Threats to Discretionary Trust

FPA 2011 NATIONAL CONFERENCE. 16 – 18 November. Brisbane Convention & Exhibition Centre.

TOGETHER WE’REraising THE BAR.

C an Tr usts still be tr usted?

E mma WoolleySpecial C ounsel, Tax & Pr ivate C lients

H all & W ilcox L awyer s




E lizabeth C astle, J er sey




H ow do you attack a castle?



I ntroduction

C hallenges?• Tax legislation – under the wall• C reditor protection – over the wall• F amily law – through the wall



I ntroduction

I ntroductionM oder n A ustr alian F amily Tr ust• ease of tr ansmission of wealth • tax planning advantages• reduce exposure to r isk



K ey F eatures

Settlor• W hat is the role of the settlor ?• W ho should be the settlor ?• W hat do you do with the $10?



K ey F eatures

Tr ustee• W hat does the tr ustee do?• I ndividual or company?• Professional tr ustees• H ow are decisions made?



K ey F eatures

A ppointor• W hat does the appointor do?• W ho should act• Succession planning

– beware ex-brother-in-law

G uar dian• W hat does the guar dian do?



K ey F eatures

Tr ust Deed• F ind it• R ead it• L ost deed?• Super annuation tr ust deeds



K ey F eatures

B eneficiar ies• Pr imar y beneficiar ies• G ener al beneficiar ies• W hat interest does a beneficiar y have?



K ey features

W ho uses tr usts and why?A t r isk?

– Sole tr ader– ‘ E xposed’ profession– Director s

• F r ying pan in one hand and signing with the other

– E mployee• Simply filling in a for m



K ey features

W hat assets can the tr ust hold?• F amily home• B each house• I nvestments• Separ ate tr usts?



K ey F eaturesTr ust L oans – asset protection



K ey features

• C osts• A dministr ation• C hallenges• Vesting – all good things come to an end?



Taxation of Tr usts – under the wall

Under the Wall I ntroduction

– Net income– Present entitlement– Problem?



Taxation of Tr usts – under the Wall

Problem? I ncome/remainder beneficiar ies• I ncome 100• Tr ust C apital G ain (100)• I ncome for Tax pur poses 150• A ssessed to income beneficiar y 150• A ssessed to remainder man 0




Under the wall• B amfor d C ase• ‘ Streaming’ problems• New R ules • New Wor ld• New legislation?• M ore attacks or new defences?




Tr ust deed• F ind the deed• R eview the deed• A mend the deed?

– C an we?– Should we?– R esettlement?



C reditor s – over the wall

Over the Wall• W hat proper ty is at r isk?• M eaning of proper ty?• A ny exemptions?• Tr usts and creditor s




W hat interest does a beneficiar y have in a discretionar y tr ust?• ‘ object’• ‘ mere expectancy’• ‘ r ight to due administr ation of the tr ust’

– W hat about tr ustees and appointor s?• L egal title • ‘ per sonal power ’ and not ‘ proper ty’ –B ur ton C ase




R ichstar (Westpoint litigation)• I nter locutor y application for appointment of receiver• Section 1323(1)(h) C or por ations A ct:

– W here there is an investigation under A SI C A ct or C or por ations A ct – C our t consider s it necessar y to protect interests of an aggr ieved per son– C our t can appoint a receiver of the ‘ proper ty’ of a per son




• Proper ty– Section 9 of C or por ations A ct

“ Proper ty means any legal or equitable estate or interest (whether present or future) and whether vested or contingent) in real or per sonal proper ty of any descr iption and includes a thing in action”

• A re tr ust assets proper ty?– ‘ or dinar y cour se’ – not proper ty




R eceiver appointed• W here a tr ust was ‘ controlled by a tr ustee who is in tr uth the

alter ego of a beneficiar y’• I t was as ‘ good as cer tain’ that the beneficiar ies will receive

benefits from the tr usts• C ontrol = proper ty



C reditor – over the wall

L imited A pplication?• ‘ proper ty’ for the pur poses of C or por ations A ct and in

par ticular Section 1323(1)(h)• Only for appointment of R eceiver




B roader A pplication?• M r s Smith and the cats• R isk from A SI C• F amily Tr usts

– Avoid the ‘ alter ego’– G ive up control



F amily L aw – through the wall

W hat is at r isk from the breakdown of a relationship?• C our t can make or der s in relation to ‘ proper ty’• F our step approach:

– I dentify proper ty– A ssess contr ibutions– C onsider adjusting factor s (age, income etc)– Deter mine just and equitable or der



F amily law – through the wall

• W hat is proper ty?– Section 4(1) F amily L aw A ct

“ proper ty to which those par ties are, or that par ty is, as the case may be, entitled, whether in possession or rever sion”

• W hat is a financial resource?– C an be taken into account in dividing proper ty



F amily law – through the wall

K ennon v Spr yT he decision• ‘ proper ty’ of the par ties to a mar r iage in a tr ust context includes:

– a beneficiar y’s r ight to due administr ation of the tr ust; – a beneficiar y’s r ight to due consider ation as an object of the tr ust; and – the tr ustee’s power to apply the income or assets of the tr ust.

• R equirement for connection to par ties to mar r iage




W hat can be done?• K eep the distance• R ules?

– R ule one – No Nexus– R ule two – C ontrol

• Out of my control– R ule three – intention

• F or the children




B inding F inancial agreements• A gree division of assets• Avoid cost, time and angst• Not without tr aps




B inding F inancial A greementsOper ationF our types:• B efore relationship• Dur ing mar r iage, but before separ ation• Dur ing mar r iage, but after separ ation • A fter divorce or breakdown of the de facto relationship




Oper ationStr ict legal requirements:• I ndependent legal advice• B efore signing agreement• E xplain meaning and effect• Not required to endor se agreement




F lexibility• Quar antine

– I nher itance– Tr ust assets

• F or mula– B ased on year s of relationship



F amily L aw – through the Wall

Too good to be tr ue?C an be set aside if:• F r aud• I ntention to defeat creditor s• C hange in circumstances mean now impr acticable• C hild will suffer har dship• Unconscionable




• C onclusion

• Questions?



C an Tr usts still be tr usted?E lizabeth C astle, J er sey



C ontact Details

E mma WoolleySpecial C ounsel, Tax & Pr ivate C lientsH all & W ilcox L awyer semail emma.woolley@ hallandwilcox.com.auTelephone (03) 9603 3551

Documents

Threats to Discretionary Trust