Correct Trust Structures

[Ebbie]

In Tony Melvin and Ed Chan’s book “How to Legally Reduce Your Tax” they talk about a client who came to them with two Discretionary Trusts already set up (each with a different company as trustee).
They give four reasons for why this is wrong:

1. The client is not in a profession or industry prone to litigation and need not have taken such drastic measures. She is an employee not a director of the company she works for.

Personally I’d rather start off with a solid asset protection plan in place. I don’t see this as ‘drastic’ but even if it is overkill, future circumstances can change and I’d already be adequately set up.

2. Not able to use her individual Land Tax concession and thus paying an extra $6,800 per year in Land Tax (NSW rates).

Unfortunately this is one of the costs of using trusts for asset protection. This point is probably no longer applicable now the Property Investors Trust (PIT) doesn’t get the tax-free land tax threshold.

3. The client had quarantined her negative gearing.

Yes, she should have used a hybrid trust for buying negatively geared properties.

4. Paid $6,000 to have the structures established. At the very least, one company could have been used as the trustee for both trusts (saving on ongoing accounting fees etc).

I’m not so sure about this because I’ve heard the experts recommend the use of separate companies for different trusts too. Can anyone confirm this?

[monoply]

I agree with your comments Ebbie.

[nomadic]

4. Paid $6,000 to have the structures established. At the very least, one company could have been used as the trustee for both trusts (saving on ongoing accounting fees etc).

I’m not so sure about this because I’ve heard the experts recommend the use of separate companies for different trusts too. Can anyone confirm this?

This is also my thinking but my accountant has assured me that having one corporate trustee is ok for the 2 trusts i have (HDT & DT).

The HDT is for holding investments (MF's and -ive geared IP's), and the DT is used for operating my business through. I guess the idea is to quarantine investments seperately from business but i'm assured that one PL trustee is ok... can anyone else comment on this structure?

[monoply]

While one corporate trustee for two trusts is probably fine 99.5% of the time, I think the best protection you can possibly get, is by having a seperate company as trustee for each trust, but this all costs more money, and most people and accountants cannot be bothered with it.

cheers
mono

[RaiLing]

My ex-accountant also said it was ok to have the same Corporate trustee for two trusts. However, according to the post below this is not ok...

See http://www.somersoft.com/forums/showpost.php?p=193159&postcount=39

[Terryw]

RaiLing

That post doesn't say it is not OK. That post says that the trustee of the unit trust cannot be exactly the same as the trustee of the discretionary trust which owns the units in the unit trust - I think anyway.

Terryw

[RaiLing]

Terryw,


That post doesn't say it is not OK. That post says that the trustee of the unit trust cannot be exactly the same as the trustee of the discretionary trust which owns the units in the unit trust - I think anyway.


This was exactly the situation I was in... I may of misread, but I thought it was relevant.
Cheers

[Mry]

The ISPT case mentioned has implications for other trusts as well.

The ruling stated "Equity will not recognise a trust where the legal owner and the beneficiary under such trust is identical". If the legal owner (trustee) and the beneficiaries are the same, both trusts are exposed to claims if one gets sued.

[Mry]

1. The client is not in a profession or industry prone to litigation and need not have taken such drastic measures. She is an employee not a director of the company she works for.

Personally I’d rather start off with a solid asset protection plan in place. I don’t see this as ‘drastic’ but even if it is overkill, future circumstances can change and I’d already be adequately set up.
If she owned the properties personally and ran into a person who got whiplash and sued her for $800,000 and won, both properties would be up for grabs in her own name and she would sue her accountant in turn for not advising of the asset protection risks. What a funny world we live in.

[Terryw]

The ISPT case mentioned has implications for other trusts as well.

The ruling stated "Equity will not recognise a trust where the legal owner and the beneficiary under such trust is identical". If the legal owner (trustee) and the beneficiaries are the same, both trusts are exposed to claims if one gets sued.

Mry,

What is the ISPT case referred to?

Could you please elaborate a bit more on this a bit please?

eg.

1) a discretionary trust with Terryw as trustee and Terryw as sole beneficiary. I assume this would not be recognised. but what about

2) Terryw as trustee with Terryw as main beneificary and Terryw's relatives, etc as additional beneificiaries. Would this be recognised even though the beneficiaries are not named?

Thanks Mry

[Mry]

What is the ISPT case referred to?
ISPT PTY LTD v CHIEF COMMISSIONER OF STAMP DUTIES - Supreme Court of NSW

I don't consider myself as much of a lawyer to go through and discuss the implications of the case. Someone else will have to answer the question.

[Ebbie]

While one corporate trustee for two trusts is probably fine 99.5% of the time, I think the best protection you can possibly get, is by having a seperate company as trustee for each trust, but this all costs more money, and most people and accountants cannot be bothered with it.

Hi mono, this probably sums it up. I'd rather pay the extra few hundred dollars a year for the ASIC registration fee and keep a separate company.

[willy1111]

Nomadic,

If Nomadic Pty Ltd is trustee for Nomadic HDT which owns property and MF, then the title for the property and the ownership for the MF's would just show Nomadic Pty Ltd (wouldn't they??)

And if Nomadic Pty Ltd is also trustee for the Nomadic DT which trades and runs a business how would you prove that it was the HDT that owned the property and not the DT as it would be the same name.

So if someone sued the business and you couldn't prove that it was the HDT that owned the property/MF's could they be up for grabs?

However if XYZ pty ltd was trustee for the HDT and Nomadic Pty Ltd was trustee for the DT, then it would be much easier to prove the ownership of the assets of the 2 different trusts.

I don't think there is an issue with having the same company as trustee for 2 different trusts until you have to prove which trust owns which assets (and if the trustee is the same then it is going to be more difficult.)

Just my take on what I have picked up on in here. No advice in there.

Cheers

[monoply]

Some stuctures have no risks at all, while other structures may have small risk, and others may have considerable risk.

So why wouldnt you completely isolate the ones with no risk, from the ones which could have some risk?

Everyone has different circumstances, and everyone has different ideas. At the end of the day we have to decide individually what we think is best, or good enough for us, but I know which option I would take.

Cheers
mono

[Mry]

This is an excerpt from the NTAA Trust notes.

"Although the Full Court of the Victorian Supreme Court in Re Enhill Pty [1983] VR 561 held that the assets of a trust could be used to pay the trustee's personal creditors the Full Court of the Supreme Court of South Australia in Re Suco Gold Pty Ltd (1983) 33 SASR 99 rejected the Victorian decision and stated that trust property was only available to creditors of that particular trust."

So we don't really know yet because there have been no decisions at High Court, merely at a state level, but if you live in Victoria, you would want to make damn sure you had separate trustees if it was important. And as mentioned before, proving which trust beneficially owned which pieces of property would be a costly exercise.

While the ISPT case doesn't address the issue of identical trustees for identical trusts directly, it does talk about the circumstances that the court would look at where a trust may merge with another. If you had two identical trusts, same trustee same beneficaries etc, and one was being sued, you would have a very tough time proving that the trusts should be treated as separate distinct entities and you would pay through the nose for that privilege. Could they be treated as one trust? There is no clear answer because there is no clear settled law. Until then as a practical issue, separate trustees are good.

PS - I disclaim responsibility for this advice but someone mentioned to me that they have Mr A as trustee of trust 1, Mrs A as trustee of trust 2 and both together as joint trustees of trust 3 before getting a corporate trustee for other trusts.

EDIT - better wording.

[Terryw]

Thank you for your posts Mry. I am starting to understand the reasoning now.

Terryw