Using Trusts For Asset Protection

Asset protection is used to describe the discipline of protecting assets from the liabilities that befall their owners. 

At its simplest, it is a matter of identifying who, or what, is at risk and ensuring that they do not accumulate value either by not having at-risk individuals acquire valuable assets or ensuring that assets that have already been acquired are appropriately encumbered.  In identifying what is at risk, it is equally important to determine the most appropriate asset protection vehicle.

It is well settled that the gold standard of asset protection can be obtained by using a fully discretionary and passive trust. 

Trusts are embedded in many business structures, used to manage personal income tax and adopted to complement family wealth arrangements. 

One of the clear advantages is that (absent very specific circumstances) none of the class of beneficiaries has a specific interest in the trust property.  This provides substantial protection in the event of a claim against at-risk beneficiaries. 

Discretionary trusts also continue to be the only vehicle available in this country that allows individuals to exert control without ownership.  This is achieved not so much of virtue of who or what the trustee is but who the appointor or principal of the trust is. 

Usually, an appointor will be granted the power to ‘hire and fire’ the trustee without the trustee’s consent.  This is not a proprietary right such as an ownership interest in real property.  It is instead a personal right noting that rights that are personal to an individual do not vest in a trustee in bankruptcy.  A good practical example of this is an individual’s right to vote.  Even if a person is bankrupt, a trustee in bankruptcy is not able to cast a vote at a ballot as these rights are personal to the individual and are not proprietary.

The following are some practical issues to consider when establishing a new discretionary trust:

  • Appointing a trustee – The trustee of the trust is the legal owner of the property and has the ultimate control over the assets of the trust. The trustee can be a company or one or more individuals.  A corporate trustee structure provides greater asset protection, and directors of the corporate trustee are provided greater protection from personal liability as opposed to if they were trustees as individuals in their own right.
  • Choosing the appointor – Although the trustee is responsible for the day-to-day running of the trust, the appointor retains ultimate control over the trust by having the ability to ‘hire and fire’ the trustee at any time. An independent appointor (i.e. a trusted family friend or professional adviser) may be advantageous where the individual establishing a trust is personally subject to business risks or in the event a dispute arises between two appointors.
  • ‘At risk’ individuals – Clearly, given the importance of the trustee and appointor roles, at-risk individuals should not be chosen to take on that responsibility; particularly if a key objective is asset protection. However, for a discretionary trust there is little risk in an at-risk beneficiary falling within the discretionary class, as for the time that that beneficiary is compromised, the trustee may simply choose to not distribute trust income to them.
  • Active and passive assets – Regard should be had to the types of assets you are seeking to protect and the most suitable and effective entity in which to hold them. Sometimes, in the case of a principal place of residence, an individual would generally be chosen to own the property so as to be able to access the CGT main residence exemption.  Trading entities are also at risk and if you choose to establish a business in a trust, that same trust should not also be used for holding passive assets which only derive income.

True asset protection is often best achieved by using a discretionary trust, but such a vehicle on its own (particularly when using an ‘off-the-shelf’ trust deed), may not always be sufficient.  Having appropriate insurance policies in place, not operating in a haphazard fashion and not mixing at-risk assets/activities with non-risk assets/activities are of vital importance.   

However, with adequate planning and appreciation for any possible pressure points, questions about, for example, true control over a trust, can be managed.  The challenge is getting the right mix of trustee, appointor, beneficiaries and directors/shareholders if adopting a corporate trustee to minimise any possible attacks on the assets of the trust without compromising the flexibility and control of the trust.

As with all matters involving trusts and other structures, appropriate legal advice should be sought to ensure that suitable mechanisms are considered for regulating asset protection, trust control and succession planning. 


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