Caldwell & Caldwell: A reminder, not a revolution

Testamentary discretionary trusts remain powerful estate planning tools, but the Full Court’s decision in Caldwell & Caldwell is a reminder that control of any type of discretionary trust still matters. The majority found that three multi-generational discretionary trusts were “property” of the husband under section 79 of the Family Law Act 1975 (Cth) and therefore available for division between the parties, turning on his effective control rather than any distribution he had received. The decision does not create new law. It applies well-established principles to a new fact pattern, and reinforces the importance of how testamentary trusts are structured. For clients, the key takeaway is that where trust assets are not intended to be akin to matrimonial assets, diluting control remains the most effective way to protect trust assets from a family law claim, and that binding financial agreements continue to play a complementary role.

The Full Court’s recent decision in Caldwell & Caldwell [2026] FedCFamC1A 81 has generated considerable discussion about the vulnerability of discretionary trusts to family law claims. In that case, a 2-1 majority declared that three discretionary trusts, established by the husband’s late father to hold a multi-generational family business, were “property” of the husband for the purposes of s 79 of the Family Law Act 1975 (Cth). The decision turned on the husband’s “effective control” of the trusts through his voting rights and his unilateral power to remove his co-appointors, even though the trust assets had been built up over four generations and neither the husband nor the wife had ever received a distribution.

While the decision has understandably attracted attention, particularly in light of the High Court’s decision last week to refuse leave to appeal the judgment from the appellate Court, we do not consider that it fundamentally changes the advice we have always given to clients about effective testamentary trust planning.

Does Caldwell change the existing law on testamentary trusts?

It is commonly acknowledged by experienced estate planning and family lawyers that:

• a testamentary discretionary trust may not be an impenetrable shield against the Family Court; and
• Section 79 of the Family Law Act 1975 (Cth) defines what will and will not be property of a relationship.

The Court’s jurisdiction under s 79 is deliberately broad, and the term “property” in that context has always been given a wider meaning than it carries at general law. The authorities, from Ashton and Harris through to Kennon v Spry, have consistently held that where a party to a marriage has effective control of a trust and the capacity to benefit themselves from it, the Court may treat those trust assets as that party’s property. Caldwell applies that principle to a new fact pattern, but it does not create a new principle.

It is also important to note that all prospective parties to a potential family law proceeding must provide full and frank disclosure of their financial circumstances, and this obligation extends to any role or interest in entities including trusts. Further, the Court may set aside or restrain the making of any instrument (such as ASIC transfers or other instruments that might assist in altering or relinquishing control of an entity) which is made or is likely to defeat a party’s family law claim.

Why control, not distributions, was decisive

What Caldwell does reinforce is the importance of how testamentary trusts are structured, and in particular, the critical distinction between the capacity to control and the concentration of control.

In Caldwell, the husband held the first-named A class voting shares in each trustee company (giving him the casting vote), was a co-appointor with his sons, and, crucially, had the unilateral right to remove his sons as co-appointors without needing to give any reason. The majority found that this constellation of powers gave him effective control, regardless of whether he had ever exercised it. That is not a surprising outcome. When one person can, at their sole discretion, assume complete control of a trust and direct its assets to themselves, it is difficult to argue convincingly that those assets are not, in substance, theirs.

The practical lesson: diluting control

The practical lesson is one we have long emphasised: the more you dilute effective control, the harder it becomes for a spouse to argue that the trust assets are an asset of the parties. Features that can help create genuine separation between the beneficiary and the trust include:

• independent trustees;
• independent appointors;
• protectors with veto rights;
• restrictions on unilateral removal powers;
• entrenched purpose clauses; and
• limitations on self-benefit.

No single feature is determinative, but each additional layer of independence makes the characterisation of trust assets as “property” more difficult to sustain.

There was also commentary in the decisions around “sham” or “alter-ego” arrangements, suggesting that the Court will be more likely to look to substance over form when considering whether either party to the relationship actually does have effective control or a particularly strong influence over the decision making for the entity.

Balancing protection against certainty

Of course, there is an inherent tension in this advice. The more you dilute a beneficiary’s control, the less certainty that beneficiary has of actually receiving their inheritance. A trust with a fully independent trustee, an independent appointor and no capacity for the beneficiary to direct distributions is well-protected from the Family Court, but the beneficiary is equally at the mercy of those independent parties when it comes to accessing the trust’s assets for their own benefit. These competing risks need to be carefully balanced in each case, having regard to the family dynamics, the nature of the assets and the testator’s intentions. There is no one-size-fits-all answer, and the right structure will depend on whether the client’s primary concern is asset protection or certainty of benefit, or, more often, finding a workable middle ground between the two.

For clients seeking the highest level of protection for inherited wealth, we continue to recommend that testamentary trust planning be complemented by a Binding Financial Agreement (BFA) under the Family Law Act. A well-drafted BFA remains the most direct and effective means of quarantining specific assets — including trust interests — from the property pool in the event of a relationship breakdown. Trusts and BFAs serve different but complementary functions, and the strongest position is one where both are in place.

What Caldwell did not decide

It is also worth noting what Caldwell did not decide. The appeal concerned only the preliminary question of whether the trusts were “property”. It did not determine what the wife would actually receive by way of a property settlement. The majority was explicit that a finding that the trusts are property of the husband “does not necessarily mean the wife will receive an adjustment from that species of asset.” That remains a separate question for the trial judge. And at that stage, the origin of the trust assets — built up over four generations by the husband’s father and predecessors, not through the efforts of the parties — will be a highly relevant consideration in assessing contributions. The parties also had substantial personal wealth outside the trusts, estimated at $16–22 million. One cannot help but wonder whether, when all is said and done, the practical outcome for the wife will be materially different from what it might have been had the trusts simply been treated as a financial resource of the husband. That question remains unanswered.

Testamentary trusts and inter vivos trusts: an important distinction

One point that deserves greater emphasis is that the trusts in Caldwell were not testamentary trusts in the traditional sense. All three trusts were established by the husband’s father during his lifetime — the C Trust in 1982, the D Trust in 1993 and the B Trust in 2016. They were inter vivos discretionary trusts used to conduct and hold a multi-generational family business. The wife was, for a period, actually named as a tertiary beneficiary of two of those trusts before being excluded by amendment in 2019. The husband worked in and around the family business throughout the marriage. Control passed to the husband upon his father’s death through the mechanism of the will and codicils (which left him the first-named holder of the voting shares), but the trusts themselves were creatures of lifetime settlements, not of a will.

A true testamentary discretionary trust is quite different. It is a trust created by a will, which comes into existence only upon the testator’s death. The beneficiary typically has no prior relationship with the trust assets, has made no contribution to them and has had no dealing with them during the marriage. The assets are not business assets that have been worked alongside for years — they are an inheritance that arrives, often unexpectedly and sometimes after separation. Where a testamentary trust is properly structured with those characteristics, the factual matrix that drove the majority’s conclusion in Caldwell simply does not exist in the same way.

This distinction also matters at the adjustment stage. In Caldwell, there is at least an argument that the parties shared a common endeavour in the family business during the marriage, and the wife was a beneficiary of two of the trusts for a period. In the case of a pure testamentary trust — established by will, assets inherited after the relationship has ended, no prior involvement by either party — it would be very difficult for a spouse to mount a serious contributions argument in respect of those assets (unless of course she had also worked in the intergenerational family business). The Court acknowledged as much when the majority noted that there may be occasions where assets derived from generational family wealth may not attract the classification of property of the parties to the marriage. A properly structured testamentary trust, where the beneficiary inherits in circumstances entirely separate from the relationship, may well be such an occasion. That question, however, remains to be tested, and the terms and control of any such prospective trust should continue to be given careful consideration.

Key takeaways

• Caldwell applies existing family law principles on trust control to a new fact pattern; it does not create new law.
• Effective control, not receipt of distributions, is what exposes trust assets to a family law claim.
• Diluting control through independent trustees, appointors and protectors remains the most effective protection, but it comes at the cost of certainty of benefit for the beneficiary.
• A binding financial agreement remains the most direct way to quarantine trust interests from the property pool.
• The Full Court has only decided that the trusts are “property”. Whether, and how much, the wife receives from them is still to be determined at trial.

Caldwell is a timely reminder to revisit the governance, appointor powers and control mechanisms of existing testamentary trusts and to ensure that new trusts are drafted with family law risk squarely in mind. But it is a reminder, not a revolution. The fundamentals of sound trust planning have not changed. Caldwell does not rewrite the law, but it does underline the importance of getting the structure right.

Macpherson Kelley’s Private Clients team assists with testamentary trust structuring, governance reviews and binding financial agreements. If you would like to discuss how Caldwell affects your existing trust arrangements, please get in touch with our team today.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.