"Trust busting" is the term given to an attempt made to penetrate a Trust structure and have assets held by the Trust declared by the Courts to be owned personally by an individual. The implication of Trust assets being found to be owned personally is that these assets then become part of an individual's net worth and are an available "property pool" to former spouses/partners or creditors with valid claims against the individual.
One tactic in the armoury of the Trust buster is to claim that a Trust is "illusory". An illusory Trust refers to an arrangement that gives the outward impression relating to a structure of being a Trust, but is not actually a Trust because of the powers retained by the settlor. Often when a Trust is found to be illusory it is because the apparent Trustees have no power to deal with the property of the Trust. In illusory Trusts, the settlor retains so much control that in effect no Trust exists at all.
In the recent decision of Clayton v Clayton – a relationship property case, which entwines a number of Trusts and arguments as to who the assets in those Trusts belong to, the Family Court and High Court have shown an acceptance of the illusory Trust argument.
Both Courts determined that Mr Clayton had so much legal power over one of his Trusts, the Vaughan Road Property Trust, that he was enabled to do whatever he wanted with his Trust property. This led to the determination that Mr Clayton had all the powers of ownership over the property. The decision was made despite Mr Clayton's lawyers arguing that Mr Clayton did not make decisions regarding the administration of the Trust.
In declaring Mr Clayton's Trust "illusory" the Court determined that even though Mr Clayton proffered to have very little knowledge of what was contained in the documents he signed, his role as settlor, sole trustee and discretionary beneficiary; along with him having the power to revoke the Trust and to appoint and remove Trustees and beneficiaries, gave him, in essence, so much control of Trust property that he actually had rights tantamount to personal ownership.
This case is currently with the Court of Appeal for further determination and we will report on outcomes as they are obtained. However, the decision serves as a timely reminder of the disastrous and costly implications relating to poor Trust management at both inception and with regard to on-going administration.
It is clear that Trusts are coming under more scrutiny from the Courts as "Trust busting" gathers momentum. The best way to persuade a Court that a Trust is not under the control of a single person or entity who holds all the power and manages the Trust for their own personal benefit is to diversify the roles and manage a Trust in a way which shows a genuine intention to assist the Trust's beneficiaries.
There are many ways to make Trusts less susceptible to "Trust busting" which includes obtaining the right advice and the right structure of your Trust from the beginning. The team at McVeagh Fleming specialise in this area and are well equipped to deal with your specific needs.
In addition, the McVeagh Fleming Trust Management Programme employs an independent Trustee company (Wyndham Trustees Limited) to act as a Trustee of aFamily Trust. As part of the Trust Management Programme, McVeagh Fleming will ensure that all Trustees are actively involved in the discussions leading to all decisions of the Trust and that each Trustee gives consideration to the best interest of the beneficiaries before making any decisions. We will attend to the drafting of all resolutions and ensure that each Trustee understands the implications relating to the decision made. By introducing a best practice management programme for your Trust, McVeagh Fleming will provide the best practice protections against illusory or any other Trust busting attacks against your Trust. We will also advise you on the relationship property elements of your particular situation and, if necessary, assist with preparation of a contracting out agreement.
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© McVeagh Fleming 2014
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.