Many business families set up a discretionary family trust on the advice of their accountant, often with the words “it will protect your assets”. For Chinese and Asian families running restaurants, building companies or property developments in Australia, business debts, personal guarantees and claims are real risks.
A family trust can provide genuine protection. But the protection is narrower than many people believe, and it depends heavily on how the trust is set up, who controls it, and when assets were put into it. This article explains how the protection works, where it stops, and what to check now.
Why a discretionary trust can protect assets
In a discretionary trust, the trustee holds the assets and decides each year which beneficiaries, if any, receive income or capital. A discretionary beneficiary has no fixed share of the trust property. They have a right to be considered and to have the trust properly administered.
Because of this, if a beneficiary becomes bankrupt or is sued, the trust assets are generally not the beneficiary’s own property. The Bankruptcy Act provides that property a bankrupt holds on trust for another person does not pass to the trustee in bankruptcy. In a well-structured trust, where the person at risk is not the trustee, does not control the trustee and has not put assets in recently, creditors will usually find it hard to reach the trust’s assets directly.
The limits of trust asset protection
Sham trusts
A trust is only as good as its substance. If the documents say one thing but everyone intends something else, a court may find the arrangement, or part of it, is a sham, meaning it was never intended to have real legal effect. The High Court of Australia upheld a finding of this kind in Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21, where a beneficiary’s entitlement under a trust deed was found to be a façade. Treating trust money as your own and ignoring the deed invite this kind of challenge.
Clawback of transfers under the Bankruptcy Act
Moving assets into a trust does not make them safe if the transfer can be undone. Two provisions of the Bankruptcy Act 1966 (Cth) are central:
- Section 120 (undervalued transactions). A transfer made in the five years before bankruptcy, for no consideration or less than market value, can be void against the trustee in bankruptcy. The transferee has a defence only if the transfer happened more than two years before the bankruptcy (four years for a related entity, which includes the trustee of a trust under which the person or a relative is a beneficiary) and they prove the person was solvent at the time. Love and affection is not consideration.
- Section 121 (transfers to defeat creditors). A transfer is void against the trustee in bankruptcy if the main purpose was to prevent, hinder or delay property becoming available to creditors. That purpose can be inferred where the person was, or was about to become, insolvent. There is no fixed look-back period. A transferee is protected only in limited cases, such as where they paid market value and could not reasonably have inferred the purpose or the insolvency.
State laws can also apply outside bankruptcy. In New South Wales (Conveyancing Act 1919, s37A) and Victoria (Property Law Act 1958, s172), a transfer made with intent to defraud creditors can be set aside, although a buyer who paid value in good faith without notice of that intent is protected. A gift of the family home to a trust after business problems start is exactly what these rules catch.
Control and appointor powers
The more control a person has, the weaker the protection. If the person at risk is the sole director of the trustee company, the appointor who can replace the trustee, and also a beneficiary, a court may see the trust assets as effectively available to them. Australian courts have increasingly looked at practical control. The High Court has also held that where a bankrupt trustee has a right to be indemnified from trust assets for expenses paid, that right can carry an interest in the trust property to the trustee in bankruptcy (Boensch v Pascoe [2019] HCA 49).
Separating roles helps. Many families give the appointor role to another family member, or to several people jointly, and keep the person with business risk out of the trustee role.
Personal guarantees and the trustee’s own liability
A trust offers no protection against obligations a person signs up to personally. Banks, landlords and suppliers commonly ask directors and their spouses to give personal guarantees. They often also ask the trustee to guarantee or give security, which puts the trust assets on the line. A corporate trustee also has its own liabilities for debts it incurs as trustee, and individual trustees are personally liable for trust debts.
Offshore trusts
Some families consider a trust in Hong Kong, Singapore or another offshore centre. Such a trust may be harder to enforce against in practice, but it does not change the fact that Australian bankruptcy and creditor laws apply to the person who transferred the assets. Australian courts can make orders against people within their jurisdiction, including orders to bring assets back or to deal with their rights over a trust. Offshore structures also bring tax reporting and CRS issues.
Timing and solvency: the most important factor
Asset protection works best when it is set up early, while the business is healthy and there are no claims in sight. A transfer made while solvent, for genuine reasons, is much harder to attack than one made after a demand letter.
When assets are transferred into a trust, it helps to:
- keep evidence of solvency at the time, such as a statement of assets and liabilities prepared with the accountant;
- pay market value where possible, or document a genuine loan rather than a gift;
- record the genuine reasons for the transfer; and
- allow for stamp duty and capital gains tax.
A practical checklist
- Find the deed. Confirm you hold the original deed and all variations.
- Map the roles. Identify the trustee, the directors and shareholders of any trustee company, the appointor and any guardian, and the beneficiaries.
- Locate the risk. Identify which family members carry business risk, sign guarantees or act as directors, and consider whether they should hold fewer control roles.
- Review guarantees. List every guarantee and security the trustee has given, and whether it is still needed.
- Check loan accounts. Unpaid distributions or loans owed by the trust to a beneficiary are assets of that beneficiary and can be claimed by their creditors.
- Keep records. Minute trustee decisions and keep trust money separate.
- Plan succession. Make sure control passes as intended on death or incapacity.
Frequently asked questions
Does a family trust protect assets from creditors?
It can, because a discretionary beneficiary does not own the trust assets. But the protection depends on who controls the trust, whether assets were transferred in when the person was solvent, and whether the trustee has guaranteed any debts.
Can a trustee in bankruptcy take assets from a family trust?
Generally not, if the bankrupt is only a discretionary beneficiary. However, transfers to the trust can be clawed back under the Bankruptcy Act, and a bankrupt’s rights as trustee or controller may give the trustee in bankruptcy a claim.
Can I move my house into a family trust to avoid creditors?
A transfer made to put assets beyond creditors can be set aside, with no fixed time limit, and a transfer for less than market value within five years of bankruptcy is at risk. It may also trigger stamp duty and capital gains tax. Get advice before transferring any asset.
Is an offshore trust better for asset protection?
Not necessarily. Australian courts can still make orders against the person who set it up or controls it.
How Chua Tan Associates can help
Chua Tan Associates reviews family trust deeds and the chain of control behind them, from the appointor to the trustee company to the board, to find where one person can act alone and where the family is exposed. Justin Chua trained in accounting and is an Accredited Family Business Advisor, and we work alongside the family’s accountant to align asset protection with succession and tax planning. We prepare deed variations, appointor and guardian arrangements, loan documents and Wills so that control passes as intended, and we work with local lawyers in Asia where family assets are held overseas. We 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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