Legal Tip 255: Bankruptcy and Trusts

Discussion in 'Legal Issues' started by Terry_w, 6th Dec, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Assets held as trustee for others are generally not available to creditors if the trustee goes bankrupt.

    See

    Legal Tip 46: Is property held by a trustee safe if trustee becomes bankrupt? Legal Tip 46: Is property held by a trustee safe if trustee becomes bankrupt?

    But bankruptcy will affect trusts because:

    a) The bankrupt cannot be a trustee, and

    b) The bankrupt cannot be a director

    c) Often the bankrupt is automatically removed as appointor

    d) Licensing is often needed


    Example

    Homer is the director of a trustee of a discretionary trust, the Simpson Family Trust.

    He is also trustee of a special disability trust for his disabled sister.

    Homer becomes bankrupt.

    He is no longer a director of the company Simpson Co Pty Ltd as he is automatically removed. The shareholders will need to elect a new director. Marge, Homer’s wife is the shareholder of this company so it is not effected too much.

    Homer is also director of Simp2 Pty Ltd which is a trustee of a discretionary trust which owns property. Homer owns shares of this company and is the appointor. Homer knows that he will become bankrupt so he transfers the shares of the company to his wife.

    But these can be clawed back or reversed so creditors can get their hands on the company and then control it and potentially make a distribution to Homer so Homer will need to exercise his powers as appointor, before he is automatically removed, and change the trustee of the trust to a new company, newly set up with Marge as shareholder and director (or other family member).

    But this trust has borrowed to buy the property. Changing trustee will mean the title of the property needs to be transferred and new loans need to be applied for. It is possible to keep the title in the name of the existing trustee, but this would be a breach of the mortgage agreement if the lender doesn’t agree. Changing the loan or getting the lender to agree to allowing a new trustee will require a full application with serviceability reassessed. This will be an issue if the director, in this case Marge, is not working. Since a change in legal ownership won’t be possible without the consent on the mortgagee there would be no not telling the bank sort of thing.

    Homer is automatically removed as appointor of the trust when certain events are triggered such as becoming insolvent. The timing of this will depend on the wording in the trust deed so Homer must carefully consider when he should exercise his powers as appointor because if he changed the trustee after he had been removed, this will be invalid as he won’t have the power and the this will mean the trustee has not been removed.


    Homer might also be licensed for the business that he being operated. He might be a licensed builder, a mortgage broker, tax agent etc and this will mean that any new trustee company operating a business may not qualify for the relevant licence unless the new director has the appropriate qualifications and experience.


    Homer might also have a self managed superfund. All members of a fund must be trustees or directors of the trustee so Homer’s super will need to be rolled over to a industry or retail fund – after receiving financial advice.



    Homer also cannot be director of the trustee or trustee of the special disability trust. This would require another family member to step in or a professional trustee. This would mean a change of legal ownership of the property and conveyancing of the title from Homer to the new Trustee.
     
  2. thesuperman

    thesuperman Well-Known Member

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    What happens to the trust if there's a sole director and/or trustee and nobody else trustworthy and/or available to be a director/trustee of that trust? Eg. Homer goes bankrupt but all his family had already passed away together all at the same time.
     
  3. Trainee

    Trainee Well-Known Member

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    Put in a lawyer or accountant?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It will depend on the wording of the deed. A beneficiary might have to go to court to appoint an independant trustee.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I wouldn't want to take such a role. Too much risk.
     
  6. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The SMSF issue does allow an additional person to be a second Trustee Director where the fund is a sole member fund. The trustee will need to be changed prior to bankruptcy to a corporate trustee (cannot be a human trustee with only one) and a new trustee can be appointed under EPOA conditional on the bankruptcy. An alternate Director also wont offend the ATO as a regulator or the Corporations Act rpovided the alternate powers are absolute and total for that duration.
     
  7. Piston_Broke

    Piston_Broke Well-Known Member

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    Rule #1 for asset protection in trusts: The Trust has NO loans.
    The Trust being the loaner could have some benefits.

    As per the OP , bankruptcy is rarely a sudden event and often there is time.
    Also the OP seems to mean that this is a personal bankruptcy.
    And afaik after the bankruptcy the BR may be able to hold assets in trust before discharge.
    Assets acquired after bankruptcy: What will happen to yours?

    ***Never believe anything you read on a forum, talk to a lawyer***
     

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