{"id":19466,"date":"2026-10-21T17:53:14","date_gmt":"2026-10-21T06:53:14","guid":{"rendered":"https:\/\/chuatan.com.au\/family-trust-used-wrong-way-how-trusts-attacked-australia\/"},"modified":"2026-10-22T04:22:35","modified_gmt":"2026-10-21T17:22:35","slug":"family-trust-used-wrong-way-how-trusts-attacked-australia","status":"publish","type":"post","link":"https:\/\/chuatan.com.au\/en\/family-trust-used-wrong-way-how-trusts-attacked-australia\/","title":{"rendered":"Using a Family Trust the Wrong Way: How Trusts Are Attacked in Australia"},"content":{"rendered":"\n<div class=\"ct-article\" data-no-translation>\n<p>A family trust protects assets, separates them from the family&#8217;s personal wealth and allows income to be distributed flexibly, but only while it is run as a trust. When the people in control treat trust money as their own, ignore the trust deed or skip the paperwork, the trust becomes open to challenge by a separated spouse, a bankruptcy trustee, the Australian Taxation Office (ATO), other beneficiaries or disappointed family members after a death. In our experience, a trust used the wrong way is one of the most common causes of trustee litigation. The way to avoid it is to use the trust as it was intended to be used.<\/p>\n\n<h2>Why the way a trust is run matters<\/h2>\n<p>A discretionary trust is not a separate legal person. It is a relationship: a trustee holds assets for a class of beneficiaries, subject to the terms of the trust deed and the general law of trusts. The protection people expect from a trust comes from that separation between legal ownership, control and benefit. Our article on <a href=\"\/en\/family-trust-roles-control-australia\/\">the roles and control in a family trust<\/a> explains how the trustee, appointor, guardian and beneficiaries fit together.<\/p>\n<p>Courts and the ATO look at what actually happened, not only at what the documents say. If the person who controls the trust behaves as though the assets are personally theirs, a court is more likely to treat them that way. If the trustee never makes proper decisions, there may be no valid decision to rely on when tax, a dispute or a death tests the structure.<\/p>\n\n<h2>Common ways trusts are misused<\/h2>\n<ul>\n<li><strong>Treating trust money as personal money.<\/strong> Paying private expenses, holidays or a child&#8217;s school fees straight from the trust account without a resolution or a loan record.<\/li>\n<li><strong>Mixing funds.<\/strong> Running trust income through a personal or company account, or paying trust expenses from personal accounts, so that no one can later say what belongs to whom.<\/li>\n<li><strong>Undocumented loans.<\/strong> Money moving between the trust, the family company and family members with no written loan agreement, no terms and no record of repayments. Years later, family members argue about whether it was a loan, a gift or a distribution.<\/li>\n<li><strong>Distributions without proper resolutions.<\/strong> Resolutions that are not made at all, are made after 30 June (or after an earlier date the deed requires), or appoint income to someone who is not a beneficiary.<\/li>\n<li><strong>Ignoring the deed.<\/strong> Acting on powers the trustee does not have, failing to follow procedures for variations, or never having read the deed (or not being able to find it).<\/li>\n<li><strong>Controllers acting for themselves.<\/strong> An appointor removing a trustee, or a trustee favouring one family member, to serve personal interests during a separation or a family falling-out rather than for a proper purpose.<\/li>\n<li><strong>No records.<\/strong> No minutes, no financial statements, no copy of the signed deed or its variations, and no record of why decisions were made.<\/li>\n<\/ul>\n\n<h2>How a misused trust is attacked<\/h2>\n\n<h3>1. Family law: trust assets counted in a property settlement<\/h3>\n<p>The Family Law Act 1975 (Cth) allows the court to make orders about the property of the parties to a marriage or de facto relationship. Trust assets are not automatically outside that reach. In <em>Kennon v Spry<\/em> [2008] HCA 56; (2008) 238 CLR 366, the husband was trustee of a discretionary trust with power to distribute the trust fund to himself. The High Court held that the trust assets were property of the parties for the purposes of a property settlement, and dispositions he had made to trusts for the children after the marriage broke down could be set aside.<\/p>\n<p>The issue continues to be litigated. In 2026, a majority of the Full Court of the Federal Circuit and Family Court of Australia in <em>Caldwell &amp; Caldwell<\/em> held that trusts established by the husband&#8217;s late father were the husband&#8217;s property because of the control he held through the trustee companies and his power to remove co-appointors, even though he had never used that power. The High Court refused special leave to appeal in September 2026. Where trust assets are not treated as property, they may still be taken into account as a <strong>financial resource<\/strong> of the party who controls or benefits from the trust, which can affect the overall division.<\/p>\n<p>The more a party has treated the trust as their own, by drawing on it freely and making decisions with no regard to other beneficiaries, the harder it is to argue that it should be left out. The court can also set aside transactions made to defeat a claim. For the related question of keeping an inheritance separate, see <a href=\"\/en\/protecting-inheritance-divorce-creditors\/\">protecting an inheritance from divorce and creditors<\/a>.<\/p>\n\n<h3>2. Sham arguments: rarely successful, but costly<\/h3>\n<p>A sham is a document or transaction intended to give the appearance of rights and obligations different from those the parties actually intended. The classic Australian description is in <em>Sharrment Pty Ltd v Official Trustee in Bankruptcy<\/em> (1988) 18 FCR 449. Findings that a trust is a sham are rare, because courts presume that documents mean what they say. <em>Raftland Pty Ltd v Commissioner of Taxation<\/em> (2008) 238 CLR 516 is a High Court example where part of a trust arrangement was found not to reflect what the parties really intended.<\/p>\n<p>Even when a sham argument fails, the evidence used to run it (personal use of trust funds, missing resolutions, decisions made by one person without reference to the deed) often supports other claims. Poor administration invites the argument in the first place.<\/p>\n\n<h3>3. Creditors and bankruptcy: clawback of transfers<\/h3>\n<p>Moving personal assets into a family trust does not put them beyond the reach of creditors if the transfer is later reviewed. Under the Bankruptcy Act 1966 (Cth), a bankruptcy trustee can seek to recover property transferred for no or inadequate value within set periods before bankruptcy (section 120), and property transferred where a main purpose was to prevent, hinder or delay creditors (section 121, which has no fixed look-back period). Payments that should have gone to the bankrupt but were directed to a trust can also be pursued.<\/p>\n<p>Undocumented loans cut both ways. A loan the founder made to the trust is an asset that a bankruptcy trustee or an executor can call on. Money the trust advanced to a family member without documents may be hard for the trust to recover at all.<\/p>\n\n<h3>4. Tax: invalid resolutions, section 100A and Division 7A<\/h3>\n<p>The ATO expects trustees to resolve how trust income is to be distributed by 30 June each year, or by an earlier date if the deed requires it. If a resolution is late, invalid, or appoints income to someone who is not a beneficiary, the income may be assessed to default beneficiaries or to the trustee, potentially at the top rate. Where a family trust election is in place, distributions outside the family group can trigger family trust distribution tax.<\/p>\n<p>Section 100A of the Income Tax Assessment Act 1936 targets arrangements where a beneficiary is made entitled to income but another person in substance receives the benefit. It is particularly relevant to distributions to adult children whose entitlements are paid to, or used by, their parents. Our article on <a href=\"\/en\/section-100a-reimbursement-agreement-trust-distribution-adult-children\/\">section 100A and distributions to adult children<\/a> explains the ATO&#8217;s approach.<\/p>\n<p>Division 7A deals with private company profits reaching shareholders and their associates. Where a family trust has a corporate beneficiary, unpaid entitlements and loans need care. In June 2026 the High Court held in <em>Commissioner of Taxation v Bendel<\/em> that a company&#8217;s unpaid present entitlement from a trust was not, of itself, a loan for Division 7A purposes. The ATO&#8217;s decision impact statement accepts that outcome but notes that other provisions, including Subdivision EA (which applies where the trust then lends or pays money to a shareholder or associate) and section 100A, may still apply. The right answer depends on the facts, and advice from an accountant or tax adviser should be obtained.<\/p>\n\n<h3>5. Beneficiaries: information, breach of trust and removal of trustees<\/h3>\n<p>Beneficiaries, including discretionary beneficiaries, can hold a trustee to account. Trustees must act in accordance with the deed, in good faith, for proper purposes and with genuine consideration of the beneficiaries. The Privy Council decision in <em>Schmidt v Rosewood Trust Ltd<\/em> [2003] UKPC 26 treats a beneficiary&#8217;s access to trust documents as part of the court&#8217;s supervision of trusts. Australian courts have drawn on that reasoning, although approaches vary and the wording of the deed matters.<\/p>\n<p>Where a trustee has used trust money personally or favoured one family member improperly, beneficiaries may seek accounts, compensation for breach of trust, or the removal and replacement of the trustee. Courts can remove trustees under their general supervisory jurisdiction and state trustee legislation. These disputes are often between siblings or between a surviving parent and the children, and they are expensive. See our article on <a href=\"\/en\/sibling-estate-disputes\/\">disputes between siblings<\/a>.<\/p>\n\n<h3>6. Estate disputes and the NSW notional estate<\/h3>\n<p>Assets held by a family trust generally do not form part of a deceased person&#8217;s estate and are not governed by their Will. What does pass under the Will may include loan accounts owed by the trust to the deceased, shares in a trustee company, and the roles of appointor or guardian if the deed allows. Where these were never documented or planned, the family can be left arguing about who controls the trust. Our article on <a href=\"\/en\/who-controls-family-trust-after-death-mapping-control\/\">who controls a family trust after death<\/a> explains how to map this out.<\/p>\n<p>In New South Wales, the Succession Act 2006 (NSW) allows the court, in a family provision claim, to designate property outside the estate as <strong>notional estate<\/strong>. This can include property transferred into a trust, and in some cases a failure to exercise a power, where the transaction falls within the time limits in the Act (for example, within three years before death if it was intended to deny or limit provision for an eligible person). Other states and territories do not have equivalent notional estate provisions, but trust-controlled assets can still become central in a family provision claim. For the wider comparison, see <a href=\"\/en\/testamentary-trust-vs-family-trust-vs-will\/\">testamentary trust vs family trust vs a simple Will<\/a>.<\/p>\n\n<h2>Summary of how a trust is attacked<\/h2>\n<table>\n<thead><tr><th>Who challenges<\/th><th>Typical argument<\/th><th>Misuse that helps them<\/th><\/tr><\/thead>\n<tbody>\n<tr><td>Separated spouse or de facto partner<\/td><td>Trust assets are property, or a financial resource, of the other party<\/td><td>Personal use of trust funds; one person in practical control<\/td><\/tr>\n<tr><td>Bankruptcy trustee or creditors<\/td><td>Transfers into the trust should be clawed back<\/td><td>Transfers for no value; transfers when debts were looming<\/td><\/tr>\n<tr><td>ATO<\/td><td>Resolutions invalid; section 100A; Division 7A or Subdivision EA<\/td><td>Late or missing resolutions; benefit going to someone other than the beneficiary<\/td><\/tr>\n<tr><td>Other beneficiaries<\/td><td>Breach of trust; remove the trustee; disclose documents<\/td><td>Self-interested decisions; no records; ignoring the deed<\/td><\/tr>\n<tr><td>Family members after a death<\/td><td>Control of the trust; loan accounts; NSW notional estate<\/td><td>Undocumented loans; no succession plan for appointor roles<\/td><\/tr>\n<\/tbody>\n<\/table>\n\n<h2>Cross-border issues<\/h2>\n<p>Many families we act for have trustees, appointors or beneficiaries in mainland China, Hong Kong, Taiwan, Singapore or Malaysia. Distance makes good administration harder and the consequences of poor administration larger.<\/p>\n<ul>\n<li><strong>Controllers living overseas.<\/strong> If the trustee is a non-resident, or the trust&#8217;s central management and control moves offshore, the trust may cease to be a resident trust for capital gains tax purposes, which is itself a CGT event. Decisions made informally by a parent overseas, without the Australian trustee&#8217;s proper involvement, also weaken the trustee&#8217;s position in any later dispute.<\/li>\n<li><strong>Foreign beneficiaries.<\/strong> Distributions to non-resident beneficiaries are taxed differently, and the trustee may be assessed on their share. See <a href=\"\/en\/trust-distribution-to-non-resident-beneficiary-australia\/\">trust distributions to non-resident beneficiaries<\/a>.<\/li>\n<li><strong>State surcharges.<\/strong> A discretionary trust whose potential beneficiaries include foreign persons may be treated as a foreign trust for surcharge stamp duty and land tax purposes on residential land, unless the deed excludes foreign beneficiaries in the way the relevant state requires. See <a href=\"\/en\/foreign-beneficiary-exclusion-clause-wills-testamentary-trusts\/\">foreign beneficiary exclusion clauses<\/a>.<\/li>\n<li><strong>Overseas tax rules.<\/strong> A beneficiary who is tax resident elsewhere may face tax in that country on distributions. Families with mainland China connections should also be aware of China&#8217;s new rules on offshore trusts, discussed in <a href=\"\/en\/china-offshore-trust-tax-rules-australia\/\">China&#8217;s new offshore trust tax rules<\/a>.<\/li>\n<\/ul>\n\n<h2>Using the trust as intended: a practical checklist<\/h2>\n<ol>\n<li><strong>Locate and read the deed.<\/strong> Keep the signed original and every variation together. Confirm who the trustee, appointor and any guardian are, and what the trustee can and cannot do.<\/li>\n<li><strong>Review the deed periodically.<\/strong> Check vesting date, beneficiary class, foreign beneficiary exclusions, powers to stream income and capital, and succession of the appointor and guardian roles.<\/li>\n<li><strong>Make resolutions on time.<\/strong> Resolve income distributions by 30 June (or the deed&#8217;s earlier date), in writing, signed by the trustee, and consistent with the deed. Keep evidence of when they were made.<\/li>\n<li><strong>Keep minutes.<\/strong> Record what the trustee considered, especially for significant decisions such as large distributions, loans, sales or changes to the deed.<\/li>\n<li><strong>Document every loan.<\/strong> Use written loan agreements for money lent to or by the trust, including to family members and companies, and keep the loan accounts up to date.<\/li>\n<li><strong>Keep a separate bank account.<\/strong> Do not pay private expenses from the trust, and do not run trust income through personal accounts.<\/li>\n<li><strong>Pay entitlements properly.<\/strong> When income is distributed to a beneficiary, make sure the beneficiary actually receives and uses the benefit, or that any arrangement is documented and reviewed by a tax adviser.<\/li>\n<li><strong>Plan control succession.<\/strong> Make sure appointor and guardian roles pass in the way the family intends, and that the Wills of the people holding those roles are consistent with the deed.<\/li>\n<li><strong>Keep financial statements and tax returns current<\/strong>, and keep them with the deed and minutes.<\/li>\n<\/ol>\n\n<h2>Common mistakes<\/h2>\n<ul>\n<li>Assuming that because the trust &#8220;owns&#8221; an asset, it cannot be touched in a separation, bankruptcy or estate dispute.<\/li>\n<li>Leaving resolutions to the accountant after 30 June without checking the deed&#8217;s requirements.<\/li>\n<li>Treating the trust account as a family wallet.<\/li>\n<li>Changing the deed or removing beneficiaries after a dispute has begun, which often makes the court look more closely.<\/li>\n<li>Not knowing who becomes appointor when the founder dies or loses capacity.<\/li>\n<\/ul>\n\n<h2>How we can assist<\/h2>\n<p>We review trust deeds and administration practices, advise trustees and appointors on their duties, prepare variations and succession arrangements for control roles, and act in disputes involving family trusts, including estate disputes and claims between beneficiaries. Where families have members or assets in Asia, we coordinate with overseas advisers and work with the family&#8217;s accountant on the tax side.<\/p>\n\n<h2>Related reading<\/h2>\n<ul class=\"ct-related\"><li><a href=\"\/en\/family-trust-roles-control-australia\/\">Family Trust Roles and Control in Australia<\/a><\/li><li><a href=\"\/en\/who-controls-family-trust-after-death-mapping-control\/\">Who Controls a Family Trust After Death? Mapping Control<\/a><\/li><li><a href=\"\/en\/testamentary-trust-vs-family-trust-vs-will\/\">Testamentary Trust vs Family Trust vs a Simple Will: Which Suits You?<\/a><\/li><li><a href=\"\/en\/foreign-beneficiary-exclusion-clause-wills-testamentary-trusts\/\">Foreign Beneficiary Exclusion Clauses in Wills and Testamentary Trusts<\/a><\/li><li><a href=\"\/en\/trustees-using-ai-duties-verification-legal-privilege-australia\/\">Trustees Using AI: Duties, Verification and Legal Privilege in Australia<\/a><\/li><li><a href=\"\/en\/family-business-trust-dispute-resolution-process\/\">Designing Your Family&#8217;s Dispute Process Before the Dispute<\/a><\/li><li><a href=\"\/en\/does-family-trust-protect-assets-from-creditors-trust-asset-protection-bankruptcy\/\">Does a Family Trust Protect Assets From Creditors? Bankruptcy Limits<\/a><\/li><li><a href=\"\/en\/family-trust-divorce-australia-kennon-v-spry-trust-property-separation\/\">Family Trust Divorce Australia: Kennon v Spry and Trust Control<\/a><\/li><li><a href=\"\/en\/founder-control-trusts-foundations-australia\/\">When the Founder Keeps Every Key: Control, Trusts and Foundations for Cross-Border Families<\/a><\/li><\/ul>\n<p><em>Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an <a href=\"#ct-enquiry\">enquiry<\/a>. Advice is available in English, Mandarin and Cantonese.<\/em><\/p>\n<p class=\"ct-byline\"><em><a href=\"\/en\/justin-chua\/\">Justin Chua<\/a> (\u8521\u667a\u52cb), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.<\/em><\/p>\n<\/div>\n\n\n<div id=\"ct-enquiry\" class=\"ct-eq\" data-no-translation>\r\n<style>.ct-eq{background:#f4f1ea;border:1px solid #e3ddd0;border-radius:10px;padding:22px 24px;margin:32px 0;font-size:16px;line-height:1.6}.ct-eq h2,.ct-eq h3{margin:0 0 6px}.ct-eq p{margin:0 0 12px}.ct-eq form{display:grid;grid-template-columns:1fr 1fr;gap:12px}.ct-eq label{display:block;font-size:14px;font-weight:600;margin-bottom:4px}.ct-eq input,.ct-eq select,.ct-eq textarea{width:100%;box-sizing:border-box;padding:10px 12px;border:1px solid #cfc6b4;border-radius:6px;font-size:16px;background:#fff}.ct-eq .full{grid-column:1\/-1}.ct-eq button{background:#8a6a3b;color:#fff;border:0;border-radius:6px;padding:12px 22px;font-size:16px;cursor:pointer}.ct-eq .hp{position:absolute;left:-9999px}.ct-eq small{color:#5f5a50}.ct-eq .ok{background:#e7f3e8;border-left:4px solid #3c8d40;padding:12px 16px}.ct-eq .bad{background:#fbeaea;border-left:4px solid #b03a2e;padding:12px 16px}.ct-eq .ct-direct{display:flex;flex-wrap:wrap;gap:10px;margin-top:14px}.ct-eq .ct-direct a,.ct-eq .ct-direct button{background:#fff;color:#2b2b2b;border:1px solid #cfc6b4;padding:9px 14px;border-radius:6px;text-decoration:none;font-size:15px}@media(max-width:640px){.ct-eq form{grid-template-columns:1fr}}<\/style>\r\n<h3>Tell us about the estate<\/h3>\r\n<p>A short message is enough. 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Letters of administration and who inherits<\/a><\/li><li><a href=\"\/en\/estate-planning-victoria\/\">Estate planning: Will, power of attorney, medical decisions<\/a><\/li><li><a href=\"\/en\/testamentary-trusts\/\">Testamentary trusts<\/a><\/li><li><a href=\"\/en\/superannuation-and-your-will\/\">Superannuation and your Will<\/a><\/li><li><a href=\"\/en\/executor-disputes\/\">Executor problems and disputes<\/a><\/li><li><a href=\"\/en\/professional-executor-trustee\/\">Professional executor &amp; trustee services<\/a><\/li><li><a href=\"\/en\/%E5%AE%A2%E6%88%B7%E8%AF%84%E4%BB%B7\/\">Client reviews<\/a><\/li><\/ul><\/div>\n","protected":false},"excerpt":{"rendered":"<p>A family trust protects assets, separates them from the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_yoast_wpseo_meta-robots-noindex":"","_wpcom_ai_launchpad_first_post":false,"_jetpack_hide_featured_image":false,"_jetpack_featured_image_duplicate_dismissed":0,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[106],"tags":[],"class_list":["post-19466","post","type-post","status-publish","format-standard","hentry","category-trusts"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v21.2 (Yoast SEO v28.7) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Family Trust Misuse: How Trusts Are Attacked in Australia | Chua Tan Associates<\/title>\n<meta name=\"description\" content=\"How misused family trusts are attacked in Australia: family law, sham claims, bankruptcy, tax, beneficiary claims and estate 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