Sub Trusts Part 2

1. I have had some interesting discussions regarding the article Why I Hate Your Sub-Trust, and wanted to set out and respond to some comments that have been made. In particular I would like to acknowledge the thoughts of Grahame Young of Francis Burt Chambers. 

Tindon v Adams

2. There was general agreement with the problems of Sub-Trusts. It is a matter that Courts don’t always appreciate. Grahame brought to my attention the case of Tindon v Adams [2006] VSC 172 the Court (erroneously) accepted a sub-trust over income in a unit trust: 

2.1. The relevant clause was the standard problematic one: 

“Any amount set aside for any Unitholder pursuant to any provision of this Clause of this Deed or deemed to be held on trust pursuant to clause 13.8 shall not form part of the Trust Fund but shall upon the setting aside be held by the Trustee as a separate trust fund in trust for such Unitholder with power in the Trustee pending payment over to such Unitholder to invest or apply or deal with such separate fund or other resulting income or any part in any of the investments authorised by the Deed in respect of the Trust Fund.” 

2.2. The Court held that the effect of this clause was that “there were constituted two separate trusts under which the trustee held one-half of the amount of the 2005 net income of the Delprop Trust upon trust for each of the unitholders”.

2.3. Another clause provided that “the only rights (if any) of indemnity of the Trustee or any creditor of the Trustee shall be limited to recourse to the assets of the Trust Fund”. The Court held that this limited the trustee’s right of indemnity and excluded assets set aside and held on sub-trust.

2.4. Although the trust had positive net assets, there was no assets marshalled for the payment of the income, nor was there sufficient liquid assets to meet the calls for the distribution of income and the other current liabilities of the trust. It is unclear to me what assets precisely form part of the sub-trust. Further, the liquid assets constituted cash in a bank account, which is more correctly a single asset that is the chose-in-action being the contract between banker and customer, and thus is difficult to set aside in part only (unless there is a separate bank account).  

Rescued Sub-Trust?

3. Grahame posited that there is possibly a way of rescuing the sub-trust, and that is if the beneficiary’s right to call for an amount equal to the net income is treated as the right that is set aside in the sub-trust. We discussed a number of problems with this: 

3.1. The beneficiary’s right is held by the beneficiary, and not the trustee;

3.2. The right to call for an amount equal to the net income is a personal right and so not assignable from the beneficiary to the trustee. This is a problem that arises in the South Australian Stamp Duty context when seeking to obtain the s71(5)(g) exemption where a “transfer of a potential beneficial interest […] is made by one member of the family group to another member of the family group, or by a member of the family group by way of surrender or renunciation of the potential beneficial interest”: 

3.2.1. A potential beneficial interest is a right in personam an may not be assignable;

3.2.2. If the right is surrendered or renounced then it is not transferred. 

In my view s71(5)(g) has no operation, notwithstanding that RevenueSA will accept such purported transfers; 

3.3. There is a conflict in duties between the trustee in their capacity as trustee of the main trust and the sub-trust, particularly when there is insufficient assets to divide between them all; 

3.4. If the trustee (as sub-trustee) holds the right to call for an amount, are they the only person who can make that call and enforce that asset? Can the beneficiary enforce the sub-trust against the main trust? 

3.5. Are there any positive duties on the sub-trustee? If not, does the sub-trust simply collapse?  

4. In my view the underlying failure of the sub-trust for lack of subject matter is not prevented. There are considered alternative views. Grahame has written further on sub-trusts in the TTI blue journal in 2013 under the title “and until paid shall be held as a separate trust fund” in a presentation to the 2014 WA State Convention titled “Claims Against Family Trusts”. 

5. It seems to me that the warning against sub-trusts remains.