Mutual Discretionary Trusts V’s Insurance – What You Need To Know
With the well publicised issues associated with availability
and cost of insurance there has been some attention given to mutual
discretionary trusts as an option to traditional insurance. In this
edition of the IEA Sport Monthly Update we look at some of the
important issues that must be considered when looking at the most
effective method of providing valuable protection to your sporting
participants.
First, let’s give a broad explanation of how a Mutual
Discretionary Trust (MDT) operates. In simple terms an MDT is a
financial trust fund out of which benefits are paid at the discretion of
the trustee to meet “claims” made. A trust deed determines the
obligations of the trust and trustee. In many cases, depending on how
the overall program is structured, the MDT may respond to claims up to a
certain financial limit (be it a limit for any one claim and/or a
cumulative limit for total claims) with traditional insurance being
purchased to respond should those trust limits be exceeded.
Financial advantages of setting up an MDT as compared to
insurance are to avoid State Stamp Duties and fire levies (if they
should be applicable). There is also the potential for the trust fund
to earn investment income and for excess funds to be left in the trust
after the payment of claims. The cost for administration of the trust
is an important issue, and dependant on the traditional insurance
arrangements to support the fund, the potential for loss is a very
important consideration.
However it is the issue of security that we bring to your
attention as the matter that requires the utmost consideration and this
is the area where insurance does have advantages over MDTs.
Advantages identified of insurance over Mutual Discretionary
Trusts are:
1. The
Insurance Act 1973 (Cth) and the Insurance Contracts Act 1984
(Cth) only apply to insurance. |
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2.
The
obligations of a MDT trustee are far less certain and understood than
for insurers, which increases the risk of an unforeseen problem
arising for a member of a trust.
3.
The
trustee has a discretion whether to pay benefits from a trust, rather
than the benefits being payable as a right of the insured.
4.
The
remedies available to a dissatisfied member of a trust are far more
limited than to an insured
The Insurance Act
and the Insurance Contracts Act only apply to insurance
A MDT is outside the regulatory framework imposed upon
insurance contracts and insurance companies by the Insurance Act 1973
and the provisions of the Insurance contracts Act 1984
Insurance Act.
The Insurance
Act protects insureds by setting up a scheme for the regulation of
insurance business in Australia. It requires insurers to meet specified
criteria as to their financial viability
and provides for their continued financial viability to be
monitored by the Australian Prudential Regulatory Authority (APRA).
The Insurance Act does not apply to discretionary
trusts. To date, there has been no equivalent regulation or monitoring
of mutual discretionary trusts. Members do not have the security of
having trustees regulated on an ongoing basis by APRA pursuant to the
Insurance Act, or by any other body. Liability insurance in
particular can have a very long tail and no matter how financially
viable the trust is now, the trust will be of no benefit to the member in
the future if there are not sufficient funds in the trust to meet losses
at the time he makes his claim.
Continued
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