In this article, we explore how well-structured family discretionary trusts and testamentary trusts can help protect assets from being drawn into the marital asset pool during property settlements, in the context of a relationship breakdown.
As part of our analysis on family discretionary trusts, we examine the recent decision in Caldwell & Caldwell [2025] FedCFamC1F 506 (Federal Circuit and Family Court of Australia, Division 1) (Caldwell). In that case, the Court dismissed the wife’s claim that the assets held in several discretionary family trusts should be included in the matrimonial property pool under section 79 of the Family Law Act 1975 (Cth) (Act). The Court found that the trusts did not form part of the divisible asset pool, primarily because the husband had limited control, the wife was an excluded beneficiary, and the assets were intergenerational in nature.
Turning to testamentary trusts, we will provide a summary of the facts and outline the Court’s reasoning in the case of Bernard v Bernard [2019] FamCA 421 (Bernard), where the assets held in a testamentary trust were also protected from being drawn into the matrimonial asset pool, subject to division between the parties.
Finally, we will conclude with some practical strategies for structuring and managing family discretionary and inherited trusts to minimise the risk of those assets being treated as part of the marital property pool in future property settlement proceedings.
Caldwell – Family Discretionary Trusts
Facts
During divorce proceedings, the wife sought a declaration under section 79 of the Act claiming that her husband’s interests in three family discretionary trusts (collectively, the Caldwell trusts), should be included in the matrimonial property pool for division.
She argued that the husband controlled the Caldwell trusts, including his power to remove and appoint trustee(s), meaning the assets should be treated as matrimonial property.
The Court’s Findings
The Family Court dismissed the wife’s claim, holding that the Caldwell trusts did not form part of the marital property pool for division. Justice Carew, in reaching the decision, noted her Honour’s reliance on the following matters:
- Trust history, purpose, and powers: In determining whether trust assets form part of the marital property pool, it is essential to consider the history of the trusts, their purpose, and the powers of the trustees;
- Established by the husband’s father: The Caldwell trusts were created by the husband’s late father, not by the husband himself;
- Husband’s control: The husband did not control the trusts during the marriage, he became one of the successor appointors only after his father’s death, which occurred around 30 years into the marriage and the same year in which he had separated from his wife;
- Lack of personal benefit: There was no evidence that the husband received any personal benefit from the trusts or that he exercised control over the trusts during the marriage;
- Exclusion of spouses: The trust deeds and their variations explicitly excluded spouses from being beneficiaries;
- Source of trust assets: The assets were derived from long-standing family wealth accumulated before the marriage; and
- Purpose confirmed in the trust deeds and Will (and Codicil): The husband’s father’s will and codicil, as well as the trust deeds and their subsequent variations, confirmed the Caldwell trusts’ purpose, which was to benefit ‘lineal descendants only’.
Key Takeaways
The decision in Caldwell illustrates how a well-structured trust can remain protected during divorce proceedings, shielding the trust assets from being included in the matrimonial property pool.
The decision in Caldwell addresses several key principles:
- Define beneficiaries clearly: However, any proposed variation to the trust deed to this effect should be carefully reviewed to ensure it is permitted and does not inadvertently trigger a resettlement or create a new trust;
- Exclude beneficiaries where appropriate (and if allowed by the trust deed): If certain individuals are not intended to benefit, clearly exclude them in the trust deed to avoid ambiguity and future disputes;
- Appoint multiple appointors: Having your family members and/or independent advisers as appointors is a key to maintaining asset protection; and
- Document your intentions: Clearly express the trust’s purpose in the trust deed and if applicable, in your will.
Bernard – Testamentary Trusts in Wills
There are few reported cases dealing with inheritance via a testamentary trust as the vast majority of inheritance cases involve direct inheritance received by the beneficiaries outright.
The decision in Bernard is often cited in support of a proposition that, when properly structured, assets held in a testamentary trust can remain protected in the event of a relationship breakdown.
Facts
The wife brought an application under section 79 of the Act for a property settlement, arguing that the husband’s interests in a testamentary trust formed a part of their matrimonial pool for division.
The relevant facts are as follows:
- The parties married in 1998 and subsequently separated in September 2015.
- The husband’s father made a Will in 2012 (the father’s Will) and died later that year. The will created two (2) testamentary trusts:
- Mr Bernard Family Will Trust for the husband; and
- Ms C Bernard Family Will Trust for the husband’s sister.
- Under the father’s Will, the husband was the primary beneficiary of the Mr Bernard Family Will Trust, whilst his sister was the sole trustee and a third party was the appointor.
The Court’s Findings
Justice Henderson found that the Mr Bernard Family Will Trust should be excluded from the matrimonial property pool. In reaching the decision, Her Honour relied on the following factors:
- Husband’s control: The husband was only a primary beneficiary of the trust and not the appointor or trustee and was entirely dependent on his sister (the trustee), for any distribution of income or capital. The husband had no entitlement to compel distributions, whether of an income or a capital nature.
- Broad class of beneficiaries: The husband was one of many discretionary beneficiaries, alongside his mother, and his parents, children, grandchildren and great-grandchildren etc; and
- Source of trust assets: The assets within the Mr Bernard Family Will Trust had never formed part of their matrimonial property. These assets had never formed part of the matrimonial property in the sense that they were not acquired during the marriage, nor did the husband have legal ownership or control over them. As a discretionary beneficiary, he had no enforceable entitlement to the trust assets.
Key Takeaways
If structured carefully, a testamentary trust is one of the best strategies to protect inherited assets from inclusion in the matrimonial property pool. As highlighted in Bernard and reinforced in Rigby & Kingston (No. 4) [2021]:
- The trust property does not originate from either party to the marriage;
- The trust is not established by a party to the marriage;
- The broad class of beneficiaries may expressly exclude a spouse; and
- Appointing multiple controllers, rather than the primary beneficiary alone, provides stronger protection.
Need Help Protecting Your Trusts?
Whilst there is no one-size-fits-all solution when it comes to estate planning for asset protection, both cases highlight the importance of having a carefully structured estate plan, particularly regarding the control of your family discretionary trusts and testamentary trusts in wills. Proper structuring, including paying due consideration to appointor roles, trustee powers, and beneficiary provisions, is critical to ensuring long-term protection and clarity.
For expert guidance on estate planning in the event of a relationship breakdown, please contact us on 03 9598 9489.
