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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Domino theory

Previous posts have touched on a number of aspects of asset protection.

One issue that comes up very regularly is the concept of 'domino theory'.

Last week, I had a timely reminder of the importance of this theory and the fact that it does not simply apply where there are two assets of substantial value owned via the same structure.

The situation last week involved a trust which owned a very substantial piece of land to be developed, together with a much smaller (and less valuable) adjoining house on a separate title.

The house was leased out to tenants, and given its nominal value, the controllers of the trust had felt it would be appropriate to leave the house in the same trust, because if something did go wrong on the property development, they could bare the economic cost of losing the house.

Unfortunately, what in fact happened was that the development was proceeding very successfully, however the tenants of the house sued the trust in relation to an accident that occurred, allegedly due to the landlord’s negligence. What this meant therefore was that the successful development was the asset that was exposed because the course of action was against the trust as a whole.

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