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Cases, General, Relationship Property, Sham trust, Trustee liability

How to lose control of trust assets in three easy steps

The recent case of Rabson v Gallagher provides an excellent example of how not to use trusts in the context of protecting property from a relationship partner.

The first mistake made was to intermingle relationship property and trust property.  Where this happens any party should expect the court to ensure that the disaffected former partner is compensated.  It is entirely possible and permissible for a trust to be used to protect property for the benefit of one party to a relationship.  However, where this is the end goal it is critical that the trust property is insulated from relationship property and from the relationship partner, which takes us to step two.

If separate property is protected by a trust for the benefit of one party only, why, why, why would that party make the other party a trustee and perhaps also a beneficiary?  The word perhaps is used here because the records were so muddled even the court couldn’t be sure.  Mistake.  If property is to be protected from the fox you don’t invite the fox in as overseer.  When you do make such a mistake you should not then compound it by removing the fox the minute the going gets tough.  Foxes are wiley creatures and once a fox knows where the chickens are you can be sure the fox will return.

Third mistake here?  Ensuring money flows between the “protective” trust and another trust of which both parties were trustees and beneficiaries.  When the end game arrived, one trust was fatlaly compromised due to the muddled management and the other through the parties inabilty to act as trustees.

The conclusion?  If you are settling or using trusts to protect proeprty, get some proper advise that factors in what will happen if the going gets tough and for goodness sake, act as a trustee with all the attendent responsibilities and not a child in a candy shop whose sole focus is how much candy can be obtained.


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