Need to know:
- The discretionary trust is not the impenetrable shield it once was. In Australia, family and bankruptcy courts are increasingly willing to look past the trust structure and treat its assets as belonging to the person who controls it.
- The concept of control is key. If you are calling the shots for the trust, courts may conclude that the assets are yours in substance, regardless of what the trust documents say.
- The risk has materialised following recent decisions, where courts went further than before in treating trust assets as personal assets. This raises real questions for anyone who sits at the centre of their own trust structure
There are three key benefits that are commonly attributed to the discretionary trust:
- tax effectiveness;
- assets protection; and
- income streaming flexibility.
The announcement of the 2026-27 Federal Budget (Budget) has sparked great debate as to the ongoing tax benefits of the discretionary trust, with many individuals now questioning the extent to which they remain tax-effective vehicles.
Yet whilst the debate rages at the statutory level, a quieter and perhaps more immediate threat to the discretionary trust has gone largely unnoticed.
This threat is constituted by a line of recent decisions at common law that have challenged the asset protective function of the trust structure, particularly in circumstances where the primary beneficiary is also the effective controller of the trust.
These decisions have emerged in family and bankruptcy courts and show a greater readiness to ‘lift the veil’ on trust assets if the right fact pattern arises.
So, what exactly is this fact pattern?
Family Law
In the family law context, courts have long grappled with the question of whether trust assets constitute ‘property’ for the purposes of spousal property settlements. This stems from section 79 of the Family Law Act 1975 (Cth) (FLA) which requires the court to identify the existing legal and equitable rights and interests in any property of the parties to the marriage (whether that be in possession or reversion) when making a property settlement order.
It is important to understand that ‘property’ in this sense is not the same as a ‘financial resource’ which has been interpreted to mean any source of financial support which a person reasonably expects to be available. In this way, a ‘financial resource’ is a source that is capable of being drawn on to supply a financial need or deficiency and is therefore distinct from ‘property’ in that it cannot be directly divided. The distinction became clear in the famous decision of the High Court in Kennon v Spry [2008] HCA 56 (Kennon v Spry).
Kennon v Spry
By way of background, this case concerned the ICF Spry Trust of which Dr Ian Spry was the settlor, the appointor and the trustee (ICF Trust). When terms of the ICF Spry Trust were confined to writing in 1981, the beneficiaries were defined to include Dr Spry and his siblings, their respective issue and all their spouses.
In 1978, Dr Spry married Helen Spry with whom he shared four children. Over the years, a series of variations were made to the ICF Trust to exclude Dr Spry as a beneficiary and appoint Mrs Spry as his successor trustee. In 1998, when the marriage became increasingly hostile, they were both removed as capital beneficiaries of the ICF Trust. When the couple finally separated, Dr Spry established four trusts for each of his children to which he applied 25% of the income and capital of the ICF Trust. The children’s trusts were controlled by him and Edwin Kennon as joint trustees.
These actions were put under the microscope in 2002 when Mrs Spry filed an application for property settlement and maintenance. As part of this application, Mrs Spry claimed she was entitled to 50% of the trust assets and sought to set aside the 1998 instrument that removed her (and Dr Spry) as capital beneficiaries of the ICF Trust and the instruments that established the children’s trusts.
In deciding whether the trust assets were ‘property of the parties to the marriage’ as required by section 79 of the FLA, the High Court examined the qualities of the trust, including:
- origin of the trust assets (which had been contributed by both Dr Spry and Mrs Spry)
- the legal title to the trust assets (noting that title was held by Dr Spry as sole trustee)
- the interests of third parties (including the children’s interests as beneficiaries of the later trusts)
- the discretionary nature of the trust (specifically, the absence of an obligation to make distributions).
Although the High Court decided that legal title to trust assets alone was not sufficient to demonstrate that trust assets were ‘property’ within the meaning of section 79, it went on to say that legal title coupled with specific rights or powers can satisfy the definition. In the view of the High Court, it was significant that Dr Spry had the power to appoint assets to his wife and that she had an equitable right to be considered by the trustee as a beneficiary. Ultimately, it was these circumstances that led the High Court to conclude that the assets of the trust were property within the meaning section 79 and accessible for the purposes of a property settlement order.
Although this case arose under unusual circumstances, it continues to stand as authority for the proposition that ‘property’ is a bundle of rights that includes:
- the practical capacity to benefit and control a trust
- the rights arising upon the exercise of discretion.
With that said, the concept of property as it relates to trusts continues to challenge the courts, especially in circumstances that fall outside the prescribed “fact pattern” as set out above.
These difficulties were well captured in the recent decision of Caldwell v Caldwell [2025] FedCFamC1F 506 (Caldwell v Caldwell).
Caldwell v Caldwell
In this case, the court was once again required to determine whether assets held by three discretionary trusts were ‘property of the parties to the marriage’ so far as they could be brought into the marital asset pool available for division on divorce.
By way of background, these trusts had accumulated significant wealth over the course of the couple’s 30-year marriage and were used to grow an intergenerational family business that had been started by the husband’s great grandfather.
The couple separated in 2022 and later commenced proceedings to divorce in 2023. Although neither party had contributed to the trust assets over the course of their marriage, the wife sought a declaration from the court pursuant to section 79 of the FLA that the trust assets were property of the marriage.
In making its determination, the court considered the following circumstances:
- husband had the power to remove co-appointors of the trusts
- an amendment that had been made in 2019 to restrict the class of beneficiaries to lineal descendants (making the wife an excluded beneficiary)
- the trust assets were managed by a corporate trustee of which the husband held shares (which came with voting rights).
Outcome
In the opinion of the primary judge, the trust assets were a financial resource (as opposed to property) and therefore, did not fall within the ambit of section 79 FLA. Even so, the court decided that these assets were not required to achieve an equitable settlement between the parties.
This decision was overturned on appeal, where the Full Court found that the trust assets were in fact assets of the husband. In reaching this conclusion, the Full Court relied heavily on the concept of control.
Among other things, it examined the husband’s role in the corporate trustee by reference to his capacity to control the board of directors and the voting rights that attached to his shares. Naturally, these factors were persuasive in establishing control.
The court went on to consider whether capacity to control was enough, or whether actual control was required. On the one hand, the majority held that it was sufficient for a person to have the power to put themselves in a position of effective control. On this basis, the majority was willing to say that the husband was in effective control because he had the power to remove his sons as co-appointors of the trust.
However, Justice Strum did not share the same willingness and instead decided that a person needed to in fact take those steps (e.g. remove his sons as co-appointors) to be in effective control because only then would the person have an ‘existing equitable or legal interest’ as required by section 79 of the FLA.
This presents an interesting debate which we hope will be resolved by the High Court if the husband and the wife’s sons’ (who were also parties to the proceedings) application for special leave is granted.
Bankruptcy Law
The same willingness to pierce a trust have crystalised in the realm of bankruptcy by virtue of the decision of the Full Federal Court in the matter of Filippini v Keystone Asset Management Limited (Receivers and Managers appointed) (in liquidation) [2026] FCAFC 71 (Filippini Decision).
Filippini Decision
By way of background, this case concerned an application for leave to appeal in respect of a freezing order made over trust assets. The freezing order supported $158 million in funds that were misappropriated by Mr Robert Filippini (Mr Filipinni) and a company of which he was a sole director. The following assets were disputed:
- real estate known as ‘The Chapel Street Property’ held by Mrs Dimitra Filippini (Mrs Filipinni) as trustee for the A&M Trust
- real estate known as ‘The Lygon Street Property’ held by Mrs Filippini as trustee for the R&D Trust
- several luxury vehicles held by FPC VIC Pty Ltd as trustee for the FPC VIC Trust.
The decision turned on the construction of rule 7.35(5)(a) of the Federal Court Rules 2011 (Rules), which empowers the court to make a freezing order against a third party if there is a risk that the judgment will be wholly or partly unsatisfied because:
- the third party holds or is using a power of disposition over assets (including claims and expectancies) of the judgment debtor
- the third party is in possession of assets (including claims and expectancies) of the judgment debtor.
The applicants contended that the phrase ‘assets of the judgment debtor’ should be construed as referring only to those assets that are beneficially held by that person.
On this basis, the applicants argued that, simply because a person controls a discretionary trust does not mean that the assets of the trust are the personal assets of the controller. Instead, the applicants suggested that trust assets could only be treated as personal assets in circumstances where there was a good arguable case that a creditor would be able to access those assets in an enforcement action.
On the other hand, the respondent argued that rule 7.35(a) of the Rules is a gateway provision that enlivens the court’s power to make a freezing order but does not otherwise confine it to making such an order in respect of assets that are beneficially held.
Concept of control
As implied by these arguments, the extent to which Mr Filippini controlled the trusts was relevant, if not determinative.
The terms of the A&M Trust and FPC VIC Trust were on substantially the same terms, in that Mr Filippini was the sole appointor and a principal beneficiary. While Mrs Filippini was the sole trustee of the A&M Trust, the FIC VIC Trust had a corporate trustee of which Mr Filippini was the sole shareholder. It was accepted that, in relation to both these trusts, Mr Filippini could:
- appoint himself as trustee and distribute all income to himself
- accelerate the vesting date and distribute all capital to himself.
Although the R&D Trust was also on substantially the same terms, it differed because it did not include a clause that allowed the trustee to act in his own interests.
The court found that there was a good case to be made that the assets of the trusts could be applied in accordance with Mr Filippini’s directions and could therefore be considered, his own personal assets. This case was arguable on the evidence which suggested that:
- Mr Filippini was making transfers to and from trust bank accounts without consulting family members, which gave rise to the suggestion that he operated the trusts in a similar fashion
- the business activity statements were only signed by Mr Filippini (notwithstanding that he may not have been trustee at the time)
- communications with the accountant were made using a shared email address, thus making it difficult to determine who was providing instructions: him or his wife.
Outcome
To make the freezing orders, the primary judge reasoned that the circumstances were similar to those of Vasiliades[1] and that, notwithstanding any factual discrepancies, the reality was that Mr Filippini was able to direct the application of trust assets so far as to mean that the trustees of the trusts had a power of disposition, or were in possession of, the assets of Mr Filipinni under the Rules.
On appeal, the Full Federal Court relied heavily on the High Court’s decision in Jackson[2] where it confirmed that the power to make a freezing order against a third party can arise when that third party has a power of disposition over the expectancy of a judgment debtor (for instance, the power to dispose of the debtor’s expectant interest in trust income as a beneficiary). On this basis, the High Court concluded that freezing orders can be framed to prevent the third party from dealing with the asset in a way that devalues the expectant interest. This is consistent with the purpose of freezing orders, namely, to protect against the risk that a debtor will divest itself of its assets to frustrate court process.
As such, the value of Mr Filippini’s expectant interest became important. To determine value, the Federal Court considered decisions of the High Court, where it has been that a beneficiary’s ability to control the trustee’s power of selection is a general power and may be akin to a proprietary interest in the trust income. On this basis, the Federal Court concluded that the degree to which a person can control the trust is directly proportional to how valuable their expectant interest in that trust is. In the case of Mr Filippini, his expectant interest as a primary beneficiary was held to be of ‘significant value’ given he enjoyed wide powers to control that trust. As such, his expectant interest surpassed that of a normal discretionary beneficiary because it constituted something that was ‘approaching a general power and the ownership of trust property.’[3]
According to the Federal Court, this conclusion did not conflict with (or otherwise erode) the longstanding principles of trust law that differentiated between ownership and control. This was because, under the construction of rule 35.5(b), what is required to make a freezing order is not ownership, but rather, establishing that the trustee is in possession of the debtor’s expectancy. According to the Federal Court, it was Mr Filipinni’s capacity to control the trusts that rendered his expectancy one worth preserving to forgo the risk that any judgment goes unsatisfied. On this basis, the decision of the primary judge was upheld and the freezing order over the trust assets was maintained.
It is worth noting that the capacity to control (that is, the capacity to put yourself in actual control of the trust) appears to be the predominant approach of the court considering Caldwell v Caldwell and the Filipinni Decision.
Given the ‘capacity to control’ threshold is lower than that demanded by ‘actual control’, there has never been a greater need for individuals to revise their trust structures to make sure they are in fact, asset protective.
The discretionary trust has long been seen as a reliable shield: a way to hold wealth at arm’s length so it remains protected from personal creditors. However, as these decisions demonstrate, the shield is only as strong as the distance between the individual and the assets it holds.
In each of these decisions, the common theme is control.
When one individual sits at the centre of a trust, that is, benefiting from its assets as a beneficiary, directing its decisions as trustee, and holding the power to reconstitute the trust whenever it chooses as the appointor, courts have shown a growing willingness to say that the individual and the trust are one and the same.
If you have a trust, it may be worth asking yourself: am I genuinely holding assets for a broader group of beneficiaries, or am I simply holding them for myself?
The answer might matter more than you think.
For more information, please contact Fran Becker, Penelope Nicholls and Jack Conway.
[1] Deputy Commissioner of Taxation v Vasiliades [2014] FCA 1250; (2014) 323 ALR 59.
[2] Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612.
[3] Filipinni v Keystone Asset Management Limited (Receives and Managers appointed) (in liquidation) [2026] FCAFC 71, 23 [83].
