coastymike
07-10-2005, 06:05 PM
I posted this over at Property Investing because a lot of people seem confused as to how asset protection works with trusts. There seems to be a misconception that having a corporate trustee means that the assets of the trust are not available to the creditors in the case of a law suit. NigelW may provide additional comments but essentially this is my understanding of how it works.
Firstly a trustee is personally liable to creditors in respect of debts and liabilities incurred on behalf of the trust. It is a statutory right found in the trustee's legislation in all States. The right to an indemnity provides the trustee with a right in the nature of an equitable lien or right over the assets of the trust. The creditors cannot make a claim against the assets of the trust but are subrogated to the trustee's right to be indemnfied.
So how does this provide protection. Well lets assume you run a business through a discretionary trust with a corporate trustee. Let's also assume you have a separate discretionary trust (or hybrid discretionary trust doesnt really matter) with a different corporate trustee over your investment property. If in this case the business was sued the creditors will only have the right for the trustee to be indemnified over the business assets. Because the investment property has a different corporate trustee in a different trust then that investment asset is not available to the creditors. That is why a corporate trustee is the preferred entity as oppossed to an individual trustee. If you had two discretionary trusts and both had the same trustee then yes you could have a problem. The creditors might claim that they have a right to be indemnified not only against the assets of the business trust but also the assets of the investment trust. The risk is low but always subject to the Courts. However if the investment trust and business trust have two totally different trustees then the assets of one trust are effectively protected against claims made against the other trust. Thats the asset protection.
Imagine that you are a business owner and have a company which you are also a director. The company is sued and they then sue the directors. Lets assume your investment assets are held in your individual name instead of in a separate trust with a separate trustee. Well you have a problem because the investment assets are the assets of the directors and available to the creditors when they take action against the directors. Not so when the investment assets are in a different trust with a different corporate trustee.
That is why some people like to have a separate trust and sometimes even a separate corporate trustee for every investment type. I have some clients who have a separate trust for every single investment and also a separate corporate trustee. For the average person this may be overkill and in fact would be very expensive. However for others it provides a secure peace of mind.
At a minimum however I would always suggest keeping your business assets and investment assets in two separate structures. Good asset protection.
There are also advantages with respect to streaming of income as suggested by gross, the refinancing principle which is rarely discussed and sometimes even more importantly the estate planning issues.
Firstly a trustee is personally liable to creditors in respect of debts and liabilities incurred on behalf of the trust. It is a statutory right found in the trustee's legislation in all States. The right to an indemnity provides the trustee with a right in the nature of an equitable lien or right over the assets of the trust. The creditors cannot make a claim against the assets of the trust but are subrogated to the trustee's right to be indemnfied.
So how does this provide protection. Well lets assume you run a business through a discretionary trust with a corporate trustee. Let's also assume you have a separate discretionary trust (or hybrid discretionary trust doesnt really matter) with a different corporate trustee over your investment property. If in this case the business was sued the creditors will only have the right for the trustee to be indemnified over the business assets. Because the investment property has a different corporate trustee in a different trust then that investment asset is not available to the creditors. That is why a corporate trustee is the preferred entity as oppossed to an individual trustee. If you had two discretionary trusts and both had the same trustee then yes you could have a problem. The creditors might claim that they have a right to be indemnified not only against the assets of the business trust but also the assets of the investment trust. The risk is low but always subject to the Courts. However if the investment trust and business trust have two totally different trustees then the assets of one trust are effectively protected against claims made against the other trust. Thats the asset protection.
Imagine that you are a business owner and have a company which you are also a director. The company is sued and they then sue the directors. Lets assume your investment assets are held in your individual name instead of in a separate trust with a separate trustee. Well you have a problem because the investment assets are the assets of the directors and available to the creditors when they take action against the directors. Not so when the investment assets are in a different trust with a different corporate trustee.
That is why some people like to have a separate trust and sometimes even a separate corporate trustee for every investment type. I have some clients who have a separate trust for every single investment and also a separate corporate trustee. For the average person this may be overkill and in fact would be very expensive. However for others it provides a secure peace of mind.
At a minimum however I would always suggest keeping your business assets and investment assets in two separate structures. Good asset protection.
There are also advantages with respect to streaming of income as suggested by gross, the refinancing principle which is rarely discussed and sometimes even more importantly the estate planning issues.