Before You Fix the Trust, Check the Risk
Proposed changes affecting discretionary trusts may cause many people to review their structures. Those reviews may be driven by tax, but asset protection also needs to be part of the discussion.
Historically, discretionary trusts have been useful for asset protection and income division if set up properly. That does not mean they are bulletproof in bankruptcy.
A bankruptcy trustee may still have potential claims involving unpaid present entitlements, loans owed to the bankrupt, void transfers into the trust before bankruptcy, or unremunerated personal services provided by the bankrupt to a trust or related entity.
As advisers consider moving some structures away from discretionary trusts and into companies or fixed entitlement structures, the asset protection conversation becomes important.
Companies need shareholders and fixed trusts have fixed entitlements. If a person later becomes bankrupt, shares, units or fixed entitlements may be assets a bankruptcy trustee can deal with.
The right structure is not just about tax. It is also about exposure and what happens if things go wrong.
