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Bankruptcy and Family Trusts in Australia and Its Relationship

are family trusts protected from creditors | Justice Family Lawyers

In Australia, bankruptcy happens when someone can’t pay back their debts. On the other hand, a family trust is set up to keep family money safe. Understanding how these two things work together can be tricky. This guide will help break down the basics for both in an easy-to-understand way.

Are Family Trusts Safe from Bankruptcy?

No, family trusts are not automatically safe from bankruptcy.

While assets within a family trust are not directly accessible, like personal assets when someone declares bankruptcy, there are instances where a bankruptcy trustee might tap into a family trust’s assets.

For example, if the bankrupt individual has significant control over the trust, it might be argued that the assets effectively belong to them.

Also, if someone transferred assets to the faith shortly before declaring bankruptcy, possibly to keep them away from creditors, these transfers could be reversed.

Additionally, if the bankrupt person receives money from the trust, those amounts might be claimed once distributed. Anyone considering a family trust must seek legal advice about how bankruptcy might affect it.

How Does Australian Bankruptcy Law Treat Family Trusts?

If a bankrupt individual exercises control or influence over a family trust, such as by being a trustee or having the power to appoint or remove trustees, a bankruptcy trustee might argue that the assets in the trust effectively belong to the bankrupt person and should be available to creditors.

Australian bankruptcy law treats family trusts with a level of scrutiny, especially if there’s a perception that the trust was used to protect assets from creditors.

Here’s an overview of how family trusts are treated in the context of Australian bankruptcy law:

  • Asset Transfers: If, before declaring bankruptcy, an individual transferred assets into a family trust, there might be an investigation to determine if the move was an attempt to hide assets from creditors. If deemed so, these transactions could be challenged and possibly reversed.
  • Beneficiary Payments: If a bankrupt individual receives distributions from a family trust, these distributions can be considered income. Depending on the amount, they might be required to contribute some of it towards their debts.
  • Trust’s Debts: If the bankrupt individual guaranteed any of the trust’s debts, creditors could pursue the individual for those debts.
  • Asset Protection: Family trusts can offer some asset protection, but it’s not absolute. If the court believes the trust was established or operated primarily to hinder, delay, or defraud creditors, it might allow access to its assets.
  • Look-back Period: The bankruptcy trustee can look back at transactions made before the bankruptcy. If they believe assets were transferred to a trust to defeat creditors, they might recover those assets. The look-back period is usually four years before bankruptcy but can be longer in certain situations.

Given the complexities involved, it’s important for anyone with a family trust or considering establishing one to understand the potential implications of bankruptcy and to seek legal advice from our trusted family lawyers experts in property settlement

Why Set Up A Family Trust?

There are many reasons why people choose to set up a family trust. These include:

  1. Separating the owner of assets (the beneficiary) from control of the assets. This happens through the appointment of a trustee. This may be desirable for several reasons, including the beneficiary being underage or suffering from a disability that might inhibit their ability to make sound decisions.
  2. To provide greater flexibility in tax planning, such as avoiding capital gains tax.
  3. To protect the assets held within the trust, and the beneficiaries, from being open to financial claims.
  4. To be used as a business entity for investment purposes such as purchasing real estate, stocks, or the creation of a share portfolio

What Do I Need To Set Up A Family Trust?

Setting up a family trust involves steps and the necessary documents. Here’s what you generally need to set up a family trust:

  • Purpose and Decision: Before anything else, determine the trust’s purpose. Are you setting it up for tax benefits, asset protection, or succession planning?
  • Trust Deed: This is the main document that governs the trust. It outlines the terms of the trust, including the powers and responsibilities of the trustee, the beneficiaries, the life of the trust, and other essential clauses.
  • The settlor: This is the individual who establishes the trust. They provide the initial asset or sum to the trust (often a nominal amount) and typically have no further involvement after the trust is created.
  • Trustee: Decide who the trustee will be. It can be an individual or a corporate entity. The trustee is responsible for managing the trust assets and making decisions for the benefit of the beneficiaries.
  • Beneficiaries: Identify the beneficiaries. These are the individuals or entities who will benefit from the trust. In a family trust, beneficiaries are usually family members.
  • Initial Contribution: The settlor makes an initial contribution to the trust, sometimes called the “settled sum.” This is often a nominal amount, such as $10.
  • Registration: Depending on your jurisdiction, you might need to register the trust with relevant authorities, especially if the trust will operate a business.
  • Taxation Requirements: Apply for a Tax File Number (TFN) for the trust from the Australian Taxation Office (ATO). If the trust is involved in goods and services trade, you may also need to register for Goods and Services Tax (GST).
  • Bank Account: Open a bank account in the name of the trust to manage the trust’s finances separately from personal or other business accounts.

Remember, setting up a trust is a significant decision with long-term legal and financial implications, so it’s crucial to ensure everything is done correctly from the start.

Also read: How to Avoid Paying Taxes on Divorce Settlement

Concerned About How Bankruptcy Could Affect Your Family Trust? 

Safeguard your assets and legacy with expert guidance. At Justice Family Lawyers, we specialize in navigating the intricacies of bankruptcy and family trusts. Don’t leave your financial future to chance; let our experienced team stand by you. Reach out to Justice Family Lawyers today and take the first step toward peace of mind.