"Are Trusts Under Threat As An Asset Protection Vehicle?" 

A recent case* (generally known as the "Richstar Case"), may have an impact on the traditional use of discretionary trusts as commercial/tax vehicles, as a judge has decided that a beneficiary who has the power to control or appoint a trustee may have an interest in the property of the trust.

The case is not tax based, but is a civil litigation by creditors in Western Australia based around the failed Westpoint group.

Important details of the case

The general rule has been that a beneficiary of a discretionary trust does not have an equitable interest in the trust income or property of the trust.

This is because a beneficiary of a discretionary trust holds a mere 'expectancy" which is not sufficient to constitute property.

Justice French was able to distinguish this case from the general rule because the beneficiary effectively controlled the trustee, so that "there is something which is akin to a proprietary interest in the beneficiary".

The arrangements which give rise to the exception to the general rule, according to Justice French are:

"the class of discretionary trusts in which, because the trustee is effectively the alter ego of the relevant beneficiary or otherwise subject to his or its effective control, the beneficiary has at least a contingent interest within the meaning of that term as used in definition of "property" in Section 9 of the Corporations Act 2001".

Justice French then stated:

"the beneficiary who effectively controls the trustee's power of selection because he is the trustee or one of them and/or has the power to appoint a new trustee has something approaching…… ownership of the trust property".

What To Do Now?

If the approach in Richstar is adopted and/or extended, maintaining control over a trustee may come at the price of reduced asset protection by the trust structure.

The NTAA (an independent body and a leading expert in this area) is of the view that the benefits of discretionary trusts are still sufficient to make them a valuable structure for asset protection purposes. 

That said, the issues and questions that Richstar raises are significant, and should be carefully considered in any decision making process concerning asset protection.

The use of independent trustees and appointors may be a course of action to be considered.

(* Australian Securities and Investments Commission in the matter of Richstar Enterprises Pty Limited V's Carey (No6) (2006) FCA 814 (Commonly called the "Richstar" case).

NOTE: any asset protection measures are not effective against any current proceedings, or against claims or potential claims, of which the person seeking to employ such measures is currently aware. Under the Bankruptcy Legislation, such asset protection measures may not be fully effective against claims of litigation for fifty four (54) months and possibly longer.

Fortress Asset Protection has not provided any tax advice, insurance advice, financial product advice, investment advice, legal advice or financial services advice in supplying this information to you.

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