best structure - hybrid trust?

Hi I am after some professional advice about structuring. I reside in adelaide and was wondering if anyone could make any recommendations preferably in lovely Adelaide.
Im aware of Dale, and NickM interstate.
My situation is that i own a few properties in my own name. I plan to continue purchasing property and shares - but am concerned about asset protection.
employee, self employed in future

No children, not married, 1sister, parents
no one with a low income to distribute to

If i purchase in discretionary trust - with corporate trustee - i have no other business income - and given that properties that i will purchase will be cashflow negative - this will be difficult without negative gearing

Hybrid discretionary trust - does it still provide enough asset protection given that my work environment lends to higher risk of being sued.
Advantage - can negatively gear still


My accountant is familiar with standard discretionary trusts but not hybrids - and Id like futher professional advice. Is it best to approach commercial lawyers?

Thankyou for your time
 
dee said:
Hi I am after some professional advice about structuring. I reside in adelaide and was wondering if anyone could make any recommendations preferably in lovely Adelaide.
Im aware of Dale, and NickM interstate.
My situation is that i own a few properties in my own name. I plan to continue purchasing property and shares - but am concerned about asset protection.
employee, self employed in future

No children, not married, 1sister, parents
no one with a low income to distribute to

If i purchase in discretionary trust - with corporate trustee - i have no other business income - and given that properties that i will purchase will be cashflow negative - this will be difficult without negative gearing

Hybrid discretionary trust - does it still provide enough asset protection given that my work environment lends to higher risk of being sued.
Advantage - can negatively gear still


My accountant is familiar with standard discretionary trusts but not hybrids - and Id like futher professional advice. Is it best to approach commercial lawyers?

Thankyou for your time

Yes. Seek some legal advice from a lawyer experienced in asset protection and estate planning.

The great thing about trusts with a discretionary element is that it gives you flexibility. Sure you may not be able to use it now, but the only certainty is that things change! You may marry, the tax threshold of one of your beneficiaries may change, even if only for one tax year... ;)

Using a hybrid trust does create a chink in the discretionary trust armour... :eek: but you need to look at your risk profile and make a judgment call ONCE your adviser has fully explained all the consequences.

Can't think of anyone to recommend in Adelaide.

Good luck.
N
 
NigelW said:
Using a hybrid trust does create a chink in the discretionary trust armour... :eek:

Whats the chink?

Keep all IP's in a hybrid trust(s) - Isnt a company the trustee still? So if some nanger living in your ip tries to sue, they come up against a recently shut-down $2 company? They cant sue you personally because you dont own the IP's - sure you lent some money to the trust, but thats enough distance even for very well paid lawyers (even the snarling, drooling, boggle eyed ones)?
 
JumJones]Whats the chink?

Keep all IP's in a hybrid trust(s) - Isnt a company the trustee still? So if some nanger living in your ip tries to sue, they come up against a recently shut-down $2 company?
Yes that's true but the balance of the trust's assets are still at risk because the trustee, in all likelihood, retains its right of indemnity out of the trust assets and retains a *warning legal jargon alert* lien over the trust property despite having been removed as trustee of the trust. The story is equally bad if the trust has lost its right of indemnity due to a breach of trust because s197 of the Corporations Act will probably make you, as a director of the Corporate Trustee liable instead! :(

They cant sue you personally because you dont own the IP's - sure you lent some money to the trust, but thats enough distance even for very well paid lawyers (even the snarling, drooling, boggle eyed ones)?

Snarling, drooling, boggle eyed ones? We've obviously met the same litigators! :D

True, you cannot be sued personally because the company owns the property. But the chink is not in relation to losing your personal assets because of your investments, its the other way round - the risk of losing your investment assets because of your other activities.

I'll give you an example. Let's say John, successful property investor, is at a party, well in his cups, and starts defaming some of those snarling, drooling, boggle eyed lawyers. Unfortunately for John this comes to the lawyers' attention and they sue John for slandering their "good" names. (Let's not talk about logical impossibilities for the time being ;) )

Assume the lawyers ultimately win and damages are awarded against John for $250,000. John unfortunately doesn't have that sort of loose change and out of principle refuses to cough up. Eventually John is bankrupted. His personal insolvency administrator looks at this assets and finds that John in fact owns a whole heap of income units in a number of hybrid discretionary trusts. Those units are assets which can be taken by the judgment creditors to satisfy John's judgment debt.

Thus you end up with the unworkable situation where a hostile third party owns income units in John's various HDTs and has an entitlement to income from those properties (in accordance with the terms of issue of those units and the trust deeds of course). Quite apart from his enemies getting a portion of the net income of his trusts, this causes a whole host of practical problems for John, which, whilst not insoluable, may mean he's forced to sell properties at less than the best time in the market or has every step of the way when the trustee is exercising its discretionary powers challenged in the Supreme Court.

All of which would be avoided if John was using a pure discretionary trust. The quid pro quo for which is, of course, foregoing the negative gearing benefit for interest on his borrowing.

Hope that clarifies things.

Cheers
N.
 
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And if negative gearing was abolished where does this leave hybrid discretionary trusts? I presume the income units would be redeemed and the trust would operate as a normal discretionary trust with no chink in the trust armour?
 
MichaelM said:
And if negative gearing was abolished where does this leave hybrid discretionary trusts? I presume the income units would be redeemed and the trust would operate as a normal discretionary trust with no chink in the trust armour?

Spot on Michael.
 
NigelW
Are you saying that it's better not to use trusts. Sorry if I'm missing the point there, but I know almost nothing about how these things work. Thanks.
 
HowDo said:
NigelW
Are you saying that it's better not to use trusts. Sorry if I'm missing the point there, but I know almost nothing about how these things work. Thanks.

No no no!!! :eek:

Trusts are great!!! Trusts are fantastic. Trusts are the best thing in investment structuring since sliced bread!

BUT every structure you use, not just trusts, has positives and negatives associated with it. The key is to find the structure or combination of structures which has the most benefits for your current and future situation.

Generally speaking in most cases that would involve one or more trusts somewhere along the lines. Whether those trusts are unit, hybrid or pure discretionary (aka family) trusts will depend upon a whole range of factors.

Sorry, didn't mean to confuse you. What I just wanted to highlight is that a lot of investors (perhaps after listening to the odd guru or two) seem to think that if they hold their property in a trust it instantly eliminates all chance of legal liability from any source. Not true. It's better than owning things in your own name, but not bulletproof. The rules have changed since Bondy etc.

Own nothing, control everything! :D

Cheers
N.
 
Asset protection and Hybrid Trust

Hi All!

I know this is an old post, but have been trying to clarify something in my mind about asset protection and HDT's.

I understand that units owned by an individual in a HDT are "assets" of the individual. If the individual is sued, the units can be taken by the creditor for satisfaction of judgement against the individual. But wouldn't the individual have a loan outstanding for the purchase of those units that offers asset protection in this case.

But what about the other way around. What happens if the HDT is sued.

If an individual owns IP via a HDT, say something goes wrong in that IP and the tenant sues the landlord i.e. the Corporate Trustee of the HDT...what are the implications.

Assuming the HDT has no "loan" from a bank as the loan is in the individual's name (who purchased the units in the HDT), does that mean the IP is unencumbered so to speak - where is the asset protection then? Or do the outstanding units offer protection similar to a debt? (as the units are an asset of the individual, and a liability to the HDT)

Just trying to get my head around this and would appreciate any help! :eek:

Thanks
 
I choose not to use hybrid trusts for exactly the reasons mentioned by NigelW - the "chink". My accountant advised against hybrid trusts given my primary motivation was about asset protection and much less about tax minimisation. If you're less concerned about that, then hybrid may be good for you.

My real estate assets are very heavily geared (and hence quite negative cashflow), but the overall portfolio is just about even - I use income from shares and other investments to offset the holding costs of the real estate. Holding in my own name or through a hybrid trust wouldn't get me all that much in the way of taxation benefits anyway.
 
Bronte said:
Assuming the HDT has no "loan" from a bank as the loan is in the individual's name (who purchased the units in the HDT), does that mean the IP is unencumbered so to speak
I think in that case the bank would normally have the loan secured against the IP in the trust, with the trustee's permission.

If the security was the individual's PPOR instead, such that the IP was unencumbered, then I would assume there could indeed be a problem in that case.

GP
 
Hiya Sim,

If asset protection is a very major concern did your accountant (is it still Tony C?) also recommend that you should not have any investment properties and shares/managed funds in the same discretionary trust? Nigel has raised this issue before and I have noticed a number of legal websites also advising this. The rule of thumb appears to be: business = high risk; property = medium risk; and shares/managed funds = low or no risk. Therefore optimally shares and managed funds should be in a trust of their own.

Personally I won't be doing this as I don't want to be saddled with too many structures. However I will be making sure that the investment properties are kept in good repair and safe (eg safety switch, smoke alarms and pool security inspections etc) and public liability insurance is in place etc to minimise any risk to shares held in the same trust. Apparantly using a property mgr as opposed to managing the property yourself may also provide a little extra protection.

Cheers - Gordon
 
There is "optimal" and then there is "cost effective".

Advice I was given is don't worry about multiple trusts until you have a lot of assets to protect, in the meantime, the cost overhead (and more importantly, the admin overhead) is just not worth it. Longer term I'll look at optimising the structures for maximum protection if it's warranted.
 
Hi Sim,

I agree totally with what you say and came to the same conclusion. However I was just curious to see if your accountant raised the issue.

We have just had a SMSF setup with the intention that this beast will only hold shares, funds and LPTs etc (ie no direct property). We will still also have shares outside Super in the Family Trusts but at least all our eggs aren't in the one basket.

The SMSF is also useful in that it can be used in conjunction with a Family Trust to limit the trust's income tax to 15% (25% from July 2005 if Surcharge applies). Obviously the age based limit applies so this strategy becomes more useful as you get older. Plus having money locked up for too long is undesirable. So probably not that useful for a young bloke like you Sim ;)

Cheers - Gordon
 
Super ? Why the heck would anyone need super ? :p
Locking my money up for the next 30+ years sounds like a very bad idea ! :rolleyes:

Actually, just on the asset protection stuff Gordon - if you took the argument to the extreme, you would find yourself with one property per trust - since you wouldn't want to risk other properties if you had problems with one - but of course we both know that reeks of overkill!

My long term plans are rather sketchy on this right now - more advice needed on the most efficient way to manage it, and the timing of such moves. But I would like to see more compartmentalisation of my assets.

The great thing about discretionary trusts (if they are set up correctly) is that you can cascade the distributions. One trust with positive income can distribute to another of your trusts that has expenses to be offset, and so on, until all the distributions are used up, or at least minimised, before you pass them on to the beneficiaries. Of course, this has little benefit if all your trusts are making too much money :D
 
Finally a bit of reality instead os a "mindless regurgitated sales pitch" in the positives and most importantly the negatives of trusts.

Trusts do not give you a way out if you lose a court case and are found negliegent, and are even less effective if they issue income units.

Also to note that if you have lent money to the trust , then this is also an asset.
Can the trust be ordered by a trustee in bankruptcy or a court order be made for the trust to repay it immediately?
 
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