Founders of family businesses are used to holding the keys. When they set up a family trust in Australia, or a foundation or trust overseas, many keep almost every power for themselves: the power to amend, the power to appoint and remove, the power to veto, and the right to benefit.
That is often legally possible. But a structure in which the founder keeps every key can be more fragile than it looks. The more a structure depends on one person’s control, the easier it becomes for a court, a former spouse, a creditor or a disappointed heir to argue that the structure is really just that person’s own property in another name.
A hypothetical: the founder who declared himself dead
Consider an anonymised example. A founder of a Southeast Asian business group, resident in Singapore and running a family office there, establishes a private foundation in a European civil-law jurisdiction. The foundation owns holding companies, which in turn own operating companies across Asia. The family is Muslim.
Under the foundation’s governing documents, the founder reserves the power to amend its charter and by-laws, to appoint and remove the board, and to veto board decisions. He is the first beneficiary, entitled to income, and also a discretionary beneficiary of capital. No other beneficiaries are named.
Years later, he adds a document allowing him to declare himself “deemed deceased” for the purposes of the foundation. That declaration activates a new set of rules. He eventually makes the declaration. Under the new rules, his children become beneficiaries when he actually dies, and they gain the power to appoint and remove the board.
The founder’s goal is sensible: to begin handing control to the next generation in an orderly way while he is alive. But the structure raises hard questions. For most of its life, was it ever really separate from him? If the children’s rights depend on a document he could change at will, how secure are they? And if some of his heirs expected their shares to be fixed by Islamic inheritance rules, will they accept a structure that departs from those rules?
The biggest risk: the structure is treated as the founder’s own
The most serious risk in a structure like this is that a court, in Australia or elsewhere, decides the trust or foundation is a sham, or is simply the founder’s alter ego. The labels and tests differ between jurisdictions and between areas of law, but the underlying question is similar: in substance, whose property is this?
In Australia, courts are generally slow to find that a trust is a sham. A sham usually involves an intention that the documents should not take effect according to their terms, rather than simply a lot of control. But excessive control, combined with the founder treating trust assets as his own, ignoring the deed, mixing personal and trust money, or keeping poor records, gives a challenger plenty to work with.
How Australian law can look through control
For families with Australian connections, several areas of law can reach assets held in a structure that one person effectively controls:
- Family law. In property proceedings between separating spouses, the family courts can treat the assets of a trust that one spouse effectively controls as that spouse’s property, or at least take them into account as a financial resource. A founder who is appointor, director of the trustee and a beneficiary is in a very different position from a beneficiary of a trust controlled by independent people.
- Creditors and insolvency. Assets of a properly run discretionary trust are generally not treated as a beneficiary’s own property. However, transfers made to defeat creditors can be challenged, and arrangements that are not genuinely operated as trusts are more exposed.
- Estates and family provision. Assets in a trust are usually outside a deceased person’s estate. But a founder who holds a power to take the assets for himself may find that power treated differently, and in New South Wales the notional estate rules can reach certain assets outside the estate.
- Tax. Australian residents connected with foreign trusts or foundations can face complex attribution and reporting rules, and how a foreign foundation is characterised for Australian tax purposes can be uncertain. Separate tax advice is essential.
What banks and counterparties will ask
Control questions are not only raised in litigation. Banks, buyers, lenders and joint venture partners dealing with a family structure will want to know:
- Who actually has authority to approve this transaction, and is that authority clear on the documents?
- Are the representations, warranties and legal opinions offered by the structure enough to rely on, or could a later challenge undo the deal?
- If the founder dies or a succession dispute breaks out, will the family still stand behind the structure and its commitments?
Personal law and religious succession expectations
Many of our clients come from families whose inheritance expectations are shaped by religious or personal law. In several Southeast Asian countries, the estate of a Muslim person is ordinarily distributed under Islamic inheritance rules (faraid), which fix shares for particular relatives. Chinese customary expectations, such as those about sons or the family home, can be just as strongly held.
Australian law generally allows a person to leave their estate as they choose, subject to family provision claims. A trust or foundation can move assets outside the estate entirely. Heirs who believe the structure has deprived them of their entitlement under personal law may challenge it, whether in the country where the founder lived, where the assets are located, or where the heirs live.
The best protection is advice at the outset from both sides: advice on the law that governs the structure, and advice on the founder’s personal or religious succession law. Some families also obtain a religious opinion on the arrangement, explain the structure to adult heirs while the founder is alive, or document why the founder chose it. None of these steps guarantees that a challenge will fail, but they reduce the risk considerably.
Practical ways to reduce the risk
- Separate the roles. Avoid one person being appointor, sole director of the trustee and principal beneficiary with nobody to answer to.
- Introduce independent or family co-decision-makers, such as a second director, a joint appointor or a guardian whose consent is needed for major decisions.
- Operate the structure as a structure: respect the deed, keep minutes, keep trust money separate, and document the reasons for distributions.
- Plan the handover of control in the documents themselves, rather than relying on later side documents that the founder can change at will.
- Coordinate the trust or foundation with Wills, powers of attorney and superannuation nominations in every relevant country.
Control is not the same as security
Founders keep control because they want to protect what they built. Ironically, a structure that can be shown to be independent of the founder is often far more secure than one that depends on him entirely. The goal is not to strip the founder of influence, but to design a structure that will hold up when someone tests it.
Frequently asked questions
Can I keep control of my family trust and still have it protected?
Usually, yes. Some control is normal. The risk grows when one person holds every power, is the main beneficiary and treats the assets as their own. Sharing or separating roles, and running the trust properly, reduce that risk.
Does holding assets in a foreign foundation avoid Australian family law or tax?
Not necessarily. Australian family courts look at who really controls assets, wherever they are held, and Australian residents connected with foreign trusts or foundations can have tax and reporting obligations.
Should a Muslim family obtain faraid advice before setting up a trust or foundation?
If any heir may expect shares under Islamic inheritance rules, yes. Advice at the outset on both the law governing the structure and the founder’s personal succession law is the best protection against a later challenge.
How Chua Tan Associates can help
Chua Tan Associates advises Asian and cross-border families across Australia on family trusts, offshore structures and succession. We review who holds which power under your trust deed, foundation documents and company constitutions, and help families plan an orderly handover of control. Justin Chua is a Nationally Accredited Mediator and Family Dispute Resolution Practitioner, and an Accredited Family Business Advisor. We work with local lawyers where an offshore structure is involved, and advise in English, Mandarin and Cantonese.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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