Trusts for Protection

[gekko_99]

I'm looking to set up a discresionary trust to hold shares, etc and the idea is that they will become cash flow positive so I can use the distributions from the trust to offset my negative cash flow property which is directly under my name.

Anyway, assuming the above is possible, the reason I want to put them into a trust is so that hopefully they will be safe if anything happens to me. As I understand it a court can look through a trust structure and if your in control and benefitting from it and they can prove its pretty much your assets are in it a trust is pointless for asset protection?!?

If your a husband and wife with kids then a discresionary trust works perfect because distributions, etc mean that proving ownership is difficult and it works.

I'm single, not stressed about getting married (and its not likely in the near future), making distributions to family members might be hard as they have their own tax issues, brothers and sisters have no kids, etc, though this may all change in the future. I'm funding the trust and pretty much want all the benefit of the trust. I can probably make various kinds of family distributions but I feel its going to be obvious that I set the trust up mainly for myself (because I want the bulk of the distributions) and having control is also of important to me.

My question is, is a trust worth it if it's likely to be shown that the assets in a trust are your's? And is it hard to prove their yours in this case?


I haven't been able to find an answer for this in previous threads unless I've missed it somewhere in which case I'm sorry!

[Mry]

This is more of a legal question rather than a tax and accounting question.

It is also difficult to make any comments about what would happen in a courtroom in an insolvency and recovery proceeding as anything could happen.

Anyway, as you know, there are 4 important positions in a trust-

Trustee - The "manager" of the trust who legally owns all the assets in a trust and operates the trust.
Settlor - The person who contributes the settlement sum to get the trust going.
Beneficiaries - The people for whom the settlor sets up the trust, who are to receive all the benefits of the trust.
Appointor - The hirer and firer of the trustee.

A lawyer I spoke with (and I preface this by saying this is more heresay than advice so take it at your own risk) said that if you can make the appointor someone other than yourself, or make it an appointor role held jointly with someone else, you can change the trustee and then refuse demands for payment of capital or assets made to the trust as you do not have the ability to enforce the payment of those demands.

[Ebbie]

A lawyer I spoke with (and I preface this by saying this is more heresay than advice so take it at your own risk) said that if you can make the appointor someone other than yourself, or make it an appointor role held jointly with someone else, you can change the trustee and then refuse demands for payment of capital or assets made to the trust as you do not have the ability to enforce the payment of those demands.
The option of changing trustee has always been in the back of my mind but never considered changing the appointer. I assume this couldn't be done at a later date because the appointer is probably fixed and could only be done at trust setup?

[Aceyducey]

Gecko,

Have you read Trust Magic?

http://www.gatherumgoss.com/shopping.htm

Cheers,

Aceyducey

[gekko_99]

I borrowed trust magic from a friend and found it pretty good. I've been trying to get it back from him as I probably need to re-read it, but his brother has it now.

I think I can see how trusts work though I'm more concerned that in my situation it'll be that obvious that I've set one up for myself that the asset protection it offers will almost be pointless.

[Ebbie]

A lawyer I spoke with (and I preface this by saying this is more heresay than advice so take it at your own risk) said that if you can make the appointor someone other than yourself, or make it an appointor role held jointly with someone else, you can change the trustee and then refuse demands for payment of capital or assets made to the trust as you do not have the ability to enforce the payment of those demands.
Hi Mry, I spoke to my solicitor today and he said a similar thing before I even brought this subject up myself. He suggested 3 appointers - yourself and two people you truly trust. That way the other two appointers (being the majority) can sack you as the trustee and put the trust assets completely out of your control. You'd have to be very careful because this could be dangerous: you would need to be 100% certain the other two appointers are worthy of your trust!

To answer my own question from earlier in this thread I was told the appointer can be changed at any time. What I'd like to know is how one would go about changing (or adding) an appointer and whether there are any serious disadvantages or drawbacks to this, apart from the obvious one.

Maybe NickM or DaleGG can comment?

[Ebbie]

On further thought it may be possible to have a pre-written agreement hidden away somewhere with a signed resignation letter from the other two appointers, re-instating yourself back as the sole appointer. The date would be left blank and it would protect you from losing total control. I may be way off track here as I don't know how the process for changing appointers actually works.

Ebbie.

[Jacque]

I borrowed trust magic from a friend and found it pretty good. I've been trying to get it back from him as I probably need to re-read it, but his brother has it now.

I think I can see how trusts work though I'm more concerned that in my situation it'll be that obvious that I've set one up for myself that the asset protection it offers will almost be pointless.

Probably well worth buying your own copy then, Gekko. At around $99 it's damn good value and worth keeping as a reference. Try Dale's site as you can buy it there

http://www.gatherumgoss.com/

[NigelW]

I'm looking to set up a discresionary trust to hold shares, etc and the idea is that they will become cash flow positive so I can use the distributions from the trust to offset my negative cash flow property which is directly under my name.

Good plan.

Anyway, assuming the above is possible, the reason I want to put them into a trust is so that hopefully they will be safe if anything happens to me. As I understand it a court can look through a trust structure and if your in control and benefitting from it and they can prove its pretty much your assets are in it a trust is pointless for asset protection?!? It's not that simple. The Family Court has more extensive powers to look at "financial resources" regardless of the ownership in the case of property division on divorce. BUT otherwise the courts have only limited circumstances in which they can ignore the separation between you and "your" assets that a trust can provide. Trusts are great for asset protection. Particularly a pure discretionary trust which is what you're contemplating.

If your a husband and wife with kids then a discresionary trust works perfect because distributions, etc mean that proving ownership is difficult and it works.

I'm single, not stressed about getting married (and its not likely in the near future), making distributions to family members might be hard as they have their own tax issues, brothers and sisters have no kids, etc, though this may all change in the future. I'm funding the trust and pretty much want all the benefit of the trust. I can probably make various kinds of family distributions but I feel its going to be obvious that I set the trust up mainly for myself (because I want the bulk of the distributions) and having control is also of important to me. Flexibility[I] is really important in investing because you're in it for the long haul...Remember that the trust is with you for the next 80 years...perhaps things may change in the interim...perhaps a sexy gekko will walk up the wall near you soon :p

Also, your family members' tax profile may change...

You've said the plan is not to negative gear the assets in the trust and that the trust assets will be shares...so there's really no downside to using a discretionary trust apart from the admin hassle and the setup and maintenance costs.

My question is, is a trust worth it if it's likely to be shown that the assets in a trust are your's? And is it hard to prove their yours in this case? I think you're underestimating the asset protection benefits considerably...certainly they are less effective in a family law scenario but otherwise trusts can be very effective.

I haven't been able to find an answer for this in previous threads unless I've missed it somewhere in which case I'm sorry!

Don't be. ps. buy Dale's book!

Cheers
N.

[gekko_99]

Thanks Ebbie and NigelW for your replies and I will get "Trust Magic".

When I spoke to my accountant he believed that what I might consider is making a trusted person (such as my mother) and myself both appointees which would then help to show that I'm not in sole control of the fund. She might go as trustee (since she's retired and I consider her more risk safe than myself), if she gets sued for anything I guess we can replace her or maybe I should put a company in here - I'm not sure, still thinking.

Not sure how this works but the next step would be to get her "will" to reflect that the trust would revert to my control on her death (assuming I outlive her). Then hopefully I can find a new appointer to share the spot with; I guess the trust has to be flexible enough to allow this.

I want to deal with local people and am seeing a solictor next week I hope to run it past him as well; if he has any better idea's I'll post them here. I saw NickM at Steve's last presentation in Brisbane and wish I'd known enough to ask these questions then, but thems the breaks.

Side note, someone I met at a BBQ today stated that they had a trust where their accountant was the appointer (unless he said appointee - but I don't think that spot exist). I'm sure thats a no-no, I assume that effectively gives your accountant control of the trust? Though I can't see them having anything to gain from doing anything where distributions go to beneficiaries only.

[Mry]

When I spoke to my accountant he believed that what I might consider is making a trusted person (such as my mother) and myself both appointees which would then help to show that I'm not in sole control of the fund. She might go as trustee (since she's retired and I consider her more risk safe than myself), if she gets sued for anything I guess we can replace her or maybe I should put a company in here - I'm not sure, still thinking.

As long as she realises that she is responsible for the liabilities of the fund should the assets not cover it all.

Not sure how this works but the next step would be to get her "will" to reflect that the trust would revert to my control on her death (assuming I outlive her). Then hopefully I can find a new appointer to share the spot with; I guess the trust has to be flexible enough to allow this.

It is quite common to have a form signed which states who the appointer will be in the event of the existing appointor's death. I recommend you get a form done rather than have her will deem it to someone.

Side note, someone I met at a BBQ today stated that they had a trust where their accountant was the appointer (unless he said appointee - but I don't think that spot exist). I'm sure thats a no-no, I assume that effectively gives your accountant control of the trust? Though I can't see them having anything to gain from doing anything where distributions go to beneficiaries only.

I would not have an accountant as the appointor at all. They can choose someone else to be the trustee without your consent and then have the legal right to direct where the assets of the trust can go. It is better to have someone you trust on a personal level.

I was sitting at a table with three other accountants on Thursday having a chat. One of us had a boss who committed $1.5 mill in fraud and forgery and went to jail. One of us had a partner who was in jail for similar fraud. Another left their old partner as he was starting to suck their partnership account dry, do questionable things and overcharge like crazy. The other one had only been an accountant for four years and struck out on her own as a sole practioner because she disagreed with the way her boss operated. I guess she still had some time before she met these types of accountants.

[MasterInvestor]

Watch out in putting your mum as appointer, as Centrelink could deem her to be in control of the trust and she could lose her pension - if she is on one.

Giving someone else the role of appointer means they control the trust, so I wouldn't give this role to an accounant etc as they could appoint themselves as Trustee and all the income.

[Ebbie]

Watch out in putting your mum as appointer, as Centrelink could deem her to be in control of the trust and she could lose her pension - if she is on one.
Hi MasterInvestor, good point and one I hadn't considered. How do you think Centrelink would view this if the pensioner mum was one of three appointers? Her control may be limited, for example if the other two appointers used their majority vote to select a different trustee etc. Does mum have a good case to argue against her perceived control of the trust?

[MasterInvestor]

Hi Ebbie

I don't think it would matter.

Do a search on centrelink's website. There is some info there. You can also call them and speak to a financial officer there. They are apparently very helpful and not like public servants of yesteryear!

[Muz]

Heya,

Information regarding Centrelinks Financial Information Service (FIS)

http://www.centrelink.gov.au/internet/internet.nsf/services/fis.htm :)

[Ebbie]

Thanks Muz and MasterInvestor. I came across the following info sheet on the Centrelink website:

http://www.centrelink.gov.au/internet/internet.nsf/filestores/fis022_0406/$file/fis022_0406en.pdf

According to Centrelink relinquishing all formal roles and control means resigning as the appointer and/or trustee of the trust by amending the trust deed. I wonder if amending the trust deed to remove/add an appointer means the trust has been resettled in terms of paying CGT or stamp duty.

[StevenO]

If anybody is interested I've cut and pasted an email from the Office of State Revenue about making variations to trust deeds. There is a summary near the end if you manage to get that far without falling asleep or scrambling your brain. It explains when stamp duty would be payable. I don't know if it covers adding or removing appointers in here somewhere:


Revenue Ruling DUT 17

Variations to Trusts

PREAMBLE

1. From 1 July 1998, the Duties Act 1997 imposes duty on "dutiable transactions" over "dutiable property". A "dutiable transaction" is
defined in section 8 to include, amongst other things, a transfer of dutiable property and a declaration of trust over dutiable property.
"Dutiable property" is defined in section 11, and includes land in New South Wales, shares in NSW companies, units in a unit trust scheme
registered on a register kept in NSW, various business assets connected with NSW (including goodwill), and an interest (including an estate or
proprietary right) in any dutiable property. A chose in action is not dutiable property unless specified in section 11.

2. Prior to the decision of the High Court in Chief Commissioner of Stamp Duties v Buckle (1998) 37 ATR 393, some variations to trusts were
assessed under the Stamp Duties Act 1920 to ad valorem duty as conveyances of property (revenue rulings SD24 and SD45). In the Buckle
decision, the High Court found that a deed that varied the terms of a discretionary trust was not a resettlement of the trust fund as a
whole.

3. The term "discretionary trust" is used to describe certain express trusts. In Buckle, the trust was described as a discretionary trust
because of the following features: (at 395-6, paragraph 9). In the case of the deed of settlement, the identity of those who might
receive income or capital, the amounts they might receive, the period or duration of the trusts, the content from time to time of the fund
impressed with those trusts, and the very terms of the trusts themselves all depended wholly or significantly upon the exercise of, or the
failure to exercise, powers bestowed by the deed of settlement upon the trustee.

4. There are two types of beneficiary under a discretionary trust: takers in default, and discretionary objects. A taker in default has a
vested interest in the trust fund subject to any exercise of a power of appointment by the trustee. However, a discretionary object, as such,
has neither a vested nor contingent interest in the fund, but has a chose in action involving a right to call for the due administration of
the discretionary trust.

5. A fixed trust is a trust under which identified beneficiaries have specified interests. A unit trust is one form of fixed trust.

6. This ruling considers the liability to duty under the Duties Act of variations to discretionary trusts and fixed trusts.



RULING

7. A variation to a trust will be subject to duty under the Duties Act if it is a transfer of dutiable property or a declaration of trust over
dutiable property. While it is immaterial whether or not the dutiable transaction is effected by a written instrument (section 10), most
variations to the terms of a trust would be effected by a written instrument, or would at least be evidenced in writing.

Is the variation of a discretionary trust a "dutiable transaction"?
8. Under section 8 and the Dictionary of the Duties Act, a "transfer" includes an assignment or exchange of dutiable property. The word
"transfer" has a wide meaning but, unlike the definition of "conveyance" in section 65 of the Stamp Duties Act 1920, it does not cover cases
where dutiable property is vested in a person without being divested from some person who previously owned it. In Coles Myer Limited v
Commissioner of State Revenue (1998) 98 ATC 4537, the Victorian Court of Appeal held (at 4546-7) that a "transfer" is essentially bilateral in
nature. A transfer requires at least that the transferee should, at the end of the transaction, have substantially the same right or interest in
the subject matter as did the transferor before the transfer took place.

9. In Buckle, although it could be said that prior to the variation, the trustee was the "owner" of the assets then comprised in the trust
fund, the variation by the trustee did not transfer those assets. The beneficiaries acquired vested interests in the trust fund as takers in
default, but these interests were not vested in the trustee prior to the variation. Consequently, there was a vesting rather than a transfer of
the property, and such a vesting is not a dutiable transaction under section 8.

10. For the same reasons, where the trustee by an amending deed adds to the class of existing takers in default, the deed does not effect any
transfer of property from the trustee to the new taker in default. Furthermore, there is no transfer of property from the existing takers
in default to the new taker in default, because the purported transferors (the existing takers in default) are not parties to the
transaction whereby the interest is vested in the purported transferee (the new taker in default).

11. In some instances, a variation to a trust will constitute a declaration of trust. For example, an instrument that varies the terms
of the trust may also contain a declaration that the trustee holds the trust property subject to the trusts as varied. Such a declaration
would be a dutiable transaction to the extent that it relates to dutiable property.

Is the property in a variation of a discretionary trust "dutiable property"?
12. Clearly, the interest of a discretionary object under a discretionary trust is not dutiable property under paragraph (l) of
section 11. Such a beneficiary has the right to compel the due administration of the trust (an equitable chose in action), but has no
vested or contingent proprietary interest in the trust fund or in the assets (including any dutiable property) which from time to time
comprise the trust fund. Accordingly, an amending variation or supplemental deed that merely adds to or subtracts from the class of
discretionary objects (whether or not the trust also has takers in default) does not affect dutiable property, and is not liable to duty
under the Duties Act 1997.

13. It is not clear from the decision in Buckle whether the interest of a taker in default can be regarded as dutiable property under paragraph
(l) of section 11 (an interest in any dutiable property listed in section 11). While takers in default have a vested or contingent
interest in the trust fund, the High Court in Buckle emphasised that this interest was distinct from the assets (including any dutiable
property) which may comprise the trust fund from time to time. The Office of State Revenue takes the view that the interest of a taker in
default is dutiable property to the extent that the trust fund comprises dutiable property.

14. However, the High Court in Buckle indicated that the present value of such interests "had to reflect the vicissitudes which were an
essential element of the structure" of the discretionary trust. Therefore, the unencumbered value of the interest of a taker in default
is to be determined after taking into account: ? the extent to which the trustee (or any other person) can, by
exercising powers conferred under the trust deed, affect or defeat the interests of the takers in default; and
? whether the interest is contingent on the taker in default being alive on the distribution date.
Consequently, the unencumbered value of the interest of a taker in default will, in most cases, be minimal. This will be so even before
taking into account whether the trust has any liabilities for which the trustee is indemnified and that would have the effect of depleting or
exhausting the funds available for distribution.

15. Where a variation to a discretionary trust includes a declaration of trust, the dutiable property is not referable to the interests of the
beneficiaries, but is the actual property in the trust fund to the extent that the property is "dutiable property" as defined in section
11. Therefore, in any case where the trust property is or includes dutiable property, a variation that includes a declaration of trust will
be subject to duty in relation to all of that dutiable property. In such a case, the unencumbered value of the dutiable property will be the
unencumbered value of all of the dutiable property that is vested under the declaration - not the (increased) fractional interest of any
beneficiary, and not the net value after deducting the liabilities of the trust.

Summary - discretionary trusts
16. The following variations to discretionary trusts are not dutiable transactions over dutiable property, and will not be liable to duty:

(a) a variation that adds a beneficiary to, or deletes a beneficiary from, the class of persons who are takers in default;

(b) a variation that adds a beneficiary to, or deletes a beneficiary from, the class of persons who are discretionary objects;

(c) a variation that varies the interests inter se of beneficiaries without altering the identity of beneficiaries; and

(d) a variation that merely inserts or amends administrative powers without affecting the interests (if any) of the beneficiaries in the
trust property.

17. If the variation is or includes a declaration of trust, the variation will be liable to duty on the unencumbered value of the
dutiable property in the trust fund at the date of the declaration, without any deduction for liabilities of the trust.

18. In the case of a discretionary trust over dutiable property, an assignment of the interest of a taker in default will be a dutiable
transaction over dutiable property, and will be liable to duty on the greater of the consideration for the transfer and the unencumbered value
of the "dutiable property". In most cases, the unencumbered value of that interest will be minimal, and duty of $10 will be assessed on a
notional value of $800.

Variations to unit trusts
19. A variation of a unit trust would rarely affect the relative interests of unitholders in the trust property, and is therefore
unlikely to constitute a transfer. Any change in the relative interests of unitholders is more likely to be achieved by way of transfer,
allotment or redemption of units. Further, an interest in dutiable property under the trust will in most instances arise as a consequence
of the ownership of a unit or units in the scheme. Such an interest is specifically excluded (paragraph (l)(i) of section 11) from the list of
dutiable property. Consequently, in most cases a variation of a unit trust will not be liable to duty.

20. Section 59 of the Duties Act provides that nominal duty is payable on certain instruments relating to a managed investment scheme. In the
Dictionary to the Act, a "managed investment scheme" includes a "public unit trust scheme". Duty of $10 is chargeable in respect
of an instrument that:

(a) amends, varies or replaces an instrument that establishes or governs a managed investment scheme, and

(b) does not transfer, or have the effect of transferring, any dutiable property to a person who does not hold units in the scheme, and

(c) does not have the effect of reducing the number of persons who hold units in the scheme.

Duty of $10 is also chargeable in respect of a declaration of trust:

(a) made by a trustee in respect of dutiable property that, immediately before the trust is declared, is held by the trustee as trustee of the
prescribed interest scheme within the meaning of the Corporations Law as in force immediately before 1 July 1998, and

(b) to hold the dutiable property on trust for the responsible entity of the managed investment scheme.

Variations to other fixed trusts
21. In the case of fixed trusts other than unit trusts, a variation that affects the interests of the beneficiaries would constitute a
transfer where the specified interests of the beneficiaries are varied by agreement between the beneficiaries and the trustee. Such a
variation would be a dutiable transaction to the extent that the trust property is dutiable property. The dutiable value will be the greater
of the consideration for the transfer and the unencumbered value of the dutiable property transferred. The nature and value of the dutiable
property will depend on the entitlement of the beneficiaries under the trust. For example, a transfer of the beneficiary's interest under a
bare trust would be assessed on the unencumbered value of the dutiable property in the trust, and not the net value after deducting the
liabilities of the trust.

22. If the trust property under a fixed trust is or includes dutiable property, any variation to the trust that includes a declaration of
trust will be subject to duty in relation to all of that dutiable property. The dutiable value will be the unencumbered value of the
dutiable property in the trust fund at the date of the declaration, without any deduction for liabilities of the trust.

PETER ACHTERSTRAAT
Chief Commissioner of State Revenue
14 December 1999

[julia]

I'm not a solicitor so just take this as another comment but I was under the impression that for joint appointers to take any action they must act unanamiously. So two couldn't gang up and sack the third.

Julia

[Ebbie]

The way my solicitor explained it to me was that if 2 appointers disagree on something they would be dead-locked 50/50 and could only act if they came to a unanamous decision. But if you add a third appointer it is the majority rules. I don't know about sacking the 3rd appointer; the idea behind it was it only takes 2 appointers to sack the trustee if necessary [the 3rd appointer could also be the trustee].

[Ebbie]

Here's an interesting link to the ATO website on what they consider a 'new (resettled) trust':

http://www.ato.gov.au/print.asp?doc=/content/14283.htm