Don't believe the hype - trusts do protect assets

With the recent adverse publicity being given to discretionary trusts many of my network of financial advisers and accountants have questioned the value of trusts for asset protection purposes.  Let me dispel some of the fear mongering.

Arguably the highest profile decision that questions the usefulness of trusts for asset protection is the decision in Richstar(1).  

The Richstar decision hasn't found traction.  Recently the 2016 decision in Fordyce(2) reinforced the view that the reasoning in Richstar, in so far as it relates to the ability to attack assets held via a discretionary trust, is at best questionable. 

In particular, the case confirms succinctly as follows -

'It is difficult to accept as a principle of reasoning that a beneficiary’s legal or de facto control of the trustee of a discretionary trust alters the character of the interest of the beneficiary so that it will constitute property of the bankrupt if the beneficiary becomes a bankrupt.

To the extent that Richstar might be thought to support such a principle, it has not been followed or applied subsequently and it has been criticised academically.'

There are numerous decisions that reached a similar conclusion. A selection of the subsequent cases is summarised below.

1.         Tibben & Tibben [2013] FamCAFC 145 - The only ‘entitlement’ of the beneficiaries under the trust deed was a right to consideration and due administration of the trust;

2.         Deputy Commissioner of Taxation v Ekelmans [2013] VSC 346 - The applicant relied on the decision in Richstar to argue that the cumulative effect of the role and entitlement of Mr Ekelmans under the trust instruments amounted to a contingent interest in all of the assets of the trust, making those assets amenable to a freezing order as if the assets of Mr Ekelmans. The Court found that the applicant could not in this matter rely on Richstar;

3.         Hja Holdings Pty Ltd and Ors & Act Revenue Office (Administrative Review) [2011] ACAT 91 – notwithstanding that beneficiaries under a ... discretionary trust have some rights, such as the right to have the trust duly and properly administered, generally a beneficiary of a discretionary trust, who is at arm's length from the trustee, only has an expectancy or a mere possibility of a distribution. This is not an equitable interest which constitutes "property" as defined;

4.         Donovan v Sheahan as Trustee of the Bankrupt Estate of Donovan [2013] FCA 437 - a beneficiary of a non-exhaustive discretionary trust has no assignable right to demand payment of the trust fund to them (and nor have all of the beneficiaries acting collectively) and that the essential right of the individual beneficiary of a non-exhaustive discretionary trust is to compel the due administration of the trust;

5.         Simmons and Anor & Simmons [2008] FamCA 1088 – the court and parties referred to Richstar on a number of occasions and confirmed that a beneficiary has nothing more than an expectancy.

Citations

(1) Australian Securities and Investments Commission v Carey (No 6) (2006) 153 FCR 509). 

(2) Fordyce v Ryan & Anor; Fordyce v Quinn & Anor [2016] QSC 307

This post contains extracts from a recent article written by Matthew Burgess of View Legal.  I was penning a blog on this topic when I read his article.  Thank you Matt, you saved me a lot of ground work.