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 trust assets to specific beneficiaries within a defined bloodline or lineage

This paper considers these down-the-line Family Trusts.

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

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. Your Will does not operate until you die. Therefore, these death trusts only operate when you are dead.

While death trusts are better than Family Trusts, there is a sacrifice. You have to die.

Restricting the beneficiaries in a Family Trust to just your decedents

It is easy to set up a Family Trust that only has your family as the 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 inlaws 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—inlaws, 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, strategically allocating them among beneficiaries on lower tax rates.

This wide definition allows flexibility in distributing each year to the beneficiaries at the lowest tax rates. It saves a lot of tax, especially when your children and grandchildren reach 18 years of age.

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 see, for free, the full Legal Consolidated Family Trust deed and a free training course on this page.

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 are restricted to just the bloodline descendants. When setting up a trust with limited beneficiaries, the settlor identifies the family members eligible for distribution. Typically, these beneficiaries are limited to direct descendants, unborn children and grandchildren and other closely related family members within the defined bloodline. This selective designation of beneficiaries helps to narrow the group of potential recipients, maintaining that the trust’s advantages are preserved for the family.

For example:

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.

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 believe that they work.

There is ample legal precedent showing that courts can and do penetrate the veil of such trusts restricted to the bloodline. 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 often directs that half the assets in the family trust be transferred to the in-law. This is respective who are the beneficiaries. 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 vs. Spry (2008).

The case of Dr Richard Spry – restricting the beneficiaries fails

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

Dr Spry sets up a Family Trust. He goes beyond the usual beneficiary restrictions of family members, excluding himself as a beneficiary in addition to his wife.

Surely, this must work. But it does not:

      • Transfer of Assets: Dr Spry, then Australia’s leading trust lawyer, set up a discretionary trust and shifted a large part of his assets into this 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 marital assets and are thus divisible.
      • Court’s Decision: The High Court rules that the trust assets are indeed part of the marital 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 landmark case in the UK influenced thoughts on trusts internationally, including in jurisdictions like 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.

 

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.

 

The Bankruptcy Court also ignores the restricted class of beneficiaries in the Family Trust

There are similar cases in bankruptcy courts controlling family trusts which have paired down beneficiaries.

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.

  • 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.

 

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 you with tailored advice to manage your assets effectively within legal boundaries.

Restricted bloodline beneficiaries trust miss out on tax advantages

As well as these restricted trusts providing little benefit, they also lack the tax advantages of a normal family trust. As you can only distribute to a small number of people.

For Expats with assets both in Australia and overseas protection from death duties, divorcing and bankrupt children and a 32% tax on super. Build online, from anywhere in the world, with free lifetime updates:

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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