February 2009

Trusts, superannuation & residential property: protection vehicles in the current environment

The current economic downturn has, not surprisingly, caused a change in behaviour for many in our community in a range of different ways.  For business owners and for private individuals a conservative and cautious frame of mind is being adopted in terms of business activity, business expansion, investment activities, tax planning and asset preservation. 

What has been interesting to note is the desire for many of our clients to revisit some very core and fundamental foundation blocks of their life and to focus their energies on things they can control.  The private client team at Bartier Perry has noticed a significant number of our clients looking to address or review issues such as:

  • the way in which their assets are owned;
  • the risk exposures for themselves personally and their business entities;
  • their personal Wills and estate planning structures;
  • whether any improvements can be made to their personal financial circumstances and supporting structures to more effectively protect the assets that they have and to improve the tax effectiveness of their asset holdings.

Against this background many clients are very interested in understanding the types of structures currently available to help protect their assets and how best to use those structures.

There have been significant developments in recent times in the way in which planning is carried out for the protection of assets.  In many ways the golden rules still prevail and many of the golden structures are still alive and well. 

Discretionary Trusts

Historically the family discretionary style of trust has always been a preferred investment vehicle for both asset protection planning and tax planning purposes.  This is still the case.  As always, part of the planning for the effective use of a discretionary trust involves considerations of how the discretionary trust will be funded (eg third party debt, family or related entity debt or capital settlement) as well as the trust terms and practical operation of the trust. 

It is in this latter area where a renewed focus of attention has arisen directly as a result of the Federal Court decision in ASIC v Carey (No. 6) [2006] FCA814 (“Richstar”).  The decision of Justice French in this case has thrown into question the effectiveness of discretionary trusts in protecting assets in circumstances where the “at risk” individual controls the trust.  While specifically dealing with an issue of director’s liability under s. 1323 of the Corporations Act it is not difficult to envisage the principles laid down in that case as having broader application in an asset protection and bankruptcy context for persons such as doctors, lawyers, accountants, financial planners, engineers and other professional persons who are “at risk” even though they may not be company directors or, if they are, may not specifically be in breach of s. 1323.

The Richstar decision has certainly caused clients and their advisers to focus their attentions more acutely on the fundamentals of their discretionary trust structure.  That is, rather than using the “one size fits all” basic family discretionary trust deed, a more sophisticated analysis should be undertaken to address issues such as:

  • who will control decision making in the trust;
  • how are decisions to be made;
  • is it envisaged that control of the trust will change over time and, if so, to whom will control pass and what is the mechanism for this to occur;
  • what happens if there is a deadlock in trustee decision making;
  • who can benefit from the trust and in what manner (eg as to trust income and as to trust capital);
  • how broad should the class of beneficiaries be;
  • are there any persons or groups of persons who should be prohibited from benefitting from the trust.

Addressing these issues can result in a much stronger, more protective, investment vehicle for the family.  As with any structure, the practical administration of the trust is critical.  That is, the effectiveness of a well prepared trust structure will be enhanced (or detrimentally affected) by the manner in which the structure is in fact utilised and administered in practice.

Superannuation Funds

Investment through superannuation funds has been popular for many years but is now increasingly so because of:

  • significant tax concessions applying to superannuation funds both in accumulation phase and, in particular, in pension phase;
  • the legislative amendments that afford statutory asset protection to assets held in superannuation funds provided that the requisite conditions are satisfied;
  • the additional opportunities that now exist allowing superannuation funds to borrow subject to the very strict rules being satisfied.

Effective use of superannuation funds as an investment vehicle will be the subject of future Bartier Bulletins.  From an asset protection perspective it is pleasing to know that the amounts held in our superannuation funds will generally be protected from the trustee in bankruptcy unless it can be established that the contributions to the superannuation fund were made with an intention to defeat creditors. 

Residential Home

One of the very many issues addressed in The Trustees of the property of John Daniel Cummins, a bankrupt v Mary Elizabeth Cummins [2006] HCA6 (“Cummins case”) litigation concerned ownership of the matrimonial home and the extent to which it could be protected if it was held in the name of a “non at risk” spouse.  Simply owning the matrimonial home in the name of a “non at risk” spouse will not always be sufficient to protect that property.  The facts and circumstances surrounding the lives of the spouses and the acquisition of the matrimonial home may well result in the home being treated as being owned by the spouses equally regardless of the name that is on title.


As with all aspects of asset protection planning the golden rules to follow are:

  • plan early;
  • plan to address as many relevant purposes as sensible and practical;
  • use appropriately prepared structures;
  • review regularly.

Author: Andrew Frankland