AustraliaI want to set up a trust to protect assets from potential bankruptcy. Is this legal?
Yes, setting up a trust to protect assets is legal in Australia — but only if done properly and not to defeat creditors or avoid bankruptcy obligations.
What the Law Says
Australian law permits trusts for legitimate purposes like estate planning or family asset management — but prohibits using them to defraud or disadvantage creditors, especially before bankruptcy.
The Bankruptcy Act 1966 (Cth) strictly regulates transfers of property made with the intention of defeating creditors. If you transfer assets to a trust while insolvent, or shortly before bankruptcy, the trustee in bankruptcy may claw those assets back.
Section 121 makes a transfer void against the trustee in bankruptcy if it was made with the intention of defeating creditors — even if the transfer was to a family trust or discretionary trust. The court looks at your actual intention at the time of the transfer.
Section 120 deals with undervalued transfers: any transfer made for less than market value within 5 years before bankruptcy is voidable, unless it occurred more than 5 years before bankruptcy and you were solvent at the time. For transfers to related parties (e.g., family members), the look-back period shortens to just 2 years.
Crucially, if you give away assets for no consideration (i.e., $0), the transfer is automatically void under s. 121(1)(b) — regardless of timing — if done with intent to hinder creditors.
Statutory TextA transfer of property by a person who is insolvent is void against the trustee in bankruptcy if the person’s intention in making the transfer was to defeat creditors.
— Bankruptcy Act 1966 (Cth), s. 121(1) — Transfer to defeat creditors
Statutory TextA transfer of property by a person is void against the trustee in bankruptcy if the transfer was made for no consideration or for consideration of less than market value.
— Bankruptcy Act 1966 (Cth), s. 120(1) — Undervalued transfers
What to Do
Seek independent legal and financial advice *before* establishing any trust — especially if you’re experiencing financial difficulty.
Ensure all trust transfers are made for full market value and documented with proper evidence (e.g., valuation reports, signed agreements).
Avoid transferring assets to a trust within 2 years before potential bankruptcy — particularly to related parties.
Never transfer assets to a trust while insolvent or intending to avoid debts — this triggers s. 121 and risks penalties.
Consider whether a trust serves a genuine non-bankruptcy purpose (e.g., succession planning) — courts examine substance over form.
Sources
Not legal advice. This article is general information based on publicly available sources, written for educational purposes. Laws change and individual situations vary. Consult a licensed attorney in your jurisdiction before acting on anything you read here. Last reviewed: 2026-06-08.