Trusts subject to bankruptcy

[D.T.]

Hi,

The following is an excerpt from a newsletter that was addressed to me from my tax lawyer, thought it may have been of interest to some here.

Since King Henry VIII's rule, Family Trusts have been protected from bankruptcy. The general rule is that if something is deemed to be your "property" then the bankruptcy courts can get their hands on it. Beneficiaries of a Family Trust only had a "mere expectancy" of the assets contained in the trust. Therefore, the bankruptcy courts had no power to include trust assets in a bankrupt beneficiary's assets. However, on 20 April 2006 something terrible happened. On that day, the Federal Court held that interests in a Family Trust could constitute "property".

The case is Australian Securities and Investment Commission (ASIC) in the matter of Richstar Enterprises Pty Ltd. It relates to Norm Carey. He was required to disclose his assets. Fair enough. But ASIC sought to have these receiver orders extended to the disclosure of property held by third parties as trustees of any trust in which Carey was a beneficiary. Extraordinary.

Now, this is the rub. The Court said that in the case of some of the nominated Family Trusts, Carey's interests came within the definition of "property" in section 9 of the Corporations Act 2001. When can this ever be the case? The court said that this is the case where Carey effectively controlled the exercise of the trustee's discretion to distribute. Apart from the Family Court, no court has ever taken this position before.

Obviously, not all of the interests fell into this category of "property". Some interests in the trusts were something less than property - being mere expectancies. Quite clearly the court is correct in not extending the orders to all property held in trusts where Carey was a mere discretionary beneficiary.

Now at this stage it is just an order for Carey to talk about his assets. They haven't been lost yet to the receivers. But it does raise the alarm bells for all clients that are in existing Family Trusts.

There are some simple and effective ways of reducing the chance of your clients' losing their interests in their Family Trusts. I have put the strategies down in Bulletin Bookshelf for our privileged and much-loved Platinum Members .

One last comment; a modern Family Trust should have the Trustee as a "mere puppet". The Appointor is "God". Occasionally, I am amazed to find old trust deeds (and even some new ones) that make the mistake of mixing the puppet and god position. If you are getting your Family Trust deeds from someone other than LawCentral or Brett Davies Lawyers then please email them this article. Ask if the Appointor holds all the power and the Trustee holds no power. I hope that you aren't surprised by the answer. If they haven't followed the strategy then you can update Family Trust deeds with Brett Davies Lawyers' instruction form.

If you are an accountant and have set up a lot of Family Trusts over the years then you are welcome to become a Platinum Member and email this entire article to any clients with Family Trusts. Prior to 20 April 2006, whatever you set up for them may have been adequate. But now it may not be protecting them. Your clients need to be warned.

What do others think?

 

[Mry]

Its always been known that the appointor has the most powerful position in a trust. It is best to nominate more than one appointor to a trust (especially someone outside the your family if you have someone you can trust) so that you aren't said to control the trust entirely. This is too late for most people since it may cause the trust to resettle.

But this isn't the only threat to trusts - I believe the AG was reviewing bankruptancy laws with respect to trusts. Trusts are still better than owning the asset outright but any accountant or lawyer must have noticed by now that trusts are being attacked for their asset protection benefits.

EDIT - Changed a phrase to be more clear.

 

[geoffw]

Looks awfully familiar

 

[DaleGG]

Hi

I ahve read a couple of interesting reviews of this court case over the last few days. I think the best was in the "Taxation Institute of Austrlia's" August journal which suggested that the decision handed down was emotionally biased in an attempt to punish the fellow because of the losses he is alleged to have caused through Wespoint.

It is argued in this journal that the law is "a bad law" and could well be reversed on review or in later cases.

Will it? I have no idea and would not rely on it happening; but it is a possibility that we could see a reversal.

Having said that, if you are concerned then it is obviously wise to consult with your solicitor and discuss your particular circumstances to get specific advice.

Have fun

Dale

 

[redwing]

Did your TaxLawyer give an opinion or advice regarding this Dave?

RedWing

 

[D.T.]

Redwing,

He gave advice similar to MRY's above. He can't give more until that westpoint case is finalised for client confidentiality reasons.

At this stage though, as far as I'm aware, it's only a review on the assets. The court hasn't actually specified whether they'll be seizable or disposable or etc.

Cheers,