We are seeing more and more cases where individuals have acted as trustees of trading trusts, prior to becoming bankrupt. In the most recent case, the bankrupt had incurred liabilities exceeding $1 million. Although as accountants we tend to regard trust liabilities as being somehow different (probably because we show them in a separate balance sheet) in truth from a bankruptcy perspective they are no different to all other claims. That is the trustee is personally liable.
It is true that the trustee has a right of indemnity from the trust assets, but that indemnity may be of limited value. In this instance the right of indemnity was almost worthless as by the time we were consulted there were very little assets available in the trust, the majority having been sold to pay creditors.
This brings us to a very important lesson. The trust was obviously set up for taxation advantages, however tax advantages and asset protection advantages are two very distinct and different issues. We implore you to consider your clients structures and make them aware of the risks associated with any structure that they currently trade from.
On that note our partners are always happy to take your calls when you are considering structuring a client from an asset protection point of view. Given our significant expertise in dismantling structures we may be able to make some suggestions that will assist in protecting your clients!