A trust is a relationship between people (including companies) about property. One person, the trustee, holds the legal title to property for the benefit of other people, the beneficiaries. The trust itself is not a legal entity, rather just a set of accounts held by the trustee for the beneficiaries. Both the trustee and the beneficiaries may hold separate ‘personal’ property which is not subject to the trust relationship.
The development of the trust as a legal concept was all very chivalrous. About 600 years ago, before women were allowed to own property, men would go off on crusades, and bearing in mind they may never return, transferred the ownership in their property to another ‘trusted’ man to hold ‘on trust’ for their wife and infants.
Where a trust enters into commercial enterprise, the third-party deals only with the trustee. It can’t see the trust relationship or the beneficiaries. The trustee is liable to pay its debts but is entitled to reimburse itself out of the trust property for debts incurred for the beneficiaries.
As beneficiaries, people think they can’t be held liable for trust debts. They often think this because a limited liability company, acting as the trustee, stands between the beneficiaries and the debt.
That thinking however, has proven not always to be correct. In Ron Kingham Real Estate v Edgar, a corporate trustee controlled by Mr Edgar owed money to Ron Kingham. To prevent Ron Kingham being paid, Mr Edgar arranged for the corporate trustee to distribute all the trust property to the beneficiaries of the trust, predictably, Mr and Mrs Edgar.
The court found that the trustee was entitled to be reimbursed for the debt not only from the trust property (which had been depleted) but also from the assets held personally by Mr and Mrs Edgar. Through subrogation to that right, Ron Kingham was able to stand in the shoes of the corporate trustee and sue Mr and Mrs Edgar directly.
There are other decisions similar to the Ron Kingham case which are authority for the idea that the beneficiaries of all forms of trusts, including large investment trusts, can be held personally liable for trust debts.
If you have any queries relating to discretionary or fixed trusts, call Everingham Solomons Solicitors because Helping You is Our Business.
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