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.
Rental Disaster
We have all heard stories of the Landlord from hell or the tenant from hell, well here is one to add to the archives.
I was recently referred a property in St. Albans, it was a 3 bedroom brick veneer home in a relatively quiet and unassuming street, your everyday suburban house. It had been purchased 12 months previously by a Vietnamese vendor who could not speak English. She subsequently rented the house to some young people without putting a lease in place. A cash arrangement. The property was not insured.
The first 2 months of the tenancy went by and were uneventful, but what happened after that was nothing short of a disaster!
The tenants decided that the property was better suited to the production of hydroponic marijuana. They dutifully set about transforming the house into a hothouse, this involved the bypassing of the electricity meter and taking power directly from the street. Installation of banks of transformers in the laundry. Covering all the walls and floors with heavy duty black plastic sheeting. Installation of additional ducted heating units which included drilling massive holes in the ceilings and bringing through flexible aluminium conduit pipes, to carry the hot air to the growing areas. Installation of heat lamps suspended from the ceilings by chains. But best of all a fully operational automatic internal sprinkler system! It was an elaborate affair indeed.
Neighbours became suspicious because the windows had been blacked out and people came and went at all times of the day, but strangely enough no one lived there!
One fateful night the Police Helicopter along with a dozen police cars raided the house and ripped out every plant some 200 full sized plants!
The vendor was left with a catastrophe! We advised the vendors’ solicitor of our findings and set about restoring the property back to something that resembled a suburban house again. By the time our gardeners, painters and maintenance people had finished the property was back to being ship shape!
From the time the vendor handed over the keys, we took total control.
We sold the property at auction one month later, the vendor being out of pocket over the exercise by $ 5000.00 that is what we call a lucky escape!
Bernard Lawry
Managing Director
ASPC Property Pty Ltd
Family Law - Trusts and Company Assets
A common misconception is that assets in the name of a company or trust are isolated and beyond the reach of the Family Court.
Yes, company and trust assets can provide asset protection from judgement creditors. Yes, they can provide flexibility with tax effective distribution of income between family members. Yes you can structure the obtaining of tax deductions on loan repayments relating to an asset.
But it’s a big NO, when it comes to property settlements under the Family Law Act 1975. Assets owned in the name of a company or trust are not safe from any claim under the Family Law Act whether it be in relation to a property settlement or child support.
Parties have a positive obligation under the Act to make full & frank disclosure of any direct or indirect interest they have in a trust or company. This includes an interest as trustee of a trust, an interest as a beneficiary, or as unit holder in a unit trust. It also includes any interest a person has in a company as a director or shareholder. The obligation of disclosure also extends to any "control" a party has over other trustees, directors or shareholders. Failing to disclose can, and has, resulted in serious adverse conclusions being made about a party's financial position and credibility in family law proceedings.
A party may appear, on the face of things, to have limited assets or income. Assets may have been acquired in the name of a trust, often a discretionary family trust. Income may have been paid to a company rather than an individual. For the purposes of property proceedings under the Act, if the Court is satisfied that the party controls the company or trust that owns the assets, the Court can treat those assets as if they were the assets of the party. That enables the Court to make Orders which, in reality, would result in the controlling party having to divide or sell company or trust assets between spouses by way of a property settlement.
Even where the party does not "control" the company or trust, the Court can still take into account the income received or assets owned if satisfied that the company or trust income or asset provides a financial need, or meets a financial deficiency, of a party. An example of this would be a party living in a home owned by a trust, alleviating the need for that person to personally pay rent or make mortgage repayments.
It is essential that parties carefully consider these matters before entering into any negotiations or discussions about property settlements or child support.
Similarly, it is essential these issues be considered and understood before entering into business or partnership arrangements which could later become embroiled in a business partner's family law dispute.
Melbourne - record low rental vacancies
Australia, and in particular Melbourne is experiencing a rental boom and the experts all agree; this is a trend that is likely to continue.
In an ANZ report Paul Braddick and Ange Montalti cited lower home affordability combined with low levels of new buildings as the main contributors to what has resulted in one of the lowest ever vacancy rates for rental properties.
In most capital cities vacancy rates are below 2%, however, in pleasing news for Melbourne property owners, they are as low as 1.8% here.
ANZ believes that this financial year will see higher rents in Victoria, as well as better yields for investors, which will eventually result in more buildings and a growth of the property market in general.
The report also indicates that Melbourne property prices are set to weaken for a short period before growing steadily at 5% from 2008 on.
Kingsford Property - Mark O'Neill
Landlords - take heed
Advice for Landlords
An alarming trend of confusion among landlords has emerged recently and is leaving owners of investment property vulnerable and under-insured.
It has been reported that many investors are under the misunderstanding that many of their risks as a landlord are covered by the body corporate building insurance.
Unfortunately for landlords, in most cases the contents of their property, including paintwork, curtains, floor coverings and light fittings, as well as any malicious damage to the inside of the strata lot are not covered by the main body corporate insurance.
If you are unsure about the level of insurance offered by your body corporate, it is recommended you speak to the building insurer.
Additionally, if you are not already covered for loss of rent, malicious damage to the building by your tenant or more importantly, bodily injury or death of a tenant, you could stand to lose everything you own – however this can be easily overcome by ensuring you have the right insurance.
This advice is kindly brought to you by
Kingsford Property - Inner City Apartment Specialists
why use a mortgage broker
It’s not that long ago that the only real choice confronting homebuyers was which bank to borrow from. For most people that wasn’t really a choice at all – you went to the people you’d always banked with. But over the last few years, things have changed. New lenders have burst onto the scene, offering many new types of home loans. But who has the time to sort through all the options?
So why use a mortgage broker?A good broker can help you to understand the various loan deals that are on offer, explaining the features and details that can make a big difference to your repayments. Your broker will also lodge your application. Nowadays this is often done electronically, which saves time. Your broker will even chase your application with the lender. So your broker is more than your advisor, they are your single point of contact for the whole process – and they do most of the work for you! Using a mortgage broker can result in substantial savings in time and money – but it’s important to choose the right one.
Make sure your broker is a fully qualified and trained mortgage professional who maintains MIAA (Mortgage Industry Association of Australia) accreditation. Also, you shouldn’t be charged for your broker’s service.
Who to talk to? We have an excellent relationship with a number of brokers.
This is a free plug for a walking talking fully qualified and trained professional mortgage broker who ‘lives and breathes’ home loans, and best of all doesn’t charge you for his service!
Andrew Mirams
Smartline Mortgage Brokers 03 9645 3377
from our erstwhile family lawyer Robert A. McHugh
The running of a legal practise specialising in family law is not normally associated with uproarious laughter, frivolity and good humour. Unfortunately the emotions on display tend towards the darker side of the human existence such as anger, bitterness, greed, revenge, humiliation, bloodletting and…well I think you get the picture and if you have had the misfortune of having gone through the process you would have a sober awareness of these harsh realities.
On the other hand if you enjoy any, some or all of the aforementioned and believe that they are exactly what your erstwhile beloved richly deserves well by all means give me a call…it can be arranged (of course for a most reasonable fee).
However I am not going to dwell on the uglier side of divorce or of litigation as a whole. No what follows is a look at the inane, the wonderously incompetent, the clever and most of all the amusing side of legal practise.
Now in presenting a few amusing stories of (mal)practise in the courtroom I shall not be paying any favourites. All parties to the judicial process, be they judges, lawyers, witnesses, litigants in person will be treated in the same manner, that is with mocking contempt and so we begin.
One of the classic sayings for lawyers is that the person who acts on his own behalf in court has a fool as a client. Now whilst you may say that that is a typically self serving comment for a lawyer to make the reality is that it is also a truthful statement, as the following example amply demonstrates.
A defendant representing himself against a charge of armed robbery and having entered a plea of not guilty commenced his cross examination of the victim:
Defendant: Did you get a good look at me when I stole your purse?
(About as bad an opening question as you could get).
Victim: Yes, I saw you clearly. You are the one who stole my purse.
By then our star defendant cum lawyer has realised that things aren’t going quite as well as he had hoped and having lost his temper now takes incompetence and breathtaking stupidity to an even higher level...
Defendant: Why I should have %#@* shot you while I had the chance!!
(It having finally dawned on him that this outburst didn’t sit well with his plea of not guilty he sheepishly added)
….that’s…that’s.. if it had been me who was the guy there at the time.
Then of course there is the defendant who whilst refreshingly honest, unfortunately allows this to get in the way of tactical wisdom:
Crown Prosecutor: Did you kill the victim?
Defendant: No, I did not.
Crown Prosecutor: Do you know what the penalties are for perjury?
Defendant: Yes, I do. And they’re a hell of a lot better than the penalty for murder.
Then there are the individuals who find the experience of answering questions in the courtroom pushing them somewhat beyond their intellectual comfort zones. The following being examples of either a too literal approach to the question or the sin of too much information, or in the worst cases a combination of both.
Solicitor: Are you sexually active?
Witness: No, I just lie there.
Crown Prosecutor: What did the defendant say?
Witness: He said “Open the #%@! door”
Crown Prosecutor: Which door?
Witness: The #%@! door!
Judge: Is there any reason you could not serve as a juror in this case?
Juror: I don't want to be away from my job that long.
Judge: Can't they do without you at work?
Juror: Yes, but I don't want them to know it.
Of course there are those witnesses who shine in the courtroom and who emerge victorious in their sparring with the lawyers:
Lawyer: (In a sneering tone) You seem to have more than the average share of intelligence for a man of your background.
Witness: If I wasn’t under oath, I’d return the compliment.
Kathy(an eight-year-old being questioned before testifying):
Lawyer: Kathy, do you know what happens when you lie in court?
Kathy: Uh huh, you go to Hell.
Lawyer: Is that all?
Kathy: Isn’t that enough?
Barrister: Mr Wilson, at any time during your life did you consider that you had developed a drinking problem?
Mr Wilson: I never thought it was a problem. I think that drinking is one of the easiest things I have ever done.
Now see what happens when the clever witness combines intelligence and wit with the lawyer who is just a bit too sure of himself:
Barrister: Sir, do I understand you that before you signed the death certificate you didn’t take the man’s pulse?
Coroner: That’s right.
Barrister: Did you listen for a heart beat?
Witness: No.
Barrister: Did you verify whether or not he was breathing?
Coroner: No.
Barrister: So when you signed the death certificate you had not taken any steps to make sure the man was dead, had you?
Coroner (with a sigh): Well, let me put it this way. The man’s brain was sitting in a jar on my desk, but for all I know he could be out there practising law somewhere in Melbourne.
And to finish off a few more satisfying examples of the lawyers emerging with the proverbial judicial egg on face:
Prosecutor: Did you observe anything?
Police Witness: Yes, I did. I found the vehicle with several unusual items in the rear of the vehicle. There was what appeared to be a Molotov cocktail.
Defence Counsel: Objection. I’m going to object to that word Molotov cocktail.
Judge: What is the basis for you objection?
Defence Counsel: It’s inflammatory, Your Honour.
And finally the woman being questioned in a slander case:
Barrister: Please repeat the slanderous statements you heard, exactly as you heard them.
Witness (hesitating): But they are unfit for any respectable person to hear.
Barrister: Then just whisper them to the judge.
Second Mortgage Lending
A not uncommon request we receive is can we arrange second mortgage finance. The borrower often is a developer of a property project looking for “mezzanine” finance. Typically the borrower has a gap that he needs to bridge between the funds available from first mortgagee and the equity or capital contribution by the Borrower. Mezzanine finance is second tier lending. In terms of priority the mezzanine lender stands behind the first secured mortgage and before the equity partner(s). Because of the higher risk involved for the mezz lender the interest rates are a lot higher.
This is specialist lending and not for mums and dads. See
Westpoint.
Second mortgage lending for development projects is the most common. If you are chasing high returns, typically 15-30% my advice is DON’T DO IT. Leave it to the professionals. I have seen enough war stories with projects that don’t happen, that take too long, that turn pear shape that just wipes out the project partners capital but also leaves the mezz lender with a serious loss of their capital as well. When you just want to be repaid and are looking to the exit doors, they are shut locked and bolted.
What about second mortgage lending for borrowers who aren’t developers? This is a different proposition, due diligence is paramount and having satisfactory security is the goal. Often I hear, can you draw up a loan agreement and lodge a caveat. No, No & No.
Risk is one thing, losing your capital is another. Here’s a list of pre-conditions.
- Valuation of the Security
- Obtain financials of the Borrower and in particular their secured borrowings. Are there any unremedied defaults?
- Preparation of Loan Agreement
- Execution of Mortgage
- Deed of Priority with First Mortgagee
- Registration of Second Mortgage
Don’t settle for registration of a Caveat. Caveats aren’t security. What you have is an unregistered equitable interest as mortgagee. Caveats don’t give you the power of sale over the security. That’s what a registered mortgage does. The valuation is important and so is getting the Deed of Priority as you will discover the truth of the current secured borrowings and the existence of any defaults.
As for lending to developers, there are a whole set of other rules.
Just Listed - Mud Brick Beauty in Healesville
A client of Hayton Kosky is selling her mud brick home in Healesville having traded the lifestyle that comes with the Yarra Ranges and switched to Sydney. Actually the switch happened many years ago, with Jo chasing her heart.
I live in the Bayside area and you dont get much luxury for $500K or even $1M. But boy you get a lot of luxury when you buy in Healesville. The asking price is $275,000 and this house is solid mud brick with absolute views of the Hills and not far from Healesville Central. No agents.
A full description is on the domain website. Click here. If you want an inspection ring Liz on 0408 585 142.
Improvident Loans to Children
Buying the first home by one of your children has probably never been harder. A low interest regime is probably the root cause as it has pushed up the capital values of property. There are a raft of other reasons and the cost of building is a large factor as well.
To enter the property market a large deposit is a good start. Securing the loan is not so hard, but the the long term committment to making the repayments is - and that usually takes the best part of two incomes to keep the whole life / debt balance in check.
It is not uncommon to see parents giving their child and their son or daughter-in-law a helping hand by making an advance which forms part of the equity in the new home.
In the heading I use the term "Improvident". A dictionary definition of the word Improvident is -
Not provident; wanting foresight or forethought; not foreseeing or providing for the future; negligent; thoughtless; as, an improvident man.Is or was the advance an outright gift, a loan or even equity?
All too often the helping hand of the parent is later judged without the benefit of any documentation as a result of the break up of the relationship of their child's marriage or relationship.
A little bit of foresight or forethought would have saved a lot of un-needed anquish in seeing their helping advance as suddenly being the catalyst for you being part of your child's family law court proceedings.
If the advance was a Loan - document it as Secured Loan with the full standing and status as a second mortgagee. No ifs buts or maybes. That's where Lawyers are really useful.
Powers of Attorney
Ask yourself - do you completely trust the person you have just given an unlimited power of attorney? This person now has the key, your complete authority, to operate on your bank accounts, sell shares, sell the house. Basically do anything.
I dont know the statistics, but the documented abuse of the ubiquitous power of attorney would be far exceeded by the undocumented abuse.
Of course we trust our partner, our children, our trusted friends and advisors. The EPOA is often drawn up and put into the bottom draw because one day we will all probably end up where we can no longer manage our affairs. However caution always needs to be exercised and a couple of things worth considering.
One. Make use of the limited or specific POA - for example, limit it to selling my house as I am overseas.
Two. Appoint not one attorney but two attorneys as joint attorneys where both attorneys must sign. for example, a son and a daughter.
Wills Trusts and the Husband & Wife Will
The typical husband & wife will is I leave everything to my spouse and on the death of both of us to the children in equal shares. The presumption is that all children are created equal and everything will be split equally. This may be true for the majority. But life doesn't always deal an even hand. There just seems to be many exceptions to the rule. Our role in drafting Wills is all options need to be explored and some that you may not have considered.
My opinion is that wherever possible things need to be kept as simple as possible when drafting, avoid ambiquity and complex language.
I recently prepared wills for a couple whose two children were both adopted. One son however had become completely wayward and little chance that he would reform. The problem with giving this son an outright inheritance is it would not help his life. The question was how to best provide for him. The first consideration was providing him with the basic requirement of suitable accomodation and the second was some form of maintenance. In this case two (testamentary) trusts were established, the first was a sum of money given to the Trustee who could either purchase a flat or invest the funds and pay for the son's rent. The second trust fund that would be created was to provide a fixed monthly distribution (as opposed to the common discretionary trusts that are often used). The balance of the estate would be left to the other adopted child.
The hardest wills to draft are the blessed mixed or blended families. They require a lot more thought.
Here I turn to the "Feynman Problem Solving Algorithm" -
1. write down the problem;
2. think very hard;
3. write down the answer.
A Word about Wills
We have heard from Warren Buffett declaring "I am not an enthusiast of dynastic wealth". Buffett in effect is devolving his wealth being the shares he owns in Berkshire Hathaway to the Gates Charitable Foundation during his lifetime. Perhaps on his death he will have nothing to will having given away all he owns during his lifetime.
For you and I making a Will is about the devolution of the assets you own at your death. Assets that do not count are jointly owned property such as family home that is held in joint names with your surviving spouse. Ditto for jointly owned bank accounts. Superannuation assets often do not count. Nor does non-vested interests in Family Trusts.
All the above however does need to be brought into account when drafting a Will.
Westpoint Fallout
At Hayton Kosky Lawyers, we have acted for a couple of clients buying off-the-plan apartments connected with Westpoint's Bayshore development in Port Melbourne. (
Westpoint collapsed with mums and dads investors losing millions - $300M to be more exact) These files are the oldest files lying around the office and possibly the weightiest files to boot. It is now just over 4 years since the clients executed the contracts and paid their deposits by way of Bank Guarantees. Well 4 years is up and our clients have elected to cancel the contracts as the Sunset Clause in the Contract is now invocable. Our clients have the option to proceed but their viewpoint is today's value of the apartments is less than the Contract Price. So much for the argument these apartments would apprecaite 10% per annum. Notices have been served canceling the Contracts but we are yet to get a reply or have the Bank Guarantees returned. Anyhow the Liquidators or the Receivers will now have some more apartments on their hands to sell.
Any Lessons here? One is you need to consider the terms of any Sunset Clause in off-the-plan contracts before signing. Sunset Clauses are usually a two edged sword. It is not unknown for developers to use the Sunset Clause provisions to cancel contracts in rising property markets to the chagrain of investors.
On another point Investors in Westpoint's mezzanine financing schemes can be justly angry and upset with any financial advisor who put their hard earned into such poorly construed investment vehicles. Such advisors need the blow torch applied to the soles of their feet.
The Lawyers Lunchbox
News views reviews. What do you do if you ever find a snail in your bottle of gingerbeer.
