Trusts have become a fairly common feature in asset protection in Australia, particularly over the last 20 or so years. Lawyers, accountants and financial planners often advise clients to structure their affairs in order to offer the best possible chance of protecting assets, which often involves assets being placed into a trust structure.
On the face of it, trusts offer an additional layer of protection (amongst other benefits, including tax benefits). However, when things don’t go well, we are often told “But it’s in a trust, you can’t get it”, which unfortunately is not always the case.
This article explores some of the common methods insolvency practitioners use to look beyond a trust in order to recover assets for creditors. Note that a trust must have a trustee and the trustee holds title to any assets “on trust” for the beneficiaries. Any references in the three issues below in regards to assets owned by a trust or claims against a trust are done so for simplicity and illustrative purposes only.
Transferring Assets to a Trust
The first thing to consider is – how did the asset get into the trust? Often, we see situations, where an asset was owned by an individual or a company and that asset, was simply transferred to a trust as part of an asset protection restructure. If there was no payment by the trust to the original owner in exchange for the transfer, it is usually pretty easy for a Liquidator or Bankruptcy Trustee to overturn the transfer and look to claim the asset.
For example, John owns his house which he purchased on his own 15 years ago. Along the way, John sets up a business and is advised to set up a trust and transfer his house into the trust to help protect the house in case his business fails. John establishes a trust and transfers the title of the property to the trust with no money received in consideration for the transfer. John subsequently goes Bankrupt due to a failed business venture. At face value, John’s Bankruptcy Trustee could void the transfer of John’s house to the trust and claim it for the benefit of John’s creditors.
Loans to the Trust
In issue 1, we looked at a simple case where an asset is transferred to a trust without payment. Often what happens is that a loan account would be created in favour of the person transferring the asset to the trust. In the example provided, a loan from John to the trust would be created for the value of the house. If the trust did not repay that loan and John went Bankrupt, John’s Bankruptcy Trustee would demand payment from the trust and often look to wind up the trust, therefore leaving the house available for recovery to repay the loan owing to John.
Contributing to Trusts Assets
Another common issue we come across is an individual or company directly contributing to assets held within a trust. Often, trusts are established as part of advice provided to a client by a lawyer, accountant or financial planner and the client may not understand or appreciate the separation between trust and individual. This can create issues when the individual directly contributes to an asset.
If we go back to John’s background above, let’s assume that John’s trust has been established for years and has accumulated funds. The trust uses its own funds to pay the deposit for a property and finances the rest with a bank loan. Over the years, John has personally been paying the mortgage repayments and the trust’s only real contribution has been the deposit, despite the mortgage being in the trust’s name. When John goes Bankrupt, his Bankruptcy Trustee will claim that the property is held on Resulting Trust (yes, another type of trust!) for John given he has been paying the mortgage, and will look to realise the property.
General Observations
The law on trusts is a complex area that is often not easy to navigate. Notwithstanding potential law reform that may be coming (long overdue and will hopefully simply our jobs), there are pitfalls for individuals and companies looking to structure their affairs through trusts.
Unfortunately, it’s not as simple as thinking that something in a trust is safe when a Liquidator or Bankruptcy Trustee comes knocking. The above examples may seem basic (and are certainly not exhaustive) but are fairly common occurrences that often catch people by surprise.
Generally speaking, trusts are great when things are going well. When things don’t go well, relying on a trust may not provide the protection first believed. If you have any concerns about how your client’s trust may stack up if circumstances change for the worse, we suggest you contact an advisor to understand where assets may be at risk.
Article was written by Adam Kersey (Associate Director) – SV Partners Brisbane