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Falling faith in family trusts Family trusts have long been held as a "safe as houses" strategy for asset protection and income splitting for the wealthy and professionals as doctors, lawyers and accountants
such risks of
being sued. But the outcome of a recent Federal Court case involving the Westpoint
collapse has changed all that.
In simple terms, a family trust allows individuals to place their investments into a structure where no individual person has direct or indirect ownership of the assets. In the event of being sued, this has been a useful practical defence in warding off plaintiff lawyers. If defendants
,
endor anagement, aintenance 1dkeeping ickages up date are a ~rybig part of linimisingthe )sts of I.T.'
who carry above-average
declare they are broke, plantiffs
believe they have a low chance of recovering any money owed, including lawyer's fees. Not surprisingly, many cases are settled or dropped for economic reasons. Individuals remain indirectly in control of their assets if they are an appointor of their family trust. The appointor of a trust is usually referred to in the trust deed and has the power to remove and appoint a trustee to direct how the trust's income and capital is paid to beneficiaries. Owners of small family trusts tend to appoint themselves or a company as the trustee in addition to being its appointor. The case of Richstar Enterprises v Carey deals with the Australian Securities and Investments Commission's
prosecution
of a director who was
involved in the failed financial planning company Westpoint.
The Federal
Court judges found that under section 1323 of the Corporations
Act, the
receiver has powers to pursue the director's family trust to recover funds. The failed director was a trustee and appointor of a family trust. This ruling creates a precedent.
By bankrupting
a director who is
also the family trust appointor, section 1323 effectively gives control of the family trust's assets to the receiver.
Nevin says that in some parts of Asia, where the firm has several offices, the costs of transferring data can be up to seven times higher than in Australia. At SKM's production centre in Manila, where it has teams of engineers who work on telecommunications and mining projects for clients in Australia and the United Kingdom, connections can also be erratic. "In the Philippines, when it rains heavily the communications usually go out." Expensive and unreliable bandwidth also creates problems when the firm needs to send updates for its software. One solution is to use third-party software that strips out any unnecessary data from the updates so only what is essential is transmitted. Delays on transferring data are not always the fault of the deficient telecommunications infrastructure. "We have locations in the Middle East where it is likely the government is running the links through various local government-run services to ensure the right data is going forward and backwards, and that tends to
add considerably to delays as well," Nevinsays.
The receiver can replace the bankrupt's role as an appointor then appoint a new trustee for the trust. The new trustee would then be in a position to take control of the family trust and deal with its assets. This could involve distributing outstanding
sufficient trust funds to settle any
debts back to the directors' (who are beneficiaries
of the
trust) bankrupt estate. Potentially, this can expose some or all of the trust's assets to a successful
litigation claim.
Individuals who risk being sued will no doubt be reviewing their trust deeds to make provisions, in the event of bankruptcy, for a new independent appointor to be installed. However, those who nominate a spouse will be stymied because spouses can be implicated under new bankruptcy
laws.
Others may choose a trusted friend to take the role. This can be more difficult than it seems because it gives a lot of power to the friend, which is generally not advisable. Some family trust owners may feel forced to establish a corporate appointor in a tax haven where it is difficult to establish who owns and controls the corporate appointor. Alternatively, one could examine whether an independent
family trust could own shares in the corporate appointor.
David Dahm is chief executive of the practice management accounting firm Health & Life.
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BRW MAY 24-30
2007
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