Family trust and divorce property settlement: how to protect assets
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If a family trust and a party owe each other money, that loan account can reshape the assets in a divorce. In Australian family law, a trust is property only when facts support inclusion; the Court looks at control over a trust, entitlement and benefit to decide what joins the pool of assets. We help you test trust assets and loan balances, then craft property settlement orders that include the assets or treat them as a resource. For tailored guidance, contact QFLP.
What a trust loan account is and why it matters
A trust loan account is a balance between a party and the trustee of the family trust that may be included in a property settlement as an asset or a liability.
Loan accounts arise in a discretionary trust when drawings occur without a distribution, where unpaid present entitlements sit on the ledger, or where a beneficiary advances cash to the trust. Depending on direction, the balance adds to the value of the party’s asset list or reduces it. Example: if the trust owes the wife $180,000, that receivable can form part of the property of the parties; if she owes the trust, it can reduce her net share in a divorce settlement.
Quick definitions
- Beneficiary loan receivable: trust owes the beneficiary; may be included in a property settlement.
- Beneficiary loan payable: beneficiary owes the trust; may count as a liability.
- Unpaid present entitlement: distribution declared but unpaid; often treated like a receivable.
Decision guide: Does the loan account represent recoverable cash within a practical timeframe, given the trust’s assets and income?
How the Court views a family trust in divorce
In family trusts in divorce, inclusion turns on control, benefit and the trust deed; trusts protected from divorce do not exist as a blanket rule.
The Family Court considers whether a spouse is appointor of the trust, a director of the trustee company, or the regular beneficiary of a trust distribution. If a party can influence the administration of the trust and benefit from the trust’s assets and income, the trust may be considered property and the trust forms part of the property pool in family law. Example: the wife’s interest in the trust is stronger where she is appointor and trustee director and uses funds for family costs; the trust and its assets are more likely to sit in the trust in the pool.
What the Court considers
- Appointor of the trust and power to hire or fire the trustee
- Control of the trust via board seats or veto rights
- Pattern of trust income funding household expenses
- Terms of the trust deed and how the family trust operates in practice
Decision guide: Can the party cause the trust to pay, forgive or call a loan account now or soon under trust law and the deed?
Loan accounts versus trust distributions and drawings
Loan accounts, trust distributions and drawings affect the property pool available and support differently in a divorce property settlement.
A drawing with no resolution is usually a loan payable to the trust. A declared distribution creates an entitlement that can be property if retained. Future discretionary distributions may be treated as a financial resource rather than immediate property. Example: $50,000 drawn by one of the parties and booked to the loan account may reduce their net position; a retained $50,000 distribution increases the assets to be divided.
| Item | Typical family law view | Practical outcome |
|---|---|---|
| Beneficiary loan receivable | Property | Adds to the party’s assets in a property settlement |
| Beneficiary loan payable | Liability | Reduces the party’s net position |
| Retained distribution | Property | Included in a property settlement |
| Future discretionary trust income | Financial resource | Influences percentages and maintenance |
Decision guide: Is the balance a present right to cash, or an interest as a beneficiary that depends on trustee discretion?
Evidence that proves loan accounts and trust assets
Good records let an accountant show the extent of the assets in a trust and how the trust structure is controlled.
Collect the trust deed and amendments, appointor clauses, trustee minutes, distribution statements, general ledger loan accounts, bank statements and tax returns. ASIC records for the trustee of the family trust establish who holds influence. Example: ledgers show regular drawings by one party; minutes show no distribution for those years. The Court can infer a loan payable and include it when making family court orders.
Document checklist
- Trust deed, variations and any deed of appointment
- Trustee resolutions, profit allocation and minutes
- Loan account reconciliations and bank statements
- Financial statements and tax returns showing income of the trust
Decision guide: Could a valuer reconstruct the trust’s assets and the capital of the trust from documents alone?
Evidence to gather before a family law property settlement
Clear documents let advisers determine whether trust assets should be included and the extent of the assets and income available.
Collect the family trust deed, all amendments and variation deeds, ASIC records for the corporate trustee, minutes, trustee resolutions, accounts, tax returns and loan ledgers. Records of how the family trust operates show whether the trust is property or a resource.
Example: resolutions allocating the income of a trust to one spouse during family law proceedings support inclusion or an adjustment in a Divorce and Separation settlement.
Document checklist
- Family trust deed and any changes to the terms of the trust deed
- ASIC extracts for the trustee company and share register
- Trustee resolutions, distribution statements and minutes
- Financial statements, tax returns and related-party loan accounts
Decision criterion: Could a forensic accountant rebuild the trust and its assets and income from the documents alone?
Valuation and tax settings for loan accounts
Value depends on face balance, recoverability and any interest terms; tax follows the deed and real transactions, not labels.
Where the trust owes a party, assess the trust’s cash flow and the extent of the assets held in a trust to decide if a discount applies. Where a party owes the trust, confirm whether interest accrues and whether repayment is enforceable. Example: a receivable from a profitable trust invested in a family business may be near face value; the same receivable from a thinly capitalised trust may be worth less.
Valuation pointers
- Face value versus recoverable amount from trust assets
- Interest clauses and repayment history
- Interaction with upcoming distributions or refinance
Decision guide: What cash can be returned without harming the trust and its assets or breaching banking covenants?
Orders that implement a workable settlement with trusts
Property settlement orders can set repayment terms, adjust control and prevent attempts to hide assets or forgive loans unfairly.
Mechanisms include staged repayments from the income of a trust, set-off against other assets in a divorce, changing the appointor or board, or directing that forgiveness resolutions be paused. Example: the trust repays $40,000 a year to clear the wife’s loan account; shares in the trustee company move to neutral directors until repayment, ensuring control over a trust is balanced.
Mechanisms to consider
- Repayment schedule with interest or CPI
- Set-off against home equity or superannuation
- Interim board and appointor changes to protect administration of the trust
Decision guide: Do orders respect the trust deed yet deliver cash to the party without disrupting lawful administration?
When a trust loan account may not be included as property
Sometimes a trust will not be included because balances are too small, stale or speculative to justify litigation cost.
If there is no practical recovery, no control and limited income of a trust, a loan may be treated as a low-value asset or ignored with an adjustment elsewhere. Costs of pursuing may outweigh benefit. Example: a $3,000 receivable in a dormant trust owned by a trust with no cash flow may be excluded, with other assets making up the difference.
Watch-outs
- Disputed or undocumented entries
- Dormant entities with no realistic capacity to pay
- Compliance cost eclipses value
How to judge urgency around trust movements
Act quickly where recent changes could reduce the property pool in family law or frustrate enforcement.
Red flags include an appointor change, resolutions to forgive loans, or transfers of assets held in the trust. Actions around the event of a divorce, including transactions within about three years, often attract scrutiny. Example: if the trustee proposes to set aside the deed or vary classes so the wife fell within the class is altered, seek interim orders before the change.
Prioritise now if
- Appointor or trustee board changes are imminent
- Large drawings, forgiveness or distributions are proposed
- Asset sales owned by a trust are scheduled
Decision guide: Could delay shrink the property pool available or allow someone to hide assets?
Where this connects to your broader family law property settlement
Trust treatment must sit alongside home equity, super and business interests so orders are just and equitable under section 79 of the Family Law Act.
Balance trust loan repayments with household cash flow and spousal maintenance. Where dividing a family trust is impractical, use offsets and staged payments. Example: one party keeps control of the family trust and divorce adjustments are paid from trust income over time, with security over shares to protect the other party.
Connected topics
- Family trust and divorce strategy and disclosure
- Consent orders and enforcement pathways
- Business and trust valuations when property is owned by a trust
Decision guide: Do combined orders include the assets that should be included, and deliver practical cash without harming the business being valued?
How to judge if you need action now or later
Move quickly when changes could shift value or control in the event of a Divorce and Separation.
Act if an appointor change is proposed, if the trustee plans asset sales, if loan accounts may be called, or if vesting is near. Conduct within and around separation, including actions affecting the trust until three years back, may attract scrutiny.
Example: pausing restructures and preserving minutes can prevent disputes about attempts to hide assets or protect assets in a Divorce and Separation unfairly.
Prioritise now if
- Appointor or director changes are imminent
- Asset sales, refinances or vesting dates approach
- Related-party loans move materially
Decision criterion: Could planned trust actions reduce the pool this quarter or frustrate orders?
Where this connects to your broader Divorce and Separation property
Trusts sit alongside the family home, superannuation and personal investments in the overall property division.
Align treatment of assets held in a trust with business valuations, super splitting and debt allocation so the settlement remains just and equitable.
Example: parties may keep control of the family business held in the trust while adjusting home equity to balance contributions and future needs.
Connected topics
- Property pool in family law and contributions
- Consent orders and enforcement pathways
- Business and share valuations with trust structures
Decision criterion: Do orders across all assets produce a practical, enforceable outcome for both parties?
