Weaknesses in Trusts ? Effective Asset protection !!?? - Recent changes to Discretionary Trusts.
The question is whether Creditors and Richstar ( Australian Securities and Investments Commission (ASIC) in the matter of Richstar Enterprises Pty Ltd v Carey (No.6)  FCA 814) is the first? weakness.
Commonly it is understood that beneficiaries are regarded as 'objects' having only a 'mere expectancy' in relation to the trust property. As such, trust assets are not 'property' available to the creditors of beneficiaries.
The Richstar case related to the appointment of a receiver under the Corporations Act 2001. ASIC applied to have a receiver appointed in relation to assets in defendants' discretionary family trusts. The question was could the trust assets be said to be 'property' for the purposes of Corporations Act 2001?
ASIC argued that the four defendants had a contingent interest in the discretionary trusts. Justice Robert French (now Chief Justice of the High Court) agreed that this was the case where the trust was 'controlled by a trustee who is in truth the alter ego of a beneficiary' because it is as 'good as certain' that the beneficiaries will receive benefits from the trusts. Where a discretionary beneficiary is also the trustee or the director and shareholder of 'a corporate trustee and/or the appointor then that beneficiary has 'effective control'. ASIC’s arguments prevailed, and the trust assets were held to be 'property' and receivers were appointed.
Do Trusts need to have their Control altered substantially?
The Richstar case is often argued to be a clear departure from commonly understood principles regarding interests in discretionary trusts. The decision was again recently considered in Smith Public Trustee v Smith  NSWSC 397 in which the Supreme Court of NSW stated that it did not interpret Richstar to state that if a person controls a trust they are the beneficial owner of the trust property. The Smith case appears to support a narrow interpretation of the Richstar case…………
The defendants in Richstar were the subject of an investigation by ASIC. Beneficiaries of discretionary trusts may need to consider the risk of them and /or related entities/persons being subject to such an investigation.
How to be prepared and Improve Asset Protection ?
Most recent trust deeds are drafted to be very flexible, (or should be !?)including provisions dealing with the appointment and replacement of trustee(s) and appointor(s). Appointment provisions in trust deed(s) should be reviewed regularly and checked to ensure that they allow for changes to be made fairly quickly. If there is a risk to any Beneficiarie(s) it is important to be ready to act…….and well before ASIC or any other co-ercive type Authority such as the Australian Crimes Commission, The NSW Crimes Commission /Official Crime & Corruption Commission in WA or even the ACCC ) ……. Do !.
What changes to Appointment and Control of Trusts may be needed?
It is very unclear what will move a trust into the 'alter ego' category. One best option may be to ensure that the relevant persons (and their relatives ,Wives and partners) have no say or control, and that they do not act as any trustee, director of any trustee company and do (or preferably cannot) act as appointor.
In many instances it may be impractical or very inconvenient to effect such changes in existing Trusts or Wills creating Trusts after death (‘Testamentary trusts”)
Where there is no real risk of an investigation or action say by ASIC , ACCC or any other coercive authority, trusts may well remain an effective tool for protecting property from risk in relation to creditors. Existing Discretionary or Family trusts may need to be changed substantially if the Richstar decision does have a wider effect in future.
The Second Possible Weakness in Trusts ? – Family Law
Reference should be made to the matter of Kennon v Spry (Kennon v Spry;Spry v Kennon  HCA 56).
The Family Court can make orders with respect to the property of the parties to a marriage (and De Facto domestic partners(both male/female) as of
The court generally only make orders to redistribute the 'property' of the parties to a relationship, but may not have the power to make orders adjusting the parties' interests in 'financial resources'. Assets held in trusts may be considered as 'financial resources' and a 'financial resource' may be taken into account by the court depending on its true nature and characterisation.
In this High Court matter the wife argued that assets of a trust should be included in the matrimonial property subject to division and claimed half of the total . For the wife to succeed in her claim, she had to establish (among other things) that the assets held in the trust in question were 'property' of the parties to the marriage and part of the matrimonial property.
The court held that the trust assets were property to be divided between the Husband and Wife. Chief Justice French (one of the four majority judges) held that the following were property of the parties to a marriage:
· a beneficiary's right to due administration of the trust and right to consideration as an object of the trust; and
· the trustee's power to apply the income or assets of the trust.
Chief Justice French noted that it may be difficult to place a value on 'a beneficiary's rights or the trustee's powers, but this did not deter him from finding that the total value of the trust assets was included in the asset pool.
This case does not change the position that assets held in Family and Discretionary trusts continue to be within the grasp of the Family Court unless both the parties to the marriage/partnership never control the trust, never contributed to the assets held by the trust, and never benefited from the trust.
Trusts created after Death by Wills and 'in-law's”
Does this case necessarily mean that parents' and grandparents' trusts are under threat if the relationships of their children and grandchildren break down?
It is still arguably necessary for the parties to a marriage or partnership to establish a connection between the property held in a trust and their marriage or partnership. For instance, it may be very unlikely that a daughter-in-law could claim that the assets held in the family trust established by her parents-in-law (in respect of which neither she nor her husband have made any financial contribution) just because she and her husband are in the wide class of potential discretionary beneficiaries.
Testamentary trusts which hold inherited wealth may remain outside the “family property pool” because the property does not result from the work or enterprise of either spouse or partner. The Asset/Property protection may decrease over time if parties separate a number of years after the testamentary trust is established (after the death of the Will maker/Testator. ( Perhaps it may not if the Will Trust takes in a number of children/relatives as discretionary beneficiaries within the same rather than separate trusts for each ? – this may cause other problems however !?)
It is important to note however that nothing can be done to stop a Family Court taking into account the resources of a Trust in respect of a possible or potential Beneficiary the subject of a Family law claim when dividing up other property
Mix up Property / Assets or Separate them out ?
The case of Kennon v Spry may suggest a need to keep assets such as inherited assets or business from assets from personal assets. If assets/property are separated there may be less risk of all assets being included as property.
It may also be worthwhile considering having single family trusts and testamentary trusts controlled and for the benefit of multiple siblings and their families.(although this may create other problems with respect to potential tax liability at State and Federal level and also with respect to possible disputes arising as already alluded to ?!!) In this eventuality it will be necessary for the court to work out how much of the assets held in the trust are property of the parties to the marriage.( with any luck this may be an impossible task ??!!)
Australian Courts now more Willing to penetrate Trusts ?
Binding Financial Agreements , “BFA’s” –Pre/Post Nuptial Agreements
Assets may be effectively kept out of a Family Law dispute by agreement. Parties to a relationship (including domestic and same sex relationships) can enter into a binding financial agreement (BFA) which sets out how the parties' assets will be dealt with in the event of a breakdown of the relationship. The BFA can refer to a particular asset, for example inherited assets or assets held in testamentary or other family trusts.
A BFA is an agreement which has strict legal requirements in order to be binding. Both parties must obtain independent legal advice as to the meaning and the effect of the agreement. A BFA often may not be effective however if (1) there are subsequent big changes in the parties circumstances or dependants (children or not) eventuate AND
2) A BFA also will not be effective in respect of Family Provision Act (now the Succession Act (NSW) claim or claims made by people under a Will after someone has died where it is argued that they should have been provided for………….!
It is very uncertain as to how the reasoning or rationale in respect of the nature of beneficiaries' interests in trusts will impact on cases falling outside Family Law. Might the High Court interpret trust assets to be property in other contexts such as bankruptcy? It maybe of note that Chief Justice Robert French, who delivered the principal judgment in the case of Kennon v Spry, also delivered the judgment in Richstar. ………………………………………………………….
The English High Court in
Some English cases concern property held in offshore trusts.