Navigating Family Trusts in Property Settlement
In our previous article on property settlement, we explored some critical tax considerations around capital gains tax, superannuation splitting, and the main residence exemption. If you haven't read that article yet, we recommend starting there for foundational context.
In this article, we continue that discussion by exploring one of the most complex areas of property settlement: family trusts.
While we can guide you through the tax implications of different settlement scenarios, Accounting Heart are accountants, not lawyers. You'll need legal advice for the settlement process itself.
Two processes - Divorce and Property Settlement
It’s worth reiterating that divorce and property settlement are two separate but related legal processes in Australia. Divorce is the legal ending of a marriage. You don't need to resolve property matters before obtaining a divorce. Property settlement deals with how shared assets and debts are divided. This can happen before, during, or after a divorce or the end of a de facto relationship, but there are time limits. This means that the property settlement process and its tax implications can extend well beyond the divorce itself.
Why Family Trusts Complicate Property Settlement
Many established families use discretionary family trusts to hold business interests, investment properties, or investment portfolios. These structures offer tax flexibility and asset protection during a relationship, but when that relationship breaks down, things can become complex.
One of the most common misconceptions we encounter is the belief that assets held in a family trust are automatically protected from property settlement claims. The reality is significantly more nuanced, with important implications for the division of assets and ongoing tax efficiency.
Unlike jointly owned property or shares in a company, trust interests don't work like typical assets. You can't simply divide a trust 50/50. The legal ownership structure, control mechanisms, and distribution rights all affect how trusts are treated in property settlement.
Understanding what's being divided
When a family trust is involved in property settlement, several elements need to be considered.
The trust assets themselves: Property, business interests, investment portfolios or cash held within the trust structure form part of the asset pool, but determining their value and how to divide them isn't straightforward.
Control of the trust: The appointor (the person who can remove and appoint the trustee) holds ultimate control. This position is very powerful. Control can often matter more than being a beneficiary because the controller has oversight of the party that determines distributions.
Trustee: The trustee makes distribution decisions. Whether the trustee is a corporate entity or individuals affects who has practical control and how that control might be divided or transferred.
Beneficiary status: Being named as a beneficiary doesn't guarantee you'll receive anything from a trust. It means you're eligible to receive distributions if the trustee decides to make them to you. This discretionary nature makes it difficult to value a beneficiary's interest.
Income versus capital: Some trust deeds distinguish between income beneficiaries and capital beneficiaries. Understanding these distinctions matters when structuring a settlement.
Control vs. ownership
Being listed as a beneficiary doesn't mean you own anything in the trust.
Legally, the trustee owns the assets and decides who gets what. But the appointor is the person who can hire and fire the trustee. So if you're just a beneficiary but someone else is the appointor, you have no real control over whether you receive anything—you're relying entirely on their goodwill.
On the flip side, being the appointor gives you control but not necessarily money. If the trust holds most of the wealth and you have few other assets, having control doesn't automatically put income in your pocket.
Valuing trust assets is complex
Trusts often hold a mix of assets, such as investment properties, share portfolios, business interests, or accumulated cash. Each requires an appropriate valuation method.
How the trust has operated in the past also affects its value. A trust that always pays out income each year is valued differently from one that keeps profits inside the trust structure.
Valuers typically look at what the trust owns (assets) minus what it owes (debts). But the real value to you depends on whether you can actually access that money, and how much tax you'd pay if you did.
Options for Dividing Family Trust Interests
Several approaches exist, each with different implications for control, income, and tax.
One party keeps the existing trust: This works when there are sufficient other assets to offset the value of the trust's assets, or when one party has been the main driver in building the trust's wealth and the business or investments within it.
The trust is wound up and assets divided: This creates a clean break, but can trigger significant capital gains tax if the trust owns assets that have increased in value. You need to weigh the tax cost against the benefit of a complete separation.
Assets are transferred out to each party individually: Some assets might be transferred from the trust to each party individually, though this can trigger stamp duty and capital gains tax depending on the assets and circumstances.
A new trust is set up: Sometimes, a new trust is created for one party, with assets moved across from the old one. This needs careful structuring to manage the tax consequences.
Control is divided by changes to the appointor and trustee: One party might retain control as the appointor, while the other receives guaranteed payments or specific assets. Alternatively, an independent professional can be appointed as the appointor with clear rules about how distributions will be made.
The optimal restructuring approach depends on the specific trust deed provisions, the types of assets held, the tax cost bases of those assets, and both parties' future needs and tax positions.
Tax considerations for trust restructuring
CGT on trust asset transfers
As we discussed in our previous article, CGT rollover relief can apply to asset transfers made pursuant to court orders or binding financial agreements. This relief extends to assets held within trusts.
However, timing matters. Transfers made before formalising the property settlement through court orders or binding financial agreements won't qualify for rollover relief, potentially triggering immediate CGT.
Trust distribution made during separation requires documentation
These distributions affect both the "contributions" assessment (demonstrating who benefited from the trust) and the "financial resources" calculation (showing ongoing access to trust income).
From a tax perspective, distributions made during separation need careful consideration. Distributions to one spouse but not the other may be scrutinised. Distributions that are designed to reduce the trust asset pool before property settlement may be challenged.
Example:
Strategic Trust Settlement - Family Consulting Firm
Sarah and Sam built a successful environmental consulting firm over 15 years. The business operates through a discretionary family trust, with a corporate trustee of which both Sarah and Sam are directors. Sarah is the appointor. The business generates approximately $450,000 in annual profit.
The situation:
The trust holds the consulting business (valued at $1.2 million) and an investment property (valued at $800,000)
Sarah is the principal consultant and brings in most of the client work
Sam works in the business, handling project management and administration
Their two adult children are beneficiaries: their daughter Emma works as a senior consultant in the business, while their son Josh works in an unrelated field
The couple also owns their family home (valued at $1.4 million with a $200,000 mortgage), superannuation ($580,000 combined), and shares ($150,000)
Total asset pool: approximately $3.93 million
Initial positions: Sarah proposed retaining the trust structure with herself as appointor and controlling trustee, providing Sam with a guaranteed distribution agreement for a set period. Sam was concerned that this left him dependent on Sarah's goodwill and gave him no real security.
Sam suggested winding up the trust, selling the business and investment property, and dividing everything equally. Sarah was concerned this would trigger significant capital gains tax, destroy the business she'd built, and leave them all without employment.
The strategic solution: After detailed analysis of the trust deed, business valuation, and tax modelling, their accountants and lawyers structured a settlement where:
Sarah retained the existing trust structure that includes the consulting business, with Emma remaining an employee and beneficiary. Sarah became the sole director of the corporate trustee and retained appointor rights, giving her full control.
The investment property was transferred from the trust to Sam individually. The transfer triggered capital gains tax of approximately $95,000 (on the property's $300,000 gain), but CGT rollover relief under marriage breakdown provisions meant this tax was deferred until Sam eventually sold the property. His cost base carried over from the trust.
Sam received:
The investment property (transferred from the trust with rollover relief)
The family home (transferred to his name, with no CGT due to main residence exemption)
$350,000 of the superannuation (via splitting)
The share portfolio ($150,000)
$300,000, paid over three years from business distributions
Sarah received:
The consulting business within the trust structure
Control of all trust assets and distributions
$230,000 of the superannuation
Why this structure worked:
Preserved business operations and value: The consulting business continued operating without disruption. Sarah maintained her client relationships, and Emma kept her role. Avoiding a forced sale meant the business wasn't sold at a discount or lost entirely.
Managed tax efficiently: Rather than triggering $280,000 in immediate CGT by winding up the trust, the settlement deferred tax on the property transfer using rollover relief and avoided tax on the home transfer using the main residence exemption. The only immediate tax was on the staged payments to Sam, which were spread over three years and taxed at his marginal tax rate rather than creating one large taxable event.
Provided Sam with security: Instead of relying on Sarah's discretion for distributions, Sam received income-producing property, the family home, the majority of superannuation, and cash. These assets were in his name, under his control.
Protected Emma's position: As the child involved in the business, Emma's employment and career weren't disrupted by her parents' separation. Josh, who wasn't involved in the business, wasn't disadvantaged, as the asset division was based on Sam and Sarah's contributions and needs rather than the children's interests.
Reflected contributions and future needs: Sarah's role as principal consultant and primary income generator was recognised through her retention of the business. Sam received asset security and income through property rather than remaining dependent on business distributions he couldn't control.
Recognised the value of control: Rather than attempting to split control through complex appointor arrangements or co-trusteeship (which would have required ongoing cooperation), the settlement gave Sarah clear control of the business she operated while ensuring Sam received equivalent value in other forms.
Disclaimer
The above scenario is a fictional example created to illustrate how family trust settlements can be structured. Individual circumstances vary significantly, and outcomes will depend on your specific trust deed, asset composition, tax position, and legal advice.
The role of accounting advice
The accountant's contribution included detailed tax modelling of different scenarios, advising on the most effective way to structure the property transfer and cash payment, and projecting Sarah’s long-term cash flow.
The structured settlement preserved approximately $200,000 in value compared to the wind-up scenario, while providing both parties with security and independence.
Why Professional Tax Advice Matters During Property Settlement
The tax implications of property settlement decisions involving trusts can amount to hundreds of thousands of dollars.
Understanding these implications helps you:
Negotiate more effectively
Preserve wealth
Avoid costly mistakes
Model different scenarios
Coordinate with legal advice
The Accounting Heart Approach
If you're navigating a property settlement involving a family trust, we work compassionately and sensitively with you to:
Model the tax implications of different settlement scenarios
Provide sophisticated tax analysis
Analyse the after-tax value of proposed divisions
Identify opportunities to legitimately minimise tax within the settlement framework
Coordinate with your legal advisers to structure tax-effective settlements
Plan for your financial future post-settlement
We provide discreet, professional advice to protect your financial position. You can book a confidential consultation here.
Sources
https://www.fcfcoa.gov.au/fl/divorce/divorce-overview
https://www.fcfcoa.gov.au/fl/fp/overview
Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and/or other advice as may be appropriate having regard to their particular circumstances. The information in this article relates to tax law and should not be considered legal advice regarding property settlement. You should obtain legal advice from a qualified family lawyer for all aspects of property settlement proceedings.