Puppet structures and alter egos: creation of a trusts, and powers of appointment to avoid the Court

People try to use third party asset structures to avoid their assets being attacked from a family law, bankruptcy and testator’s family maintenance perspective (“TFM”). There have been a variety of cases involving inter vivos trusts, which have been used by parties to argue their non-ownership of assets in the Family Court.[1] The same principle may be applied to ousting the jurisdiction of the TFM legislation. In Australian Securities and Investments Commission In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 (“Richstar”) French CJ said at paragraph [36]:

“…where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because… ‘it is as good as certain’ that the beneficiary will receive the benefits of distributions either of income or capital or both.”

De-identified case example #2:

“A has two children B and C. A’s estate is worth $300,000.00. A is the appointor and trustee of the A Family Trust. The A family trust has a commercial property worth $2,000,000.00. A’s will states that B and C are residuary beneficiaries in equal shares. A’s will creates a power of appointment in the will to B as appointor and guardian (or A executes a deed of variation of trust making B the substitute appointor and guardian of the trust in the trust deed). A dies C has only $150,000.00 worth of estate assets to claim against.”

In the High Court case of Kennon v Spry [2008] HCA 56 the only substantial assets of the marriage were assets held in a Family Discretionary Trust. In 2001, the parties separated. Dr.Spry then settled four separate trusts for his children and transferred the original trust assets into the newly created trusts for his children. The quarantine of assets was designed to defeat the Family Law Act. These transactions were not successful due to the legislative intervention of Part VIII of the Family Law Act 1975 (Cth).

[1] In the Marriage of Ashton [1986] FamCA 20; In the Marriage of Davidson (No2)(1990) 101 FLR 373. In the Marriage of Goodwin (1990) 101 FLR 386, In the Marriage of Harris (1991) 104 FLR 458, In the Marriage of Gelley (No2)(1992) 107 FLR 160.

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