Discretionary Trust - Investment with no documentation

Hi

We originally operated a business trading under a Partnership structure. After selling that business, we invested in other assets in a Discretionary Trust structure.

Partnership funds were used to purchase the assets, and were treated in the accounts as "Loan from Partnership to Trust."

If no documentation was prepared to state if this was a gift or a loan - what is the legal situation? Is it a loan or a gift?

It now becomes important due to asset protection reasons, whereby one of the partners is bankrupt, with no assets apart from equity in the partnership. The only asset of the partnership is the "Loan to the Trust".

Thanks.

 

It depends who is arguing.

If you are bankrupt the trustee in bankruptcy will be arguing it was a loan at call. But the trustee may be arguing it was a gift.

If it is treated as a loan in the financials of the trust then this is evidence that there was a loan, but no evidence of the terms - who the lender was, rate, term etc.

 

You are correct, the TIB is arguing it is a loan at call.

If it's a loan at call, is this where the Statute of Limitations may apply? As the "loan" was initiated in 2008/09, can I argue it's not enforceable?

There is no loan agreement specifying terms, rate etc.

 

Yes it may be unenforceable.

But if it is classed as an unpaid present entitlement the limitations act wouldn't apply. An unpaid present entitlement is where the trustee resolves to distribute to a beneficary but doesn't pay over the money.

 

It's not an unpaid present entitlement as the Trustee didn't make such a resolution, and in any case, the Partnership is not a beneficiary. (The Partners are though.)

It seems there is some argument to be had here, firstly if it was a gift or a loan.

Is it a loan, just because the FInancials have it recorded as such. We were never asked the question by the Accountant, that is just how it was recorded.

The genuine intention was to restructure, so that all assets were in the Trust structure.

Secondly, if it's a loan at call, then is it enforceable.

I will put it to the TIB, and see what he has to say.

Thanks for your help.

 

Accountants often make decisions such as this without instruction from the client - which is dangerous.

If it is not a loan then it must be a gift - but how could you prove this and would you be believed? There is evidence that it is a loan so you will have to rebutt this - which would be difficult.

This is why it is good to get legal advice when setting up trusts. A simple mistake as destroyed the asset protection to a large degree.

 

Yes, but the Trust structure when set-up was fine, it was the recording of the transactions by the Accountant (and our oversight in understanding the ramifications).

I would argue that only a fool would lend money to a Trust (or anyone) without some documentation detailing terms, interest rate etc. and seeking some form of security or guarantee.

Can I muddy the waters further and ask, we have a bank loan in our personal names, which is secured by property owned by the Trust.

In bankruptcy, I understand the concept of secured creditors ahead of unsecured creditors, but does that only apply when the property is an asset of the bankrupt, rather than as asset of a Trust?

 

Seriously just pay the man for specific advice...

 

Yes and only a fool would make a gift without documenting it too.

Secured creditors take priority over unsecured. So the bank would take priority over creditors.

 

The accounting likely followed the transaction. For example a transfer of $X from PShip to trust bank. Accountant asks - What is that ? Its money from the partnership. Shows it as such.

I would argue 50% is at risk. The asset of the partnership reflects as a liability of the trust. If it was to be a "gift" then the correct approach may be to treat the sum initially or at some point when determined, to treat the sum as corpus of the trust.

If its not income the only other credit is funds loaned by "X"...or corpus That's where a further issue creeps in. Did the partnership or the partners lend ? If so how is that shown in the partnership ? It should be shown as drawings by the partners.

 

Thank you.

Can you please explain what is meant as corpus of the trust?

 

capital

 

The word capital is not used in this context as capital suggests a form of investment that may be returnable or produce income. The word corpus refers to "the body of"...the trust.