“Trusts just don’t work anymore”, a client said to me.
“My accountant tells me that family trusts are on the way out. The government has got rid of the benefits. And courts are looking at trusts differently to how they used to.”
What he’s saying is asset protection in Australia is now a myth. A legend. Like the loch ness monster.
Is that true?
Let’s look at the facts.
Firstly, the government has not changed the laws in relation to trusts. Far from it. Most politicians and farmers use family trusts! They are still as tax effective as ever.
Yes, they have tinkered with trusts to pander to the welfare minority. Trusts now have to complete their income resolutions by 30 June, not 31 August (very inconvenient). And lowering the tax to 30% by distributing to companies now requires a loan agreement.
Secondly, and very importantly, the courts still love trusts as much as always. This is seen in the recent decision in New South Wales Lewis v Condon [2013] NSWCA 204 (4 July 2013).
Lewis v Condon shows that if an individual Trustee or Appointor of a family trust becomes bankrupt, the trust assets are still protected. The “firewall” of the family trust structure remains intact. No trustee in bankruptcy can seize the assets to give to creditors.
Let’s look at this decision more closely.
- A family discretionary trust was created by a lady called Colleen in 2001.
- She was the appointor (the one who controls the trust) and her children the beneficiaries.
- The trustee was a company trustee, but the company director was her accountant. This was because she was going through family court proceedings, and she didn’t want her husband to know about it at the time.
- On the day the trust was created, the trust entered into a contract to buy land.
- The property was paid by a loan from a lender (CMI), with Colleen providing the personal guarantee. The balance of the price was paid from Colleen’s company PKI Pty Ltd.
- In 2006 family court proceedings were finally settled. As part of the settlement, the company trustee was replaced by Colleen as the individual trustee, and the property was transferred to Colleen to hold through her family trust. (Authors note: I do NOT recommend people to have an individual trustee, and I believe that was a big reason why this case even went to court.)
- In 2009, Colleen became the registered owner of the property.
- In 2010, ANZ loaned over $700,000 to Colleen, with a mortgage over the Property.
- Colleen defaulted on the ANZ loan and was made bankrupt in 2012.
- The trustee in bankruptcy sought to get the property, claiming the trust was a sham and that Colleen was the sole beneficial owner of the property.
It ended up in the NSW Court of Appeal. The court held the trust was not a sham in 2001 when the property was purchased. It was always intended that the trust would have legal effect, and the trustee in bankruptcy needed strong evidence to show otherwise.
Some interesting things came from the decision.
- Firstly, Colleen had done it for an improper motive, to deceive her husband and avoid land tax. The accountant admitted that it was always intended that the property would go to Colleen. But the court said this didn’t make it a sham in itself. Colleen was the appointor, so she could give herself the property if she wanted. What the accountant had said was consistent with the trust itself.
- Secondly, that Colleen paid part of the purchase price didn’t make it a sham either.
- Thirdly, it was also argued that because the trust was set up by Colleen, and she was going to get the property, it wasn’t really a discretionary trust. It was a “bare trust”. That is, the benefits were always intended for Colleen, not the other beneficiaries. The court disagreed with this as the way it was set up was consistent with how a discretionary trust worked.
- Fourthly, it was argued it was an “emerging sham” in 2005 or 2006 when Colleen became the individual trustee, or in 2010, when she borrowed against the trust and used the money for her personal expenses. The court said this didn’t make it a sham either, because Colleen only owned the property subject to the terms of the family trust. The beneficiaries always had a right against her for breach of duties.
In summary, this decision shows that a family discretionary trust works for asset protection in Australia. That is, the trustee of a family trust holds the trust assets for all of the beneficiaries. No one beneficiary can claim to have the right to the trust assets, unless it is a sham, which needs stnrog evidence. Being an appointor or individual trustee did not change that.
This all reinforces just how strong the trust is to protect assets!