Despite popular belief, discretionary trusts do not always guarantee asset protection. As highlighted by a series of cases recently considered by the Federal Court, this is especially so in the instance a trustee is declared bankrupt. To be effective, discretionary trusts need to be set up correctly and constantly reviewed.

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The series of cases considered by the Federal Court concerned a family trust of which the sole shareholder of the trustee company was declared bankrupt. Upon the declaration of bankruptcy, the shares held by the sole shareholder vested in the trustees in bankruptcy, who took no time in appointing themselves as directors of the trustee company.

In order to prevent the trustees in bankruptcy from distributing the assets of the family trust to the bankrupt party or his legal representatives, the appointer of the trust sought to have the trustee company removed as trustee. In denying the appointer from utilizing her powers in such a way, the Federal Court disagreed with the proposition put forward by the appointer that “no trustee … should exercise the trust powers for the purpose of benefitting not the beneficiaries of the Trust but the creditors in the bankrupt estate of one of the beneficiaries”. Instead, the Court found that the trustee could make such distributions, provided they did not breach the fiduciary duties the trustee owed to the beneficiaries.

While they can be used as a means for providing asset protection, there is a lot that needs to be considered when setting up a discretionary trust. You need to be careful about who you appoint as the trustee, the shareholders and the appointer. If you have any questions about the structure of your discretionary trust, or if you are looking to set up a discretionary trust to protect your assets and want to know more, the experienced lawyers here at The Quinn Group can help. Call 1300 747 667 to make an appointment or submit an enquiry online.