Tuesday, November 10, 2020

Changes** and ownership structures and the bankruptcy rules

View Legal Blog Changes and ownership structures and the bankruptcy rules

Recent posts have looked at various aspects of the bankruptcy regime in relation to jointly owned assets.

As set out in last week's post, from an asset protection perspective, it is generally preferable to own assets with other parties on a tenants in common basis, so that if a co-owner dies, their interest can be distributed to a testamentary trust.

Arguably the leading case in this area is Peldan v Anderson [2006] HCA 48.

As usual, if you would like a copy of the case please contact me.

In this case, the wife as one of the co-owners of a house, who was in no financial difficulty, was diagnosed with an illness that meant she did not have long to live.

Driven largely by asset protection objectives, given the husband’s financial difficulties, the two owners decided to change the ownership structure of the property from joint tenants to tenants in common.

This meant that the husband as co-owner who was also at risk would not receive 100% of the property automatically on the death of his wife, rather her 50% would pass via a will, which was structured to include a testamentary trust.

The High Court held that this change in ownership was not a transaction that was void against the trustee in bankruptcy and therefore only the husband’s 50% interest was exposed to his creditors.

** for the trainspotters, the title here is riffed from the David Bowie song ‘Changes’.