Tuesday, November 22, 2016

Pierce the veil and the Domino Theory

As alluded to in last week’s post, utilising a corporate trustee as the corporate beneficiary of a trust can be a problematic approach.

Aside from difficulties that often arise in relation to whether the company is in fact a beneficiary under the terms of the deed, a significant issue also exists from an asset protection perspective.

In particular, given a trustee is directly liable for all activities of the trust (subject to an indemnity against the assets of the trust), where the effort has been made to appoint a corporate trustee, it is always preferable to ensure the total assets of that corporate trustee in its own right are limited to a nominal amount (for example $2).

Where a corporate trustee has been used as a corporate beneficiary (even if the distributions remain outstanding as an unpaid present entitlement), the value immediately becomes significantly more than $2.

While steps can generally be taken to ‘unwind’ the adverse aspects of distributing to a corporate trustee, as with many adjacent areas of the law, prevention is always better than the cure.

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