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Is the end of discretionaty trusts?

The recent decision by Justice French[1] (Western Australian Federal Court) as part of the ongoing litigation over the collapse of the West Point Group has raised the need to reanalyse:                        


1. the structure of and set up of discretionary trusts;


2. the wording of the trust deeds; and


3. the roles and identity of trustee, directors, shareholders, appointors and default beneficiaries.


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.


The definition of "property" includes "any legal or equitable estate or interest whether .vested or contingent." This is not dissimilar to the definition of "property" in the Bankruptcy Act 1966.


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 in that trust.


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


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.


We have, as a consequence of the decision, developed a detailed checklist for:


1. review and analysis of existing trust structures and set ups to identify risk;


2. for the establishment of new trusts,


particularly in circumstances where a party could be or is a "person at risk" and may be somehow involved with the discretionary trust.


We highly recommend a very careful review of your existing trust structure.  It is also vitally important you take account of these factors in the establishment of any new trust so as to limit the exposure of the assets of those trusts to bankruptcy or insolvency administration.


If you would like any further information please contact either Gavin Barnes or Ian Tindale on (07) 3852 5055 or gavin@redchip.com.au  and ian@redchip.com.au.


 [1]  ASIC - In the matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No. 6) [July 2006]


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