Trusts restricted to your bloodline to stop inlaws, family and bankruptcy courts

Setting up a trust so assets only go to children, grandchildren and direct bloodline descendants

As tax lawyers, clients instruct us to set up structures to stop the loss of wealth to the:

Another strategy is to set up a Family Trust with beneficiaries restricted to just your direct bloodline descendants. This is designed to restrict the distribution of Family Trust assets to specific beneficiaries within a defined bloodline or lineage

This paper considers whether there is any value in the down-the-line Family Trusts.

Difference between a Family Trust and a 3-Generation Testamentary Trust Will

Firstly, consider the difference between a trust set up during your life and after you are dead:

  • A Family Trust is set up and operates while you are alive.
  • A Testamentary Trust and the superior 3-Generation Testamentary Trust are trusts in your Will.
    Since your Will does not operate until you die, these death trusts only operate when you are dead.

While death trusts are better than Family Trusts, there is a sacrifice. You must die to get a Testamentary Trust!

Restricting the beneficiaries in a Family Trust to just your decedents

Non-law firm websites promote Family Trusts with restricted beneficiaries. This is for a lot of money.

It is easy to set up a Family Trust with only your family as beneficiaries. You take a Family Trust deed, remove the many classes of beneficiaries, and just put in your bloodline decedents.

Why do normal family trusts have such a huge number of beneficiaries?

restricting family trust beneficiaries to just the bloodline does not work

As frightening as losing money to in-laws may be, restricting family trust beneficiaries to just the bloodline does not work.
The Family Court ignores the restricted beneficiaries.
The Bankruptcy Court overrides family trust deeds with lineal descent.

In a family trust, “General Beneficiaries” are set out in the Family Trust Deed. This group includes many family members—in-laws, spouses, children, grandchildren, nieces, nephews, and distant relatives. It includes charities and family businesses. Trustees have the authority to decide who receives distributions, when, and in what amounts.

This large group of beneficiaries provides adaptability. It includes current family members, future descendants, and in-laws, enabling the trust to evolve without requiring modifications to the deed. Such a broad definition enhances flexibility in managing distributions each financial year and in strategically allocating them among beneficiaries at lower tax rates.

This broad definition provides flexibility to distribute each year to a bigger group of beneficiaries at the lowest tax rates. It saves significant tax, especially when your children and grandchildren have reached 18.

Example of a normal Family Trust set of beneficiaries

Here is an excerpt of a Legal Consolidated Family Trust Deed showing the vastness of the classes of beneficiaries:

General Beneficiary in a normal Family Trust – Definition
  • as at the Commencement Date the Default Beneficiaries, Trustee, Appointor and Back up Appointors;
  • any entity, subsidiary, parent company, company and association (whether incorporated or not) that has an interest in, related to, Associate, or Associated Entity in any of the Default Beneficiaries, Trustee, Appointor and Back up Appointors and each of their directors, members, employers, employees, contractors, independent contractors (and in all cases including whether equitable and legal, whether vested, expectant or contingent);
  • charities and charities listed by the Australian Charities and Not-for-profits Commission from time to time; and
  • schools, universities, colleges and other educational bodies of any kind, private and otherwise, either within or outside Australia from time to time.

(Each referred to as Persons)

Plus, for each of the Persons the following classes:

  • any Spouse, Children, Grandchildren, Great grandchildren, parent, grandparent, sibling, uncle, aunt, niece, nephew;
  • any entity of which the Person is a director, trustee or partner;
  • any entity in which the Person has a legal or equitable interest (whether vested, expectant or contingent);
  • any entity for which the Person is a Beneficiary or potential Beneficiary (whether vested, expectant or contingent);
  • any entity who is the personal representative of the Person;
  • any entity employed by or employs the Persons;
  • any charitable, religious or community organisation, group or association of which the person is a member, participant or benefactor;
  • any entity who would be or could possibly be an Associate or Associated Entity of that Persons; and
  • any entity or classes nominated by the Trustee from time to time (at the Appointor’s direction).

The classes are open to include an entity that has not yet come into existence or a class not yet identified.

The term ‘entity’ in this definition, also includes natural persons, companies, trusts, associations, groups and entities.

Most law firms have a similar wide definition. You can view the full Legal Consolidated Family Trust deed for free, along with a free training course.

An example of a Family Trust with Beneficiaries restricted to your decedents – down-the-line Inheritance Trusts

Unlike a normal Family Trust, the General Beneficiaries of a restricted lineal trust are restricted to just the bloodline descendants. When setting up a trust with limited beneficiaries, you identify the family members eligible to receive distributions. Typically, these beneficiaries are limited to direct descendants, unborn children, grandchildren and other closely related family members within the defined bloodline.

This selective designation of beneficiaries narrows the pool of potential recipients, ensuring the trust’s advantages are preserved for the bloodline family – or so you hope.

Example of a bloodline Family Trust

While these non-law firm websites charge a lot of money, bloodline trusts are easy to set up. You reduce the class of beneficiaries. Here is an example of a bloodline Family Trust:

General Beneficiaries restricted to the bloodline – Definition
  1. Definition of Beneficiaries: The General Beneficiaries of this Trust shall be limited exclusively to the direct descendants of the Trustee and Appointor. For the purposes of this Trust, “descendants” shall include all biological children, legally adopted children, and the lawful issue of such children, including grandchildren and great-grandchildren of the Trustee and Appointor.
  2. Exclusions: No individuals other than those defined as descendants in sub-clause 1 shall be eligible as General Beneficiaries under this Trust. This exclusion specifically applies but is not limited to in-laws, spouses of descendants, stepchildren, and any charitable organisations or business entities.
  3. Adaptability: The definition of descendants shall adapt automatically to include any future direct descendants born or legally adopted into the family after the establishment of this Trust.
  4. Trustee Discretion: Within the bounds of the definitions provided in this clause, the Trustees shall retain full discretion to decide the manner and timing of distributions to the General Beneficiaries, in accordance with the guidelines set forth in this Deed and the best interests of the Trust.

If Legal Consolidated believed they worked, then we would provide restricted lineal trusts on our webpage. But they do not work. We, therefore, do not sell them.

Do Family Trusts restricted to direct descendants escape Family Court claims?

Down the line, inheritance Trusts restrict beneficiaries to direct descendants and blood relatives. They aim to shield these assets from claims by in-laws and other non-relatives. Legal Consolidated does not provide such documents because we do not consider them effective.

This article sets out the legal precedents showing that courts penetrate the veil of such bloodline trusts. Trust assets are not inherently immune to claims simply because they are earmarked for direct descendants. In practice, if a trust beneficiary goes through a divorce, the court views trust distributions and control as part of their financial resources. The family court directs that half the assets in the family trust be transferred to the in-law. This is irrespective of who the beneficiaries are. The family court often completely ignores who the beneficiaries are in your family trust.

See, for example, the High Court of Australia case of Kennon v Spry (2008).

Dr Richard Spry’s bloodline Family Trust fails

Kennon v Spry put to bed any value of restricting beneficiaries through trusts to progeny.

Dr Spry sets up a bloodline Family Trust by removing certain people. People removed were himself and his wife. He hoped his bloodline Family Trusts would prevent the court from awarding money to his wife.

Surely, this must work. But it does not:

      • Transfer of Assets: Dr Spry, then Australia’s leading trust lawyer, transfers his assets into the bloodline Family Trust. The deed clearly states that only specific bloodline family members benefit. He limits beneficiaries to a few people.
      • Divorce Proceedings: During his divorce, questions arise about whether the trust’s assets count as assets of the marriage and are thus divisible.
      • Court’s Decision: The High Court rules that the trust assets are indeed part of the matrimonial property. This holds true even though control passed to his children — specifically, those aligned with him against his ex-wife. Despite having no rights to these assets, the court orders their distribution to his ex-wife.

Brooks v Brooks [1995] Fam Law 545

This UK landmark case, Brooks v Brooks [1995] Fam Law 545, influenced international thinking on trusts, including in Australia. The court determined that trust assets could be varied during divorce proceedings if they are seen to form part of the financial resources available to either spouse.

It did not matter who was named or restricted in the discretionary trust. The court looked through that ruse.

 

Why Family Courts Ignore Beneficiaries in a Family Trust

The family court holds extensive authority to distribute assets equitably in divorce cases. This power extends to considering trust assets for fair division, particularly if those assets have supported the marriage or children.

Excluding someone through trust terms does nothing to shield these assets from the family court.

 

Bankruptcy Court ignores the Family Trust restricted to the bloodline

There are similar cases in bankruptcy courts addressing family trusts with reduced beneficiary counts.

Narrowing the class of beneficiaries in a family trust does not shield assets from the Bankruptcy Court. The court assesses control and influence over the trust. Those assets may count towards their estate if a bankrupt person can direct the trust. Transactions into the trust prior to bankruptcy are closely scrutinised. They can be reversed if seen as a move to avoid creditors. Setting a small, limited number of beneficiaries alone will not protect trust assets in bankruptcy proceedings.

Bankruptcy courts have significant authority to access trust assets even when the class of beneficiaries is restricted, particularly if the bankrupt individual controls the trust. For example:

  • Bonnell’s Case

Mr Bonnell was the appointor and beneficiary of a discretionary family trust he controlled. Windoval was the trustee of the family trust, into which Mr Bonnell transferred significant assets. Years later, when he declared bankruptcy, the court found that this transfer was intended to hinder or delay creditors and thus voided the transfer under section 121 of the Bankruptcy Act. It made no difference who the beneficiaries were.

See Windoval Pty Limited (Trustee) v Donnelly (Trustee), in the Matter of Donnelly (Trustee) [2014] FCAFC 127.

  • The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins [2006] HCA 6

This High Court of Australia case, The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins [2006] HCA 6,  involved the trustee of a bankrupt estate challenging the transfer of property into a family trust years prior to bankruptcy. The court ultimately held that the transfer was void, demonstrating the court’s willingness to scrutinise and potentially unwind trust arrangements made before bankruptcy to protect creditors’ interests.

These cases underscore that simply narrowing the class of beneficiaries does not necessarily protect trust assets from bankruptcy claims, especially if the trust is seen as a tool to shield assets from creditors or if the bankrupt party controls the trust. Bankruptcy courts carefully examine the intentions behind and the timing of such transfers when assessing their validity.

Stop a hated child from getting Family Trust assets

Clients often ask us to set up a new Family Trust to exclude a specific child. They want to stop a “wayward” or “spendthrift” child from accessing the family wealth.

Some people incorrectly believe you must restrict the list of beneficiaries. They suggest a “Bloodline Trust” or a “Lineal Restricted Trust”.

This is wrong. It is bad advice. You do not need to restrict the beneficiaries. You do not need to delete the child’s name from the Family Trust Deed.

To exclude a child, you simply control the Appointor and the Default Beneficiary.

The loved child is the Appointor to get rid of the hated child

The Appointor is the most important person in a Family Trust. The Appointor hires and fires the Trustee.

The Trustee decides who gets the income and capital each year. If the Trustee does not please the Appointor, the Appointor sacks the Trustee. The Appointor appoints a new Trustee. The new Trustee does what they are told.

Therefore, the Appointor determines who receives the Family Trust funds.

If Mum wants to exclude a wayward child, she appoints her “favourite” child as the Appointor. The favourite child then directs the Trustee. The Trustee distributes income to the favourite child and their own family. The Trustee gives nothing to the wayward child. Having the Trustee under the control of the most loved child also helps.

The wayward child is still a beneficiary. But they receive zero dollars. This is the correct way to manage a Discretionary Trust.

Discretionary Beneficiaries have no rights

The wayward child cannot demand money from the Family Trust.

A General Beneficiary in a Discretionary Trust has no “proprietary interest” in the trust assets. They only have a “right to be considered”.

Gartside v IRC: The hated child only has a right to be considered

This was established in the landmark House of Lords case of Gartside v Inland Revenue Commissioners [1968] AC 553.

The Court held that a beneficiary of a discretionary trust has a “mere expectancy”. They have no right to the property or income. They only have a right to be considered by the Trustee.

The Trustee considers the wayward child. The Trustee decides to give them nothing. The Trustee has fulfilled their legal duty. The wayward child has no recourse.

Family Trust Default Beneficiaries get the Trust Capital

You must also consider the “Default Beneficiaries”. These are also called Takers in Default.

The Default Beneficiary receives the trust capital upon the Family Trust’s termination (vesting). They also receive the income if the Trustee fails to make a distribution minute by 30 June. But this is only if the Trustee forgets to sign the trust minutes – this is rare.

Mum merely names the favourite child as the sole Default Beneficiary. This ensures the wayward child cannot access the capital.

Make sure Mum obtains a doctor’s certificate on the day she signs the Family Trust deed or the day she transfers the wealth into the Family Trust. If the accountant, financial planner or lawyer cannot get such a letter, they should refuse to take instructions.

Tax flexibility requires 400,000 beneficiaries

A Legal Consolidated Family Trust Deed contains over 400,000 beneficiaries. This includes distant relatives, charities, universities, and companies.

You need this wide list for tax planning. You want the ability to distribute to a retired uncle or a corporate beneficiary to lower the tax rate.

If you restrict the beneficiaries to a “bloodline”, you lose this tax flexibility. You destroy the value of the Family Trust and get no protection back the other way It is a waste of money and time.

Do not delete the wayward child. Just ignore them.

What Should You Do?

No Family Trust offers complete protection against family court interventions.

If you are considering setting up a Family Trust to shield it from the Family Court, consider these free strategies with your accountant, lawyer, and financial planner. These professionals can provide tailored advice to help you manage your assets effectively within legal boundaries.

Restricted bloodline beneficiaries miss out on tax advantages

In addition to providing little asset protection, these restricted trusts lack the tax advantages of a standard family trust. As you can only distribute to a small number of people.

Why do Divorce Protection Trusts in a Will work, but bloodline Family Trusts do not work?

When your parents die, those assets are not yet in your marriage. A Divorce Protection Trust in your parents’ Will means that it was never your money. Instead, it is your parents’ money that they are leaving to you and your family. In contrast, when you transfer your own money into a Family Trust or a bloodline Family Trust, equity traces that money. It was your money, and you are trying to ‘hide’ it from the Family Court and the Bankruptcy Court.

Why do Bankruptcy Trusts in your Will work, but bloodline Family Trusts do not work?

Similarly, to a Divorce Protection Trust, your parents can also put a Bankruptcy Trust in their Wills.

Again, why they work comes down to where the money came from. Your parents’ money before your parents die is not available to your trustee-in-bankruptcy. That is trite and obvious. When your parents die, and there is a Bankruptcy Trust in your parents’ Will, then again, that money is earmarked not just for you but for you and your family. Your parents’ money is never your money.

3-Generation Testamentary Trust Wills vs a bloodline Family Trust

Imagine two scenarios:

  1. Your Parents’ Money: Your parents give a locked briefcase (the inheritance) directly to a security guard (the Trustee of the trust in their 3-Generation Testamentary Trust Will). They give the guard a set of rules: “Use this for the benefit of our child and their family.” You, the child, never get the key.
  2. Your Money: In scenario two, you have a briefcase full of your own money. Fearing a lawsuit, you give it to a security guard (the Trustee of your own Family Trust) and tell them to look after it for you and your family. This does not work.
Why a Trust in a Will Works (The Protected Briefcase)

When your parents die and leave their inheritance to a Divorce Protection Trust or Bankruptcy Trust in their Will, the situation is like Scenario One.

The assets come directly from your parents’ estate and are placed into the trust. The money was never legally yours. You never owned it or had control of it.

The court sees this clearly. It was your parents’ wealth, and they dictated the protective terms. It is not considered your personal property.

In your parents’ Wills, you never got the money and could not hide it. In Scenario Two, it was your money, and you tried to hide it.

Why a bloodline Trust is weaker (The Traceable Briefcase)

When you transfer your own assets into a Family Trust or a “bloodline” family trust during your lifetime, the situation is like Scenario 2.

The assets were originally yours. The court can trace the transfer. They see that you moved your own property into a structure you control in an attempt to protect it.

The law views this differently. The Family Court can rule that the trust is a “sham” or that you still have effective control, and can include the trust’s assets in the divisible pool of matrimonial property. Similarly, a trustee-in-bankruptcy can claw back assets you transferred if it was done to defeat your creditors.

 

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For expats, these are the extra Australian Death TaxesTax effective Wills are important for Australian living overseas
Vulnerable children living in Australia or overseas
Second Marriages & Challenging Wills when overseas
What if I:
Assets not in your WillHow to name a pet in your Will when you are overseas for expats
Power of Attorney
  1. live overseas you must have an Australian Enduring Power of Attorney and and a Power of GuardianshipMoney POAs: NSW, VIC,  QLD, WA, SA, TAS, ACT & NT
  2. Medical, Lifestyle, Guardianships, and Care Directives:
  3. Company POA when directors go missing, insane or die
After death