A Trust Should Not Operate Like a Personal Bank Account

The problem is often not the trust itself - it is how the trust is controlled and used. Three things to review before pressure appears.

A trust should not operate like a personal bank account with different paperwork. That is where people can get into trouble.

The asset may be held in the trust. The deed may be properly drafted. The annual resolutions may be completed.

But if one person controls everything, uses the assets as though they are personally available and keeps poor records of important decisions, questions may arise about how the trust genuinely operates.

The problem is often not the trust itself. It is how the trust is controlled and used.

For business owners and families, the practical answer is to respect the structure in day-to-day life - not only when a dispute or other problem arises.

Three things to review

1. Who actually controls the trust?

Look at the trustee, the directors of any corporate trustee, the appointor, the guardian and the beneficiaries. These positions can affect who controls the structure and who may benefit from it. They should be considered together rather than in isolation.

2. Are important decisions properly recorded?

Distributions, loans, asset purchases, payments for beneficiaries and other significant decisions should be recorded when they occur. Annual resolutions are important, but they do not replace proper records of the trust’s activities throughout the year.

3. Are trust assets being treated like personal assets?

Trust and personal transactions should be kept separate. If the trust pays a private expense, allows someone to use an asset or advances money to a beneficiary, the transaction should be properly considered and recorded. The more informal the arrangement becomes, the harder it may be to explain later.

A trust can be a valuable part of an asset-protection strategy. But the structure needs to be real in practice, not just on paper.

That means maintaining proper records, respecting the trustee’s role and making considered decisions well before a claim or dispute arises.

General information only. This article does not constitute legal, tax or financial advice. Professional advice should be obtained before establishing, changing or acting through a trust.

Source note: This article draws on issues considered in Australian Securities and Investments Commission, in the matter of Richstar Enterprises Pty Ltd v Carey (No 6) [2006] FCA 814. The case concerned an interim asset-freezing application. It does not establish that control of a discretionary trust automatically makes the trust assets the controller’s personal property.