A family trust is not a legal entity in its right. In the case of a discretionary trust, the beneficiary has no right to the assets of the trust. Thus there is no value in that interest which can be used to repay the creditors.
However, the transfer of assets to a discretionary trust is subject to the clawback provision. To overcome the clawback provision, the transfer has to meet the following conditions:
•if the transfer has been made within the period of relation back, being at most six months before the making of the sequestration order, then the transfer will be void as the bankrupt had no title in the property as it has already vested in the trustee in bankruptcy.
•if the transfer to a related party has been made within four years of the commencement of the bankruptcy, then the transfer must have been made for market value.
•if the transfer has been made within five years of the commencement of the bankruptcy, the transferee must show that at the time of that transfer that the bankrupt was not insolvent, or that the transfer was made at market value.
•irrespective of the date that the transfer of the property was made, the bankrupt must show that their main purpose in making the transfer was not to prevent the transferred property from becoming divisible among the transferor's creditors, or, it was not done to hinder or delay the process of making property available for division among the transferor's creditors.
In the real practice, many taxpayers and advisers overlook the effect of the clawback clause which allows the bankruptcy trustee to break the protection created by the family trust. It is critical that you set up the trust properly from the very beginning. Please feel free to consult us if you want to know how to protect your assets.