Justice Robert French has just taken up residence as new Chief Justice of the High Court of Australia. He came from the Perth wing of the Federal Court where he was involved in some important cases. Of special interest is Re Richstar Enterprises, a 2006 case with a significant impact on private law areas of personal liability, insolvency and taxation. It was civil litigation by creditors of the failed Westpoint Group.
Justice French opined that where a person was able to “effectively control” a discretionary trust then that person held at the very least a contingent interest in the Trust’s assets. The learned Judge was saying that the perception that an individual who is a beneficiary of a discretionary trust is capable of exerting control over the trust’s assets implies that the individual has an interest in the trust. If that opinion were to achieve acceptance the days of the discretionary trust as a major protector of assets would be limited if not over.
Devastating for Asset Protection
This is such a potentially devastating decision for the traditional use of the discretionary trust in commercial and taxation areas. It was thought to be settled law in common law jurisdictions that a beneficiary of a discretionary trust holds a mere “expectancy”, not an interest sufficient to constitute property. Hence assets held in a discretionary trust would be safe from raiders, such as receivers, continuing to be held for beneficiaries.
No longer so, says Justice French. His concern was that the traditional formula did not reflect the reality where a beneficiary has the major say over the trust’s assets, rather than an arm’s length trustee. The issue was about restoring control to Trustees and appointors and removing it from beneficiaries. Perhaps the appointment of truly independent trustees would solve the problem but many would not command the same level of trust from beneficiaries that traditional useage of the discretionary trust has provided and the convenience factor would be missing.
The Future and You
This decision has not been appealed so we must await cases which raise a similar point of law. If one of these goes to the French High Court we can anticipate an interesting exchange of views among the Judges.
In the meantime the use of the complying self-managed superannuation fund booms as a substitute asset protector. At least until it too is faced with a decision like that of French J on the discretionary trust. Alternatively, the law may eventually decide that the Richstar decision is anomalous or even wrong and the problem will go away. The wise course is to continue to use the discretionary trust as we have traditionally, restoring the trust to its pre-eminent place as a protector of assets.
Contact Champion Legal on how you can best protect your assets.
DR BERNARD CAREY
Special Counsel
Commercial and Corporate Law
