Damien Grant: Trusts must be made trustworthy

It has been proposed that trusts be registered to create greater transparency and mitigate risks such as theft of creditors' funds and placing it into a sham trust. Photo / Thinkstock

The effectiveness of trusts as a means of shielding personal wealth from disaffected creditors cannot be denied - but we should not be too quick to write off the contemporary benefits of this medieval institution.

Trusts allow us to draw a line in the sand between our current wealth and our future activities.

In a domestic setting it means that we can tuck our assets securely away as we embark on new romances, safe in the knowledge that if our hearts should be broken our wealth won't be.

This principle applies equally in commerce. We want successful business people to continue trading.

Allowing a solvent business person to draw a line in the sand and sequester their current assets from future risks is a good thing. It encourages the successful to continue being bold.

The dark truth of trusts, however, is that they are often used to facilitate theft. Failing company directors gorge themselves on other people's money and make gifts of these funds to sham trusts, safe from a liquidator's or Official Assignee's reach.

The Law Commission is undertaking a comprehensive review of the trust regime. It acknowledges the creditor problem but it has shamefully left this to be "... addressed separately in the individual regimes" rather than tackling the problem where it lives, in the rotten heart of the trust system.

It has been proposed that trusts be registered.

I dislike the idea of a government registrar on principle but, as a liquidator, I'm frustrated by the parade of dishonest company directors who steal creditors' money, shovel it into some sham trust and proceed to hide behind the skirt of the Official Assignee.

Trusts lack transparency. You can know that a bankrupt has an asset. Usually, they are living in the damn thing. But the details of ownership and trust relationships are opaque.

The truth of a trust is usually revealed only in litigation and, while most trusts funded by illegitimate means can be broken, the cost of doing so is prohibitive.

Registration would allow for a timeline of when a trust was established and what assets were vested in that trust at what time.

Money gifted to it after the bankrupt was insolvent can then be clawed back.

The Law Commission complains there will be a cost, and it is right, but a user-pays system can deal with that. Currently, the cost is being borne by trust creditors who are unable to enforce their claims.

The commission makes the point that most of the submissions received were from the perspective of the trustees and not creditors.

The commission is yet to complete its report.

If you want to see real reforms in this area or if you have lost money to someone using a sham trust, you need to make a submission to the Law Commission before February 22 next year.

Anyone can make a submission. The details are on the Law Commission's website.