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Estate Alert Newsletter July 2006

Author: Cropper Parkhill

Creditors and the Controllers of Family Trusts—New Rules Emerge

Is the asset protection function of your family trust at risk?

Recent Court decisions have allowed the creditors of people in de facto control of a family trust to gain access to assets of the trust.

Often, founders of these trusts have been commercial entrepreneurs, who have sought to keep oversight and ultimate control of their family trust by being named the appointor, guardian or protector of the trust. The appointor is most often a beneficiary of the trust and can hire and fire the trustee. The appointor therefore has oversight and de facto control of the trustee. The appointor can if he or she wishes, sack a trustee and appoint a person more closely aligned to their interests.

Appointors serve a useful function in the administration of a trust but not a function that is essential. For most families, there is sufficient trust in the trustee to enable the trustee to be given control of its own succession. Governance of a corporate trustee can be regulated through the use of shareholder and director deeds.

There have been recent ATO rulings on service trusts and amendments to the bankruptcy legislation, which have placed some limitations on the effectiveness of trusts in diverting income and protecting assets. However, there is continuing government support for asset protection objectives and the allowing of families to accumulate long term investment capital while they are solvent. Such accumulation is made in low risk capital management structures such as superannuation funds and family trusts. These structures, however, have to be formed and managed with these rulings in mind if their capital is not to be attacked by the creditors of beneficiaries.

Is your family trust at risk of creditor attack? If we have provided you with a family trust in recent years, it would have been formed with these matters in mind, but if not, please call one of our Estate Services team.

Who Will Care for Me and My Stuff?

Strategic choices when planning the management of your estate

The incidence of degenerative diseases such as dementia is steadily increasing. Lawyers see many instances of hardship wreaked on families when such diseases strike and the family concerned has not established a long term team to manage the family’s affairs. There is often a need to fall back on trustees, managers and guardians appointed by Government bodies such as the Guardianship Tribunal.

If you have established structures such as a company, family trust or self managed superannuation fund, you need to think about questions that go further than “I have made a will, power of attorney and power of enduring guardianship”. You should put in place such documentation as is required to give your representatives full power to assume the necessary level of control and operation of those structures. So in appointing an executor, trustee, attorney or guardian, you must think about what you will be asking those representatives to do in the event of incapacity or death.

Here are some further issues that should be considered when establishing a scheme of management of your estate:

1. what assets, liabilities and obligations will my representatives have to administer?
2. how are my personal effects and collectables to be dealt with in the event of my disability or death? 
3. have I left appropriate directions about dealing with health and medical decision making on my behalf? 
4. have I dealt adequately with the succession to management and ownership of my business, company or trust? 
5. have I considered how tax issues impact on my estate, including the impact of beneficiaries living overseas?

These issues should be dealt with in any estate review to the extent appropriate to you. Call one of the estates team at Cropper Parkhill if you wish to discuss these issues and their relevance to you.

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