The Lawyer's Lunchbox

The end of Family Trusts for Asset Protection

ASIC had obtained interim asset freezing and other orders in the Federal Court of Australia in Perth against four directors of Westpoint and a number of companies associated with Mr Norman Phillip Carey including Richstar Enterprises Pty Ltd which acted as a trustee of a discretionary trust.

The recent decision in the Westpoint saga (Richstar Enterprises Pty Ltd v Carey (No 6) [2006] FCA 814) has made a very significant ruling about the use of family discretionary trusts to hide assets from business creditors.

In that decision, Justice French found that because a trustee was effectively the “alter ego” of a 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 the definition of "property" in Section 9 of the Corporations Act 2001.

In Richstar, the Federal Court found that the distinction between fixed and discretionary trusts was unhelpful in determining what "property" was owned by a person for the purposes of the Corporations Act. The court examined what rights the discretionary beneficiaries had under the various trusts used by Beck and Carey and determined that the extensive powers conferred on Beck and Carey through the trust instruments (particularly the power to replace the trustee) meant that Beck and Carey controlled the family trusts and therefore their interests in the trusts could be considered to be "property" under s 9 of the Act. Section 9 provides that "property" includes a contingent interest in real or personal property. In Richstar, the court found that the ability to replace the trustee made the trustee their "alter ego" and made it "as good as certain" that they would receive benefits from the trust, which the court stated was at the very least a contingent interest, and may have even been nearing complete ownership of the trust property. This meant that ASIC could obtain freezing and receivership orders over the various family trusts, even though they were discretionary not fixed trusts. This is the first time that such an order has been granted over discretionary trusts of this kind in corporate law (there have been some cases where the Family Court has traced into discretionary trusts). This decision will have very significant ramifications for enforcing orders against beneficiaries in discretionary trusts and sends a clear warning that maintaining control over the trustee may defeat the purpose of the trust and render the beneficiary (and the assets of the trust) vulnerable to litigation.

As a consequence French J extended the receivership of a director’s personal property to the assets of a discretionary trust of which that person was a beneficiary or a member of a class of beneficiaries of a trust.

Essentially this is the first time (outside of a family law dispute) that a beneficiary's interest in a discretionary trust has been equated to a form of property. Previously, a beneficiary's interest in such a trust was considered a mere expectancy and was not considered sufficient to create any proprietary interest.

The breadth of the decision and its impact on discretionary trusts as an effective vehicle for asset protection is potentially extremely wide and serious.

It appears on this basis that great care needs to be taken in the establishment of discretionary trusts, as to who is appointed to key roles (trustee, director, appointor and beneficiary). It is equally important that the trust is administered and operated in an appropriate manner after it is established.

It is suggested that there needs a careful review of existing trusts established for clients and that great care is taken in the creation of new discretionary trusts in light of Richstar (whether or not it remains current law) so as to limit the exposure of the assets of those trusts to bankruptcy or insolvency administration.

The Corporate Veil has been lifted that little bit more.

posted by brett hayton @ 6:31 AM