Over a year ago I wrote that many of the schemes people use to try to protect their assets against creditors fail. That was when I wrote about the case of Mr Cummins, the barrister who had not lodged a tax return for about 30 years and who had transferred his half of the family home at Hunters Hill to his wife and his shares in the company that owned his barristers chambers to his family company. You might remember that the High Court said the scheme failed totally. You might also remember my comment that the only people who make money out of these schemes are the people who peddle them –because they get their often very high fees and the government-because it charges stamp duties on the transfers.

It seems some people are still trying the schemes and the schemes are still failing. Earlier this month the High Court held another scheme didn’t work to prevent assets being available for a family court split.

Dr Ian Spry, a retired Victorian barrister, married Helen Spry in 1978. They had four daughters, now in their twenties. In 1968, Dr Spry created the ICF Spry Trust with himself and his siblings, their spouses and their children as beneficiaries. He was the sole trustee. In 1983, he excluded himself as a beneficiary for land tax reasons. In 1998, when his marriage was in difficulty, Dr Spry further varied the trust to exclude himself and his wife as capital beneficiaries. The Sprys separated in October 2001. In January 2002, Dr Spry divided the income and capital of the trust between four trusts he set up for his daughters. Mrs Spry filed for divorce in the Federal Magistrates Court in December 2002. The divorce was finalised in February 2003.

In April 2002, Mrs Spry applied to the Family Court for property settlement . Dr Spry and the
children argued that the assets of the trust were not part of the asset pool to be considered in making property orders In 2005 that court found that the steps taken with respect to the ICF Spry Trust in 1998 and 2002 were designed to keep property away from his wife and the Family Court and set them aside.

Dr Spry and the children appealed Eventually the case came to the High Court which dismissed the appeals.

Three Justices held that without the 1998 variation and the 2002 dispositions, Mrs Spry would have had a right due administration of the trust and to due consideration as a beneficiary –that means she has two related rights. First she can make sure the accounting is correct- protecting the trust money against fraud or negligent investments. Second while she does not have the right to receive money (if she did then the whole tax purpose of the trust would be defeated) she has the right to be considered. . Dr Spry would have had a power to give her the whole of the assets of the trust.

The three justices held that these rights were property of the parties to the marriage. It held that the Family Court could make orders in property settlement proceedings as if changes to property rights brought about by the divorce had not yet occurred.

Another judge came to the same answer by considering special provisions of the Family Law Act.

The three judges in the majority are saying the same thing as the High Court said in Mr Cummins case, that you cannot protect assets by changing how you hold them.

That’s not to say family trusts don’t have a function. They do, but the way to safeguard the assets is to hold them in the right way to begin with. That may not always work but fiddling with the assets once you own them almost never works

The odd thing about all this is that Dr Spry thought the scheme would work, he was a very well known barrister who wrote textbooks on trust law.

I am surprised that some lawyers and accountants continue to promote these schemes. IF they don’t tell their clients the risks then either they don’t know what the risks are –in which case they are incompetent or they do know them- in which case they are rogues.

Be warned.

Further reading the high court judgement http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2008/56.html?query=^spry