77 - March 2013
Trusts and trust lawyers are very dull. But once you know that it gets easier.
If you have a trust, there are consequences for not knowing the basics - so try to read on.
Delegating Control is a Matter of Trust
Trusts are all the rage.
To create a trust is fairly easy. It starts with a 30 plus page “trust deed” which allows you to hand all or some of your money to a completely separate entity so that you do not control it anymore.
Why would anyone want to do that? Well, people get worried about being sued and losing the lot. Or their ex spouse finding it. Or their accountant says it is a good way to save tax. Or it is a bit cheaper to set up than a company.
There are three major players in the trust world:
“The Trustee” is generally a long suffering individual who is chosen to be the gate keeper of someone else’s fortune. Often suspected of torturing difficult beneficiaries by giving them their inheritance on a “drip, drip” basis, they harbour thoughts of throwing off their responsible image and doing a runner to Rio. Few make it.
“The Beneficiary” is allowed to slouch around waiting to be paid while grouching and whinging about how the trustee is not doing a good job. Yes, it is a lot of fun. Beneficiaries of discretionary trusts are a little better behaved as the trustee decides who gets the money and in some trusts, can decide not to give anyone anything. This leads to the phenomena of “trustee's pet” for those beneficiaries who know which side their bread is buttered.
“The Appointor” is a shadowy figure who works behind the scenes and usually decides how the trustees are dismissed and who replaces them. If he does not like what the trustees are doing he sacks them. Making yourself the Appointor allows you to call the shots and continue to control your fortune.
Trusts can have drama, intrigue and be a great source of entertainment in your declining years.
Trustees in the Firing Line
A person who was about to become a trustee wanted me to assure him that he was not taking any personal risk. I told him, absolutely not. Of course, I was joking.
Trustees know that if they are fraudulent, reckless or negligent then they can be pursued by the beneficiaries of the trust. But, sportingly, beneficiaries need to catch them first.
However, that is not the trustees only problem. Consider the following:
- When you sue a person and they refuse to pay after you have got a judgment/court order the last resort is to make them bankrupt, but it is a little bit fiddly.
- When you sue a company, if it does not pay up, you threaten to wind it up. This is surprisingly easy to do.
So what about a trust? It is a separate legal entity, the sort of place that you put your money to try and shield it from other people e.g. your daughter’s layabout husband. However, a trust cannot be wound up or made bankrupt.
Fortunately, for the trust’s creditors they do not need to sue the trust, they only need to sue you, the trustee. The good news is that you, as trustee, can rely on the trust to indemnify you against such a claim. This is the bad news if the trust doesn’t have any money.
One solution is to have a company acting as a trustee. Nevertheless, creditors can wind that company up and then pursue the directors if they have done a lousy job or made payments to one creditor (usually themselves or their families) in preference to another creditor.
Most people become a trustee at sometime in their life. For instance, being the executor and trustee of another’s will.
Is it a mug’s game? Well, no more than being a parent.
(c) Paul Brennan 2012. All rights reserved.
My lawyer has erected a sign by the front door of his law firm saying “Welcome”. Do you think that this applies to all his clients, or will the next step be that he will require some of us to go around the back?
I do not think a lawyer is behind this, it is more likely some brash young marketer.
I am all for throwing out the threadbare carpets but a sign saying “Welcome” raises dangerously unrealistic expectations.
Having said that, law firms should not foster an impression of hostility and that is one of the reasons that many small law firms have removed their receptionists.
In the 1990s, law firm receptions were as busy as those of doctors. However, with the advent of email, fewer clients attended personally for interviews and due to isolation, many receptionists turned to drink. Greetings to clients, which overnight turned from stern to welcoming and even jolly, often became morose by late afternoon.
To counter this, receptionists designed higher reception desks to hide the bottles, ear pieces were employed to explain the occasional muttering and they remained seated to avoid collapse or in some cases, unseemly dancing.
Clients became used to peering over high reception desks to see the receptionist on the telephone, looking into the distance, absentmindedly mumbling.
But eventually receptionists were taken into the back office, dried out and rehabilitated. Many have gone on to achieve successful careers as prison camp guards.
Recently, a conveyancing lawyer was persuaded by his marketing manager to put up a sign outside his office which read, “Prepare to be Amazed and Astounded”. His wife quickly took it down.
Send your legal questions to firstname.lastname@example.org
Extract from John Fytit’s International Legal Problem Page. For more go to https://www.lawanddisorder.com.au/legaladvicepage.html
(c) Paul Brennan 2013. All rights reserved.
How the tax office and beneficiaries can crack open a trust and take the money
I will never forget the important legal principle of “The Three Certainties” as it was the name given to the three blond girl students who sat together in the front row of my trust class. It means that a trust correctly formulated must have certainty of intention, subject matter and object.
Trusts are created for all sorts of reasons such as avoiding tax, they can stop your creditors, frivolous children, scorned wives, cuckolds, step persons, pets, adult children (alcoholic or otherwise) getting their paws on your money. Trusts will continue on despite your death and can be created by your will to protect your money from your family long after you are gone e.g. no money to your children until they are 25 year or in some cases for good reason, 55 years.
So by tying your money up in a trust, the people who benefit (including you) can be vastly outnumbered by the people who would rejoice if a court found that the trust that you created was no good, after all and they got the money now.
One way to attack a trust is to allege that the trust deed was signed, dumped in a drawer and forgotten. Judges can expect that trusts are managed like a prize winning garden. For instance, trustees carefully come to decisions rather than writing cheques to order. Files are kept, memorandums written and telephone calls logged. In short, you show that you really did intend to create a trust with all its quirky, historic formalities. This trust husbandry all costs money and most people simply do not bother and provided there is not much money at stake and no challenge it does not really matter.
So if you have a husband or debtor who is hiding behind a trust or your inheritance is tied up in a trust you will want to find out more about The Three Certainties, as I did.
(c) Paul Brennan 2013. All rights reserved.
(c) Paul Brennan 2013 All rights reserved.
Disclaimer: The content of the Law & Disorder eZine is to give you legal basics and in some instances, included unashamedly to try and make you laugh. In law, it is sometimes difficult to work out what is serious and what is just for fun. Therefore, if you plan to do anything legal, rely on your own lawyer’s advice or instruct me to look at the particular facts of your case. Not only will I deny responsibility for the legal content but also for some of the jokes.