Alter ego trusts - the trust that is all about you, and only you

"Alter Ego" Trusts

A number of family court decisions in Australia and New Zealand have incorrectly created the impression that if a trust is the "alter ego" or "puppet" of the settlor it can be disregarded.

Legally the description of the trust as the "alter ego" or "puppet" of a settlor is not sufficient on its own to make it a sham if it reflects the genuine intention of the parties. In Marriage of Gould  1 Fogarty J stated:

36. On the other hand, the description of an entity as the 'alter ego' or 'puppet' of a person really denotes something different. Correctly described, it is not an assertion that it is a "counterfeit, a facade or a false front". Rather, it describes an actual situation although as a matter of law or practicality the actions of the other entity may be capable of and may in fact be controlled by the party in question. For example, a party may establish a trust over which he or she exercises control. That trust may in turn own or control property. It may be correct to describe that trust as the alter ego or even perhaps the puppet of that party, but it would not be correct to describe its existence or its ownership or control of property as a sham. Transactions entered into by it under which it deals with its property by, for example, a transfer of property to a third party would not be a sham transaction. It is likely to be a genuine transaction although the evidence may demonstrate that the transaction was carried out 'by direction of or in the interest of' the party.

In Marriage of Gould was applied in Official Assignee v Wilson.2 This was an unsuccessful attempt to bring the concept of alter ego trust from the Australian family law jurisdiction into the field of trust law.  As Chisholm J, stated 3:

[58]      The underlying common intention requirement for a sham has been consistently adopted by the Court of Appeal and is clearly binding on this Court. If alter ego trusts were to be automatically recognised as shams that underlying requirement would be negated. The result would be that a half way house between a conventional sham trust and a valid trust would be created. In Re Securitibank Limited (No.2) at 168 Richardson J seems to have rejected the possibility that there is any half way house. I accept that view.  It seems to be that to adopt a half way house would be to effectively re-write the traditional understanding of a sham."

 The Court of Appeal declined an appeal against the decision of Chisholm J in Official Assignee v Wilson.3A The Court followed Chisholm J's treatment of the alter ego trust argument that they were not an independent cause of action, nor were they the same as shams; they were confined to evidence to help establish a sham. Robertson and O'Regan JJ in delivering their judgment stated:

[70] Actual control alone does not provide justification for looking through/invalidating a trust. The uptake of control by someone other than an authorised person cannot be sufficient to extinguish the rights of the beneficiaries under a trust. It is difficult to see the alter ego trust operating in New Zealand as an independent cause of action.

The following Australian and New Zealand family law decisions show a failure to appreciate what a "sham" is, and need to be treated with a great deal of caution. They show a tendency to attempt to do justice in the circumstances, without identifying and applying the correct legal principles.

In Ascot Investments v Harper 4, the question was whether orders of the Family Court would affect the rights which a company had. Gibbs J stated:

The position is, I think, different if the alleged rights, powers or privileges of the third party are only a sham and have been brought into being, in appearance rather than reality, as a device to assist one party to evade his or her obligations under the Act. Sham transactions may always be disregarded. Similarly, if a company is completely controlled by one party to a marriage, so that in reality an order against the company is an order against the party, the fact that in form the order appears to affect the rights of the company may not necessarily invalidate it.Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it.

In DCSR v B  5 a company, which involved an application for enforcement of family support, a garnishment order was made against a company which was held to be the "alter ego" of the respondent,

In In the Marriage of Kelly No 2  6 a Full Court of the Family Court considered that "financial resources of a party" within s 75(2) of the Family Law Act 1975 included the assets of a family trust found to be in the control of one party.

The approach of the Full Court of the Family Court of Australia to the validity of a trust in The Marriage of Ashton 7 shows that in Australia if the trust is the alter ego of the settlor, the Courts will take the assets of the trust into account for the purposes of matrimonial property division. The trust known as the "Ashton Family Settlement" had Keobach Pty Ltd as the settlor and the husband as the trustee and the appointor. Subsequently the appointor appointed Povido Pty Ltd as trustee. The shareholders in Povido Pty Ltd were the husband and his cousin GA. The trust deed excluded the Settlor; "any person who is for the time being the Appointor but not any person who is no longer the Appointor"; any past or present Trustee and any Notional Settlor from being a beneficiary. Clause 12(c) of the trust deed gave the Trustee power:

To alter, modify or revoke any of the terms or conditions of this Deed in such manner as the Trustee shall in its absolute discretion think fit ... PROVIDED THAT no such alteration, modification or revocation shall have the effect of ... creating ... any interest or benefit whatsoever in or arising from the Trust Fund in favour of any member of the excluded class.

 By cl 28 the Appointor was given power, subject to cl 29, to remove trustees and to appoint new and/or additional Trustees. Clause 29 provided "None of the following persons is eligible to be appointed as or to hold the office of a Trustee: -- (a) any of the Beneficiaries; (b) the Settlor; (c) Any past or present Appointor; (d) Any Notional Settlor."

In fact, the assets of the trust fund were dealt with and treated, for practical purposes, as if they were the husband's absolute property. Although he was not a named beneficiary he was paid income from the trust. It was conceded throughout that the husband was in full control of the assets of the trust, and the evidence made it clear that he was applying them and income from them as he wished and for his own benefit.

The Full Court of the Family Court held that the family trust which had been established effectively gave the husband absolute control. Consequently the finding by the trial Judge that the whole of the property of the trust was in reality the property of the husband was upheld by the Full Court:

In the result, having regard to the powers and discretions which the husband has, and having regard to what had in fact taken place, for the purposes of s 79 [of the Family Law Act 1975], the husband's power of appointment, and all the attributes it carries with it, amounts to de facto ownership of the property of the trust. His Honour's order that he should appoint himself trustee so as to make a requisite payment was not contrary to the trust deed on its proper construction, nor did it require the husband to deal with property which was not his own ... A trust is, of course, a very different entity from a company. A company is a separate legal person. A trust, on the other hand, is not a separate legal person. The legal owner of the trust property is the trustee and the beneficiaries are the equitable owners of the trust property. The powers which the husband has in the Ashton Family Settlement give him control of the trust either as trustee or through a trustee which is his creature, and at the same time he is able to apply all the income and property of the trust for his own benefit. In my opinion, in a family situation such as the one here, this Court is not bound by formalities designed to obtain advantages and protection for the husband who stands in reality in the position of the owner. He has de facto legal and beneficial ownership. [His Honour then referred to Ascot Investments v Harper per Gibbs, J at p 76,061.] ...No person other than the husband has any real interest in the property or income of the trust except at the will of the husband:   In the marriage of Kelly No 2 (1981) 7 Fam LR 762; [1981] FLC 91-108.

 A similar result occurred in In the marriage of HM and BA Stein  8. The parties married in April 1963 and separated in October 1980. In 1976 the husband went into business on his own account with T under the name of Camden Datsun Centre. The purchase price of the property and the business conducted thereon was $140,000, all of which was borrowed from the IAC Corporation. In addition, the husband put in $4000 by way of capital and T put in $25,000. Subsequently, the husband put in a further $29,000 from the proceeds of sale of one of the jointly-owned properties of the parties. That business, so far as the husband was concerned, was conducted in the name of Bayarin Pty Ltd as trustee for the Stein and Tomlin Family Trusts. The Tomlin interest was subsequently bought out for $65,000 and the business was then conducted with Bayarin Pty Ltd continuing as the trustee under the directorship of the husband and his accountant, R. In 1978 Bayarin Pty Ltd purchased, for $68,000, a block of land opposite the Camden Datsun Centre, the purchase price being provided in cash from the profits of the business. In 1980 a service station was bought by the same company for approximately $100,000. That business was subsequently sold for $170,000, after improvements at a cost of $40,000 had been made.

The husband argued that the trust assets were not his property and that he was only a beneficiary at the discretion of the trustee. However, evidence of the husband's actions with regard to trust property indicated that he considered himself to be the effective owner of the business owned by the trust. The Court held that:

It is not open to a party to assert on the one hand that the assets acquired in a family trust are not his and at the same time deal with them as if they are. There is no doubt that for general purposes Mr Barry Stein considers the business known as Barry Stein Nissan to be his, whatever arrangement he may have made for taxation purposes. It is a regrettable fact that frequently spouses, usually husbands, come to this Court asserting on the one hand that assets placed in the wife's name do not really belong to her but to the husband, having been placed there for taxation purposes, and asserting at the same time that assets standing in the name of a third party, such as a trustee, do not really belong to the husband ...In our view, the company Bayarin Pty Ltd is a mere puppet of the husband. So far as the trust is concerned, the husband has, since the interests of the Tomlin family were bought out, the power to apply the income and property of the trust for his own benefit ...In those circumstances the learned trial Judge had jurisdiction to make an order which required the husband to pay an additional sum out of the assets of the trust through the exercise of his control over the trustee company. The cross-appeal cannot succeed.

 In the marriage of KR and MI Davidson 9 was an interim application for a stay against an order made by Cook J that the husband pay $700,000 to the wife. This was on the basis of a finding that a company controlled by the husband, Lestato Pty Ltd was entitled to shares worth $1.8 million in Thurlstone Australia Pty Ltd as trustee for the MAVK Trust. His Honour held that Lestato was the alter ego of the husband, who, under the terms of the trust, could not be the trustee, but had the power to appoint and remove trustees. Cook J concluded that the trust property should be regarded as the husband's property because, although the trust was not a sham, it was controlled by the husband and the trust property was used by the husband as if it were his sole property.

The husband sought a stay of the orders on the basis that the trustee of the MAVK Trust must commit a breach of trust before the money could be paid to the wife. Cohen J held that this contention was not sustained on the evidence because:

 There is nothing to suggest that the trust is other than an ordinary discretionary trust. If it is not, I would expect the husband to have proved this before me:   Jones v Dunkel (1959) 101 CLR 298. It seems, therefore, to be possible that there will be no breach of trust or fiduciary duty occasioned if the trustee company is controlled by an individual who makes a distribution of trust funds to a company beneficiary controlled by the same individual.I am, therefore, relieved of the burden of considering whether, if the order necessarily requires a breach of trust, yet is made because it is just and equitable to be made, there is sufficient ground to say that there are special circumstances warranting a stay of the order. Nor do I need to decide upon whether the husband, who has always been the person directly causing past breaches of trust, and who probably will continue to act as if the trust property is his own in continuing breach of trust, can be heard to rely on the duty of the trustee to uphold the trust, particularly where there is little likelihood that any action will be taken against the trustee for breaches, and the trustee is a company with no other assets than those which are held in trust.It seems that it shall soon be necessary to decide whether this Court acts upon practical reality or theoretical reality. The now famous words of Gibbs J in   Ascot Investments Pty Limited v Harper (1981) 148 CLR 337 make me feel that this Court will probably act upon practical reality ... That the company is theoretically a trustee does not in my mind alter the situation. If I was required to decide whether to exercise my discretion on the issue of breach of trust I would choose not to grant a stay.For the reasons above, I refuse the husband's application.

In Marriage of Gould 10 the wife alleged that various substantial transactions involving millions of dollars, which fell within s 85 of the Family Law Act 1975, occurred involving the husband, the third parties in Australia and overseas (including tax haven entities). In relation to each of these transactions the wife alleged that they were done to defeat and were likely to defeat anticipated orders in these proceedings. It was further alleged by the wife that some or all of the above transactions were a "sham," and that some of the entities were the "alter ego" and/or the "puppet" of the husband, and that they are "owned and controlled" by the husband. The wife also sought an order under the provisions of s 85 of the Act that various mortgages and transfers of mortgages and charges be set aside.

Fogarty J, delivering the judgment of the Court, stated: 

32. ...There is an important distinction between the term 'sham' on the one side and 'alter ego' and equivalent terms on the other which is not unimportant not only in relation to s 85 but also s 79 of this Act and generally ...36. ...The description of an entity as the 'alter ego' or 'puppet' of a person really denotes something different. Correctly described, it is not an assertion that it is a 'counterfeit, a facade or a false front'. Rather, it describes an actual situation although as a matter of law or practicality the actions of the other entity may be capable of and may in fact be controlled by the party in question. For example, a party may establish a trust over which he or she exercises control. That trust may in turn own or control property. It may be correct to describe that trust as the alter ego or even perhaps the puppet of that party, but it would not be correct to describe its existence or its ownership or control of property as a sham. Transactions entered into by it under which it deals with its property by, for example, a transfer of property to a third party would not be a sham transaction. It is likely to be a genuine transaction although the evidence may demonstrate that the transaction was carried out 'by direction of or in the interest of' the party ...39. In this case the wife's claims in relation to the third parties include allegations that the third parties are either the alter egos of the husband or that the transactions complained of are shams In my view s 85 is not, as a matter of construction, confined to either or both of these circumstances but, subject to the safeguards in subs (3), also applies to other transactions, including transactions involving a bona fide third party. It is unnecessary in these appeals to consider the meaning of the term 'bona fide purchaser or other person interested' in subs (3) or the application of that sub-section except to the extent that it is referred to hereafter in relation to the constitutional validity of s 85 ...42. The ultimate issue in this context is whether the applicant establishes that the instrument or disposition is likely to defeat an 'anticipated order' ...

In Prime v Hardie11 Salmon J stated:

[30] What is clear on the evidence, however, is that the trust was effectively Mr Hardie's alter ego. He was the principal (although not the only) beneficiary. He borrowed the money which enabled the trust to purchase its assets. He paid the interest on the mortgages and rates and insurance. In the 1998 financial year his personal income return showed an apparently fictitious rental received from Rahopara Street of $3600 and deductions for interest, depreciation and other items resulting in a net loss of $10,975 which he claimed as a tax deduction against his personal income. There is no doubt that the Rahopara Street house and before that, the Dallinghoe Crescent property, were the family homes for the couple and their children. In those circumstances I see no reason why a constructive trust should not be imposed upon a property owned by a trust. That too is the view expressed by the authors of Family Law Service, LexisNexis, para 7.204

In Glass v Hughey 12 Priestley J applying Prime v Hardie stated by way of obiter:

[89] As an additional and alternative route to the same result I find that the trust has for all intents and purposes been disregarded by the husband so far as his operation of International is concerned and, so far as the wife's claim is concerned should be regarded as a sham or more particularly the husband's alter ego.

[90] In Prime v Hardie [2003] NZFLR 481, 486, Salmon J held that a trust which owned the family home was the husband's alter ego. Although Salmon J did not specifically refer to them, there are Australian authorities which make it clear that Courts will disregard trusts which are a spouse's alter ego or a sham to ensure that a family property claim is not unfairly defeated. (See In the Marriage of Bowman (1984) FLC 91- 574; In the Marriage of Stein (1986) FLC 91-779; In the Marriage of Ashton (1986) FLC 91-777; In the Marriage of Goodwin (1990) 14 Fam LR 801; In the Marriage of Davidson (1991) 14 Fam LR 817).

 With respect both Prime v Hardie and Glass v Hughey incorrectly treated a finding that the trust was the "alter ego" of a party as meaning that the trust could be treated as that party's. That would only have been legally possible (in the absence of a statutory provision authorising this) if the trust was a sham and therefore invalid.

In Turner v Lynsky13 one of the facts which led Christiansen AJ to grant an injunction to prevent removal of a caveat registered against a trust's property was that registration of a caveat based upon a relationship property claim was not precluded because "arguably the trust is the alter ego of the transferor".

 1 In the Marriage of Gould (1993) 17 FamLR 156 at 167 applied in  G v T [2003] FamCA 1076 by O'Reilly J.

2 Official Assignee v Wilson [2006] 2 NZLR 841, Chisholm J. This decision was followed by Williams J. in Isolare Investments Ltd v Fetherston HC Auckland CIV-2002-404-1791, 15 September 2006 BC200661868 at para [60].

3 Official Assignee v Wilson [2006] 2 NZLR 841, Chisholm J, at para 58.  In that case his distinguished Prime v Hardie [2003] NZFLR 481, (2002) 22 FRNZ 553 as a sham had not been pleaded and Salmon J expressly upheld the objection of counsel for the plaintiff to that matter being raised, and Glass v Hughey [2003] NZFLR 865, (2003) 23 FRNZ 674 on the basis that Priestley J's comments were probably obiter.

 3A Official Assignee v Wilson [2008] NZCA 122, [2008] 3 NZLR 45 BC200860991.

4 Ascot Investments Pty Ltd v Harper (1981) 33 ALR 631. This case was followed by Bulley J in In the Marriage of Moran (1994) 18 Fam LR 534.

5 DCSR v B [2000] FMCAfam 32.

 6 In the Marriage of Kelly (No 2) (1981) 7 Fam LR 762.

7 In the Marriage of Ashton (1986) 11 Fam LR 457.

8 In the Marriage of Stein (1986) 11 Fam LR 353, (1986) FLC 91-779.

9 In the Marriage of KR and MI Davidson (1991) 14 Fam LR 580 (Family Court of Australia).

10 In the Marriage of Gould (1993) 17 Fam LR 156.

11 Prime v Hardie [2003] NZFLR 481; (2002) 22 FRNZ 553.

12 Glass v Hughey [2003] NZFLR 865.

13 Turner v Lynsky (High Court, Blenheim, CIV 2007-406-204, 7 September 2007) BC200762250.