Are Your Asset Protection Strategies Still Effective?
Two court decisions raise questions about the effectiveness of discretionary trust structures and asset giving as an asset protection mechanism. The decisions highlight the importance of reviewing asset planning structures that are in place as to their effectiveness. If they are not water-tight new strategies may be required.
Discretionary Trusts and the Richstar Decision
The issue in the Richstar decision was whether an order to appoint receivers to an individual’s ‘property’ under the Corporations Act 2001 (Cth) could be extended to include any interests that the individual had as a beneficiary of a discretionary trust.
The Federal Court ultimately held that where the trustee is ‘effectively the alter ego of the relevant beneficiary or otherwise subject to his or its effective control’ then the beneficiary will have ‘property’ in the trust fund. The court identified the following factors as being relevant in making this determination:
* whether the beneficiary holds powers of appointment
* whether the beneficiary is a director or secretary of the trustee company
* whether the beneficiary is also a trustee
* whether the trustee has powers akin to ownership
* whether the trust document provides a wide power to favour one beneficiary to the exclusion of others
The consequence of this decision is that many existing family trust arrangements may now be ineffective as an asset protection mechanism. This will depend upon the kind of control given to the beneficiaries under the relevant trust document.
Gifting and the Cummins Decision
The Cummins decision involved a successful barrister who was made bankrupt by the ATO for failing to pay income tax since 1955. One of the main issues in the case was determining the size of the barrister’s share in the family home.
The High Court resolved this issue by recognising a new equitable presumption that applies only to matrimonial homes. The law now presumes that all matrimonial homes where both partners contributed to the purchase price are held on resulting trust in equal shares unless a contrary intention can be evidenced on the facts.
This decision effectively unwinds the gifting of many matrimonial homes to the low-risk partner for asset protection purposes. If the high-risk partner is made bankrupt, the trustee in bankruptcy will now be able to access a 50% share in the matrimonial home unless the high-risk partner is able to prove that a contrary arrangement was intended at the time of the transaction. This may be particularly difficult to show if the relevant transaction occurred many years ago.
There have also been recent amendments to the Bankruptcy Act 1966 (Cth) which make it possible for the trustee in bankruptcy to access superannuation contributions when they were made for the main purpose of defeating creditors. In making this determination regard may be had to any patterns of contribution. Accordingly, superannuation contributions remain protected in the event of a bankruptcy versus a one-off substantial contribution.
In the present economic environment, urgent attention should be given to existing strategies given the higher risk of business failure.
Author: Laughlin Nicholls