Family Trusts in Australia

Why Are They Commonly Used for Asset Protection and Wealth Succession?

In Australia, family trusts (commonly discretionary trusts) are one of the most widely used structures for holding family wealth and investment assets.

They are frequently used by:

• business owners;
• investors;
• professionals;
• high-net-worth families; and
• family groups managing long-term wealth.

Family trusts are commonly used for:

• holding and managing family assets;
• operating family businesses;
• owning investment properties and shares;
• succession and intergenerational wealth planning;
• improving asset protection; and
• structuring tax arrangements.

It is worth noting that in May 2026, discussions associated with the Federal Budget raised the possibility of future reforms to the taxation of discretionary trusts, including proposals involving a potential 30% minimum tax rate mechanism. However, at the time of writing, no such measures have been enacted into law and the details remain uncertain.

This article focuses primarily on the legal and practical aspects of family trusts, including:

• why family trusts may provide a degree of asset protection;
• why trust protection can sometimes fail;
• why personal guarantees, bankruptcy and family law disputes often create major risks for trust structures; and
• why many families use trusts for long-term wealth preservation rather than simply “protecting assets”.

What Is a Family Trust?

A common misunderstanding is that a family trust is similar to a company.

It is not.

A family trust is usually not a separate legal entity. Instead, it is a legal relationship.

In simple terms:

• a trustee holds and manages assets;
• beneficiaries may benefit from those assets; and
• the trust operates according to the terms of a trust deed.

This means the person legally holding the assets may not be the same person who ultimately benefits from them.

That separation between:

• legal ownership;
• practical control; and
• beneficial enjoyment

is one of the key reasons trusts are commonly used for both asset protection and long-term wealth planning.

Why Can a Family Trust Assist With Asset Protection?

The core concept is relatively simple.

Assets held within a trust are usually owned by the trustee, rather than by beneficiaries personally.

As a result:

• personal creditors may not automatically have direct access to trust assets;
• business and personal risks may be separated from family wealth;
• long-term assets may be better insulated from personal liabilities.

For example, if a person personally owns an investment property, creditors may generally pursue that property directly.

However, if the property is held by a properly administered family trust, and the individual is only a discretionary beneficiary, the legal position can be significantly more complex.

This is one reason why family trusts are commonly used by:

• business owners;
• directors;
• medical professionals;
• developers; and
• individuals exposed to litigation or commercial risk.

Why Many Business Owners Use Family Trusts

Running a business inherently involves risk.

Common risks include:

• commercial disputes;
• contractual claims;
• negligence allegations;
• debt recovery proceedings;
• insolvency risks.

For this reason, many business owners separate:

• operating activities; and
• long-term family wealth.

A common structure involves:

• a trading company operating the business; while
• a family trust holds investment assets or long-term wealth.

If the business later fails:

• creditors will usually first pursue the trading entity;
• trust-owned assets may be more difficult to access directly.

This separation of risk is one of the main commercial reasons family trusts remain popular in Australia.

Why Trust Protection Is Not Absolute

A family trust is not a “magic shield”.

Australian courts increasingly examine:

• who actually controls the trust;
• how trust funds are used in practice;
• whether the structure is genuine; and
• whether trust formalities are properly maintained.

If trust assets are treated as personal assets, or the structure is improperly administered, the effectiveness of asset protection may be significantly weakened.

Why Personal Guarantees Create Serious Risk

One of the most overlooked risks is the personal guarantee.

Many business owners assume:
“If the company borrows money, only the company is liable.”

In reality, banks, landlords and suppliers commonly require:

• directors; or
• shareholders

to sign personal guarantees.

Once a personal guarantee is signed, creditors may:

• bypass the company; and
• pursue the individual personally.

This can substantially increase insolvency risk.

In practice, insolvency practitioners may then investigate:

• trust distributions;
• trust loans;
• transfers into the trust;
• whether trust assets were used personally; and
• whether the trust operated as the individual’s “alter ego”.

Even if the trust itself remains legally valid, the level of scrutiny and exposure can increase significantly once personal liability arises.

Family Law — Why Trust Assets May Still Be Included

Family law proceedings are often one of the weakest areas for trust-based asset protection.

Australian family courts focus heavily on:

• practical control;
• access to wealth; and
• economic reality.

For example, if one spouse:

• controls the corporate trustee;
• controls the appointor role;
• determines trust distributions; and
• freely uses trust funds,

the court may conclude that the trust is effectively under that spouse’s control.

As a result, trust assets may be treated as part of the matrimonial property pool during property settlement proceedings.

This means trusts often provide weaker protection in family law matters than in ordinary creditor disputes.

Trustee Indemnity Rights — An Often Overlooked Issue

Another important issue is the trustee’s right of indemnity.

Where a trustee properly incurs liabilities while acting as trustee, the trustee will usually have a right to recover those liabilities from trust assets.

This becomes important during insolvency.

If a trustee becomes insolvent:

• liquidators or bankruptcy trustees may rely on indemnity rights to access trust assets for trust-related liabilities.

As a result, trust assets are not always untouchable simply because they are held within a trust structure.

Transferring Assets Into a Trust Before Litigation Can Be Dangerous

One particularly risky situation occurs where assets are transferred into a trust shortly before:

• litigation;
• bankruptcy;
• insolvency; or
• separation.

For example:

• transferring assets into a trust for little or no consideration after becoming aware of potential claims.

Courts may regard such conduct as:

• an attempt to defeat creditors;
• asset concealment; or
• an improper transaction.

This can lead to:

• clawback claims;
• voidable transaction proceedings;
• bankruptcy recovery actions; or
• allegations involving fraudulent transfers.

Timing and purpose are therefore critically important.

Long-Term Wealth Succession — Often the Real Strength of a Family Trust

In practice, the greatest strength of a family trust is often not short-term asset protection.

It is long-term wealth preservation and succession planning.

Where assets are personally owned:

• death may trigger estate administration;
• probate may be required;
• assets may become fragmented between beneficiaries.

By contrast, assets held within a trust may continue to be controlled without transferring legal ownership of each asset individually.

This may help:

• preserve family wealth across generations;
• reduce fragmentation of assets;
• maintain continuity of investment structures; and
• improve long-term family wealth management.

Parents also sometimes use trust structures to reduce direct ownership exposure for children, particularly where concerns exist regarding:

• future divorce;
• bankruptcy risks; or
• external claims.

However, again, protection is never absolute.

Proper Administration Is Critical

The effectiveness of a family trust often depends less on whether it exists, and more on whether it is properly managed.

Common problems include:

• mixing personal and trust funds;
• failing to comply with the trust deed;
• failing to make proper distribution resolutions;
• treating trust assets as personal property.

Poor administration can create:

• tax risks;
• litigation risks;
• uncertainty regarding ownership; and
• significant asset protection failures.

Conclusion

A properly structured and properly administered family trust can be a highly effective tool for:

• asset protection;
• family wealth management;
• succession planning;
• commercial structuring; and
• long-term intergenerational wealth preservation.

However:

• trust protection is never absolute;
• courts increasingly focus on practical control and economic reality;
• personal guarantees, insolvency and family law disputes can substantially weaken protection.

If your trust structure or family assets may be exposed to legal risk, obtaining both legal and accounting advice at an early stage is critical.

 

This blog is published by Lawson Stanford Lawyers on 21 May 2026. If you have any questions about this blog. Please contact us by email to Info@lawsonstanford.com.au 

*Disclaimer

This article provides general information only and does not constitute legal, taxation or financial advice. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.