Tuesday, May 21, 2024

All of this; and nothing** - Default beneficiaries and bankruptcy

View Legal blog - All of this; and nothing** - Default beneficiaries and bankruptcy by Matthew Burgess

Following on from the posts over the last few weeks, it is important to be aware that some commentators argue that the interest of a default beneficiary constitutes property that may vest in the trustee in bankruptcy if a default beneficiary is declared bankrupt.

It has generally been argued that the interest of default beneficiaries is of a different character from that of a discretionary object and may well be property of a bankrupt (see - Dwyer v Ross (1992) 34 FCR 463).

However, it has also been argued that the interests of takers in default do not have a vested interest in the assets of the trust until the trust vests, and until that event occurs, the assets of the trust have not been the subject of an effective appointment.

That is, such interests can be deferred or taken away at any time prior to vesting or termination of the trust and, accordingly, such interests are ‘mere expectancies’ in respect of property that is not capable of vesting in a trustee in bankruptcy.

The preferred position adopted by the cases remains that a default beneficiary does not have an interest in trust assets that amounts to property that is attackable by a trustee in bankruptcy.

This said, it is always appropriate, when establishing a trust, to consider carefully who should be nominated as the default beneficiaries to ensure that the assets of the trust do not become unnecessarily exposed to claims against those beneficiaries if the law in this area changes.

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** For the trainspotters, the title of today's post is riffed from the Psychedelic Furs song 'All of this and nothing’.

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