Since King Henry VIII’s rule, Family Trusts have been protected from bankruptcy. The general rule is that if something is deemed to be your “property” then the bankruptcy courts can get their hands on it. Beneficiaries of a Family Trust only had a “mere expectancy” of the assets contained in the trust. Therefore, the bankruptcy courts had no power to include trust assets in a bankrupt beneficiary’s assets. However, on 20 April 2006 something terrible happened. On that day, the Federal Court held that interests in a Family Trust could constitute “property”.

The case is Australian Securities and Investment Commission (ASIC) in the matter of Richstar Enterprises Pty Ltd. It relates to Norm Carey. He was required to disclose his assets. Fair enough. But ASIC sought to have these receiver orders extended to the disclosure of property held by third parties as trustees of any trust in which Carey was a beneficiary. Extraordinary.

Now, this is the rub. The Court said that in the case of some of the nominated Family Trusts, Carey’s interests came within the definition of “property” in section 9 of the Corporations Act 2001. When can this ever be the case? The court said that this is the case where Carey effectively controlled the exercise of the trustee’s discretion to distribute. Apart from the Family Court, no court has ever taken this position before.

Obviously, not all of the interests fell into this category of “property”. Some interests in the trusts were something less than property – being mere expectancies. Quite clearly the court is correct in not extending the orders to all property held in trusts where Carey was a mere discretionary beneficiary.

Now at this stage it is just an order for Carey to talk about his assets. They haven’t been lost yet to the receivers. But it does raise the alarm bells for all clients that are in existing Family Trusts.

Thanks to Brett Davies, Law Central for this news.

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