Testamentary Trusts and Family Law

Key Message

Cross-sibling testamentary trust structures are vulnerable to challenge in the Family Court, after relationship breakdowns. These structures may fail to protect family assets from being included in property settlements.

Family Court’s Approach to Property

• The Family Court can alter property interests after a relationship
• Property includes all assets and debts; financial resources are considered in
• Even if a spouse has not contributed to a trust, the Court may still adjust interests in the trust.

Trusts in Family Law

• Discretionary trusts can be treated as property if one party has control or if the trust is a sham.
• A 2008 High Court decision confirmed that a beneficiary’s right to due administration is considered property.
• Courts distinguish between enforcing property orders and restructuring trust assets to satisfy settlements.

Power to Bind Third Parties

• Parts VIIIAA and VIIIAB of the Family Law Act give courts power to make orders affecting third parties, including:
  • Forcing trustees to transfer or distribute
  • Changing trust deeds, appointors, or
  • Converting discretionary trusts into fixed
  • Issuing injunctions to prevent trust asset

Problems with Cross-Sibling Testamentary Trusts

• Common structure: Child A’s trust is controlled by Child B, and vice versa.
• Issues include:
  • Unrealistic expectations of sibling
  • Control dynamics – each sibling can influence the other’s
  • Potential conflicts between
  • Valuation and accessibility of trust assets make them easy targets in family
  • Bernard’s case, often cited in support, is not widely accepted and had unique

Conclusion

These trust structures, while well-intentioned, are legally fragile and may not achieve the goal of asset protection in family law contexts. Legal advice should be sought to explore more robust alternatives.

Disclaimer

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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At O’Sullivan Davies, our experienced family lawyers can guide you through the property settlement process and ensure your rights are protected.

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