Be Careful When Trying to Protect Your Assets through a Trust

A couple ran a jewellery business, which was owned by a company of which they were both directors and shareholders.  It had been a tough couple of years in which the profits of the business had taken a hit due to inability to get staff, and to the impact of Covid-19 on the retail sector.  

During the couple’s most recent meeting with their accountant, they were informed that the company that owned the business was insolvent.  In order to protect their property from creditors, they decided they wanted to establish a family trust to own their family home.

They were shocked when their company later went into liquidation that some creditors could still get access to assets that were put into the trust.  

They had signed personal guarantees with many of the creditors, and because the family home had been in their personal names before it was transferred to the trust, those creditors argued that the couple were deliberately trying to defeat creditors’ interests (which they clearly were).

Trusts have long been considered an important form of asset protection by lessening the risk of any potential creditor claiming against your personal assets in the event your business cannot pay its debts.  

Generally speaking, when property is transferred into the ownership of a trust, the assets are not personally owned by you anymore, and a creditor cannot have a claim to something that you no longer have.  

However, a trust is not a “get out of jail free card”, as trusts can be overturned by the Courts if they are satisfied that the trust was established purely for the purpose of concealing your assets from creditors, or defeating the interests of those creditors.

This was the situation in the example above. In a relationship property context defeating the interests of a spouse or partner in what would otherwise be relationship property could also be potentially overturned.

Factors such as the timing of the establishment of the trust, together with the powers of the settlors and trustees, will be relevant if the Courts are asked to overturn a trust.

In this case, where assets were transferred to the trust so as to defeat the claims of creditors against the couple individually, it is likely that the creditors would succeed in overturning the trust.

There is nothing wrong with putting assets in a trust for protection against possible claims if you do not have any creditors at the time. It is best to transfer assets into a trust before you start a business.  That way, you are not likely to be seen as trying to defeat creditor’s interests.

It is prudent when setting up a trust to complete a ‘solvency statement’ to help prove later that your intentions were not to defeat the rights of creditors.

It is vital to take legal advice before setting up a trust or transferring assets into a trust to ensure the trust will give you the benefits that you are anticipating.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price initial consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Guy Goodwin and Charlotte Cameron

Trust Lawyer and Law Clerk
Wellington