Legal Tip 42: Suing a Trust

Suing a Trust


As you probably know from legal tip 41 a trust is not a legal entity and therefore cannot be sued. This is because a legal person will be acting as trustee and entering contracts. They will do this in their capacity as trustee. So if there are problems it will be the trustee that is sued.


An example is Tom is a mortgage broker and operates through a ‘trust structure’. Tom is the trustee of the Tom Mortgage Broking trust. A client sues the ‘business’ which is Tom in this case. Tom is the name that will appear on court documents and Tom is the one that will suffer a court judgment if the case is lost. It is Tom that is personally liable for the money awarded to the other side.


However Tom will have incurred this expense in his capacity as trustee and Tom may recover his expenses out of the assets of the trust - which may be nil or minimal. If there are not enough trust assets to cover the debt Tom's personally assets will be at risk.


Trustees are personally liable for the debts they incur as trustee for a trust.


Next we will cover what happens if a company is sued.

 

This issue is very apparent when a Trust gets into a tax dispute. Its at that point that the decision to use human trustees appears a foolish decision v's a corporate trustee. I have seen people charged with criminal offences relating to tax dealings where a corporate trustee may offer a layer of personal protection. (A Director may still be charged for an offence but not always)

eg a offence of failure to lodge a return is a Crimes Act offence. Its a offence for a company and conviction recorded, fine etc. But a conviction for a human trustee or both becomes a lifetime burden when travelling oseas as a matter to declare. A visit to the US consulate for an interview to obtain a full visa where without the conviction the ETSA visa waiver application is made online.

Other outcomes from a conviction may include:
- Employment issues (some employment concerns do not consider the offence type - Just a conviction as reason to refuse employment)
- Some offences may result in specific trades or professions losing registration (ie good character etc...A Tax agent must disclose to the TPB)
- Applications for some licenses and jobs may be a lifetime burden as spend convictions rules wont apply eg : Casino license etc...

All good reasons why sound legal advice for trust formations is a must. The $200 trust deed ordered at 10pm online with human trustees to save a few bucks for a small business start up may seem very expensive later.

 

What if Tom was walking on the weekend in his personal time, and his dog happened to bite a little old lady. If Tom was sued (in his personal right), would the assets inside "Toms Mortgage Broking Trust" be safe from litigation or would they also be at risk?

For the purposes of the example, lets say that;
- Tom is not the only trustee. The trust has set up with his dad "Rob" as a joint trustee
- Tom is the sole beneficiary of the trust

 

This would depend on the structure and the conduct of the parties. At first glance assets of a discretionary trust are safe from creditors of a beneficiiary, but not always.

It would be very rare to have a discretionary trust with one beneficiary - but possible - I assume you meant the only named beneficiary. If there was just 1 beneficiary the asset protection will be pretty weak as the beneficiary would have something approaching an interest in the assets of the trust. If

if it was a bear trust then no asset property for an insolvent beneficiary at all.

 

Are the trusts assets also safe from the creditors of the trustee? I.e. If Rob's dog was to bite the old lady and he was sued. I assume trust assets are safe as the liability was not incurred in his capacity as the trustee and he is not listed as a beneficiary. Is this correct?

If the trust were a testamentary trust (I.e. in the instance where Tom had inherited the business from his grandfather "Tom Snr"), would this give the trust's assets more protection from the personal liabilities of "Tom" and "Rob" than a standard discretionary trust?

 

Under s blah blah of the bankruptcy act assets owned as trustee are not available to creditors of that trustee.

A testamentary trust is just a trust set up under a will. It could be a bare trust, unit trust or discretionary trust. Assuming it is a testamentary discretionary trust the assets will be just as safe as an inter vivos discretionary trust. But the main difference will be that the assets of the trust would not have originated with the beneficiary so there would be more protection because of this.

 

A trust owns property with a corporate trustee. The trust has property and the pty ltd has no assets. Can someone sue the pty ltd with a view to accessing the trust property?

 

The trust doesn't own property. It is a relationship not a legal entity.

The company owns the property in this case and yes someone could sue the company, in its own right or as trustee. If sued as trustee the trust assets will certainly be up for grabs.

 

Thank you Terry. I thought that that might be the case.

 

That's why it is common to have a trustee that has no assets of its own

 

But say someone slips on the property and the insurance fails for whatever reason (e.g. no insurance policy taken out), and the trustee company is sued as trustee for the property, the property asset could potentially be up for grabs.

So am I right in saying that an impecunious corporate trustee is only of benefit in this context to stop assets of a corporate trustee being used to satisfy any debt relating to the trust.

 

Not sure what you mean but if the assets held by the trustee are not enough to satisfy the debt then their personal assets are at risk.