well. They can help you manage risk, support wealth accumulation and assist with intergenerational wealth planning. But when it comes to dividing property in a divorce, the Family Court isn’t focused on tax efficiency – it’s focused on fairness.
Anita says, ‘In tax and business planning, a structure can be very effective. In family law, though, the Court asks a different question entirely, often looking through the structure, particularly when they deem the structure to be a puppet of one of the parties.’
This is a critical distinction, because the Court isn’t automatically bound by how the assets are labelled. Instead, the Court will examine how they function in practice.
At its core, the Family Court is trying to ensure that there’s a just and equitable outcome for all the parties. They look at the size and nature of the overall asset pool, the contributions made by each party, both financial and non-financial, and each party’s respective future needs. In other words, to achieve fairness, the Court is much less concerned about what you’ve planned, and far more focused on ensuring that the outcome of the financial division reflects the practical and financial reality of the relationship.
If the Court looks beyond labels to have assets function in real life, what are they looking at? First and foremost, they’re looking at the history of the structure, and who controls it or benefits from it, even if they don’t legally ‘own’ it.
Control, benefit & history
Technical ownership is certainly something the Court will consider when dividing property in a divorce. But it’s only the tip of the iceberg.
In family law property settlements, ‘Control often matters more than legal ownership. If someone appoints the trustee, directs decisions and receives the benefits, the Court may treat those assets as part of the relationship pool – even if their name isn’t technically attached to the entity,’ Anita says.
This level of influence can significantly affect how the Court sees control of the structure, and that will impact how they ultimately divide those assets or property.
The Court will also look to see who benefits from an asset or structure. For example, if personal expenses flow through the trust year after year, the Court will assume that the assets aren’t genuinely separate, and those ‘protected’ assets can become part of the property settlement.
The Court will also always look at the history. Structures that were set up years before a relationship will be treated very differently from those created just before separation. But the overall approach will be the same – substance almost always outweighs form.
Real-world consequences when structures are challenged
If you’re going through a divorce, there can be real-world consequences when one party challenges the trust, company or SMSF structure. It can, of course, be surprising when structures don’t do what you expect, and this can lead to much higher legal fees.
But, as Anita says, ‘When structures are challenged, the cost isn’t just legal fees – it can be months of forensic accounting, document reviews and stress that could have been reduced with a clearer understanding of the structures upfront.’ And the Court’s examination can be extensive as well. They’re looking for patterns, not just snapshots, which can mean a much deeper dive than you might expect.
How to best ‘protect’ your assets
As family lawyers, we’re often asked which structure is ‘safest’ in the event that you do go through a divorce or separation. This might be a discretionary trust, a company structure or an SMSF. ‘The honest answer is that no structure is automatically protected. The Court looks at purpose and control, not entity type,’ says Anita.
Even SMSFs aren’t necessarily immune. Anita goes on to say, ‘Although an SMSF is regulated differently, it’s not invisible in a property settlement. It will still be considered when determining the overall property pool.’
Superannuation interests, including SMSFs, are generally brought into the property pool for family‑law purposes, but how they are treated (split, offset against other assets or left largely intact) also depends on the Court’s assessment of contributions and future needs and on any agreement reached between the parties.
In other words, it will be treated the same as any other asset. However, since it’s governed by superannuation law and subject to specific regulations, it won’t be simply transferred like cash in a bank account, even if it is divided between the parties.
Instead, the best approach is tailored advice & real understanding
‘The best outcomes I’ve seen come from clients who sought integrated advice early – accountant, lawyer and adviser working together,’ Anita says, ‘rather than relying on a structure alone.’ That’s because there’s really no one-size-fits-all solution. A structure that works brilliantly for tax and succession planning could create complications in family law if it doesn’t really reflect how the family uses it in real life.
Your expert team can help you create a structure that covers all the bases. When your legal and financial documentation, as well as your behaviours and financial records, all tell the same story, disputes over property division are often less complex and adversarial.
Finally, Anita says, ‘In my experience, one of the main issues with family structures is a lack of understanding by one party (or lack of information being provided to them). Where the family group has assets in different structures (or even just assets in general), be inquisitive, ask questions and understand what the structures actually are and how they work.’
The Court doesn’t punish people for having structures. They simply look past the paperwork to understand what’s really happening. The goal isn’t to undo planning – it’s to achieve a fair outcome based on reality.
Seek advice
If you’re concerned about how trusts, companies or superannuation may be treated in a divorce or separation, get in touch with our team. We can work with you and your financial experts to provide early advice that can help you move forward with real understanding and a strong foundation. Get in touch with Toomey Family Law today.