What happens if a trustee becomes bankrupt

Finally, for a trust to be valid and operational, there must be a trust deed. A trust deed is a formal document that sets out how the trust will operate.

A trust deed should be drafted by an experienced lawyer to ensure the deed is legally binding. A discretionary trust, also known as a family trust, is the most common type of trust used by families. There are several benefits to setting up this type of trust. They are beneficial from a tax point of view as they enable the trustee to distribute assets to the beneficiaries according to their relative tax brackets, meaning the entirety of the estate makes significant tax savings.

They also allow assets to be passed down through the generations without facing taxes and duties. In most cases, family trusts are also immune from creditors or legal action should one or more of the beneficiaries named in the trust become insolvent.

Bankruptcy and family trusts — when a beneficiary of a family trust becomes bankrupt, whether voluntarily or involuntarily, they will be subject to the laws of the Bankruptcy Act Unlike certain other forms of trusts, when the beneficiary of a family trust becomes bankrupt, it is generally at the discretion of the trustee as to whether or not the bankrupt party will continue to receive distributions from the trust. Therefore, it is usual practice for the family trust trustee to decline to continue making contributions to the bankrupt beneficiary.

Bankruptcy and family trusts can be a tricky topic, so if you require more information, we recommend you obtain specific legal advice. Setting up a family trust can be a wise choice for families looking to pass assets between generations while making considerable tax savings and protecting their assets from anybody involved who becomes bankrupt.

If you decide you would like to set a family trust, you will need to undertake the following steps:. Principal of Justice Family Lawyers, Hayder specialises in complex parenting and property family law matters. Phone Number. Briefly Describe Your Enquiry. Skip to content Bankruptcy and family trusts When bankruptcy and family trusts intersect, and one of the trustees or beneficiaries files for bankruptcy, the other interested parties may be left wondering where they stand.

Why set up a family trust? There may also be problems with operating a bank account. An undischarged bankrupt is not prohibited by law from operating a bank account but the restrictions on obtaining credit apply to the operation of any post-bankruptcy account.

An undischarged bankrupt will not necessarily find it easy to open or operate a bank account as individual banks make their own commercial decisions and may have a policy of refusing to operate accounts for undischarged bankrupts. Even if a person acts in their capacity as trustee and not in their personal capacity, it is likely that bankruptcy will affect the person's ability to use a bank. Apart from the legal disabilities, there will be the most important question as to whether possibly substantial funds beneficially owned by someone else trust beneficiaries should be entrusted to a person who well, at least in most cases is clearly unable to look after their own financial affairs.

Clearly there isn't a simple answer. Where the trustee is not automatically disqualified, the question will be for the settlor if still alive and the other trustees to consider. While generally it may not seem advisable to retain a bankrupt individual as a trustee, the circumstances of each case will be different and the reason for bankruptcy of fundamental importance, as well as the relationship between the trustee in question and the remaining trustees and beneficiaries.

In a recent case we were asked to comment on, a trustee who was declared bankrupt was a retired accountant and a long-time friend of the family of the settlor.

His firm had collapsed through no personal fault of his and the settlor's family still trusted him with another trustee to look after the trust fund for their grandchildren, so they were quite relieved that he could carry on in his role despite his bankruptcy. To find out more about Trusts and Trustees see our Guides section. Our website uses cookies, by using our website you consent to our cookie policy.

Learn more. Insolvency or bankruptcy of a trustee. However the Court found that the trust was not a sham. In , Colleen surrendered her interest as a beneficiary of the trust, retired as appointor and was appointed as the new trustee. As part of the settlement of the Family Court proceedings, the Court ordered that the property be transferred to Colleen's name.

In , Colleen borrowed from the ANZ bank on the security of the property and used the funds for her private purposes. Colleen defaulted on the loan and the bank took possession. After Colleen became bankrupt, her trustee in bankruptcy Mr Condon caused himself to be registered on the title to the property and purported to seize the funds available after repayment of the secured amount to the bank. Colleen's daughter opposed this on behalf of the beneficiaries of the trust.

The Court relied upon s 2 a of the Bankruptcy Act Cth which excludes from vesting, property held by the bankrupt in trust for another person; and s 82 of the Real Property Act NSW which excludes recording notice of trusts on the Land Titles Register.

Therefore the trustee in bankruptcy held title to the property, subject to the existing trust. It was important that the Court found that the establishment of the trust was not a sham. Had it been a sham, the result may have been different.

Importantly, the Court went on to say:. Taxation Office statistics for disclosed that , trusts lodged tax returns.