Frequently, I am asked to give advice to business owners who operate through Trusts (either Unit or Discretionary Trusts). Whilst the use of Trusts can be useful for tax minimisation and certain levels of asset protection, there are several practical considerations and possible complications that can occur if financial difficulty arises.

From a practical perspective, most Trading Trusts have a corporate trustee i.e. a Pty Limited company. It is the Trustee that effectively incurs the debt or obligation on behalf of the Trust. As a result, typically the Trustee has a right of indemnity against the assets of the Trust for such obligations.

Generally if a business that is operated through this type of structure encounters financial difficulties and becomes insolvent, it is usual to place into external administration both the Trustee and Trust (on the basis of the right of indemnity).

But what if the Trustee has assets itself and/or is also Trustee of other trusts? This is where complications can arise. It is in three (3) key areas:-

• Where such company may be the listed owner per Land Titles records (even though it is holding the real estate as Trustee); or
• Where only one (1) of the Trusts is effectively insolvent; and/or
• Where records maintained by the Trusts have not been properly maintained and it is difficult to establish the precise ownership of assets.

In such circumstances there can be ripple effects for non-insolvent trusts and/or the new trustee. Careful consideration of the entire group structure should be considered at the outset and regularly thereafter to ensure that in the event of insolvency of one of the group’s businesses that there are not unintended consequences. Such consideration should extend to considering separate corporate trustees. We work with several experienced solicitors in this area should business owners require assistance in this area.

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