Assets protection & Cross Securitisation
- Thread starter agent007
- Start date
Hi James,
Strictly speaking cross securitisation doesn’t help in assets protection. Drawing available equity to the max does. You can x-securitise or simply open LOC and fund any further IP/shares purchases. The bottom line is - if somebody wants to sue you need to look worthless.
There is a reasonably good article in the latest API magazine by Rob Balanda about assets protection. It covers the question you asked.
M.
Strictly speaking cross securitisation doesn’t help in assets protection. Drawing available equity to the max does. You can x-securitise or simply open LOC and fund any further IP/shares purchases. The bottom line is - if somebody wants to sue you need to look worthless.
There is a reasonably good article in the latest API magazine by Rob Balanda about assets protection. It covers the question you asked.
M.
The best way to protect assets from attack when they are held in your own name may be to ensure that they are always mortgaged to the hilt (not cross-collateralised) so that your equity remains minimal. You then borrow more than the remaining equity is worth from your company/trust/whatever, secured against your assets and bingo, you have negative net worth. 
John Burley used to claim that his net worth was about -$180,000.
The main way to use cross securitisation to protect your assets is to be a bank, and insist on tying up your assets against as much security as possible.
John Burley used to claim that his net worth was about -$180,000.
The main way to use cross securitisation to protect your assets is to be a bank, and insist on tying up your assets against as much security as possible.
Hiya
I believe you are referring to overstamping assets that are outside of the trust, using assets within the trust to carry some of the load
For eg
500 k Personally owned PPOR with 400 k loan today and P/L trustee owned Ip worth 500 with 200 k loan.
Cross the securities and put a loan of 525 against the PPOR.
While this increases asset protection from creditors, it does weaken the position with regard to the lender.
Horses for courses I suppose
ta
rolf
I believe you are referring to overstamping assets that are outside of the trust, using assets within the trust to carry some of the load
For eg
500 k Personally owned PPOR with 400 k loan today and P/L trustee owned Ip worth 500 with 200 k loan.
Cross the securities and put a loan of 525 against the PPOR.
While this increases asset protection from creditors, it does weaken the position with regard to the lender.
Horses for courses I suppose
ta
rolf
Rolf Latham said:
As Rolf mentions Cross Securitisation is effectively increasing (overstamping) the mortgage on an existing property.
Eg unprotected PPOR value $500K mortgage $200K = exposed equity $300K
Buy new property (Ignore stamp and legals for simplicity) value $300K in a trust (corporate trustee). As well as the lender taking $300K mortgage as security on the property in trust you ask them to take an EXTRA $300K mortgage (stamped and registered) against your PPOR. That means that the lender effectively has $600K security against a $300K lend and your apparent mortgage on your PPOR has increased to $500K.
Advantage: You have an asset protected new property in the trust and when a title search is done your PPOR has no visible equity available - you are protected by appearing to be a "Penniless Bum". You have no stamp duty or capital gains tax problems as would happen if you tried to transfer your PPOR to a trust or another entity. In addition if you "transfer" assets to get away from a lawsuit the court can claw them back in certain circumstances - This law does not apply to cross securitisation.
Disadvantage: Normal lenders are a bit nervous of unusual actions so lenders solicitors have to sign off on these and many of them will say no because it's "easier" - even though the lender has higher security levels! You are also wedded to that particular lender till you discharge the mortgage on the trust property, and even though you do not actually have higher borrowings, the extra apparent mortgage on your PPOR puts other lenders off for future deals.
Rolf - you mention that cross securitisation weakens the position from the point of view of the lender. Why is that when they are effectively getting a higher level of security for the same loan amount?
Bill
Hi Bill
Sorry, bad verbage. It weakens YOUR asset protection against the lender.
Many asset protection people would argue, one structure one lender and dont pollute the structure with more than one lender (personal being the first structure)
ta
rolf
Sorry, bad verbage. It weakens YOUR asset protection against the lender.
Many asset protection people would argue, one structure one lender and dont pollute the structure with more than one lender (personal being the first structure)
ta
rolf
Mikhaila said:
Hi Mikaila,
Cross securitisation is one of the best asset protection techniques outside of a trust structure and indeed you want to look worthless but you can't just get a LOC and draw out equity from your existing unprotected asset.
If you take a LOC on an existing asset and then loan the money to a trust - that loan becomes an asset to you. If you get sued you may have to pull the money back from the trust to pay out a judgement against you. If you settle the money into the trust (giving to the trust with no return) then any interest on your LOC is automatically NOT tax deductable. For interest to be tax deductable there must be an expectation of some income being earned from the LOC loan and if you "give" the money away that is not possible.
Proper cross securitisation is not merely cross collateralising loans or drawing excess funds from an LOC - these other techniques are too vulnerable in an asset protection sense.
Bill
Rolf Latham said:
Thanks Rolf,
If you own property or assets you are always vulnerable to someone - I would rather be vulnerable to a lender rather than the tender mercies of a court case! At least you know the rules before you go into the game!
I agree on your one lender one structure comment - so much easier and cleaner. If you have multiple unprotected assets you may need to use multiple lenders to cross securitise.
Bill
keithj said:
Hi Keith,
In some circumstances it would but you have more complexity. You must have legitimate grounds for legal entities like mortgages or a court case can set them aside as a legal fiction eg you would have to appear to have borrowed money from the trust for the trust to have the mortgage - what have you done with the money? Have you lent it to another trust? The money may be vulnerable tax wise ..etc.
There is a second mortgage option idea available but it has not been tested in court yet and I won't discuss it here. PM me if you want to discuss this line further.
Bill
wbthom said:
Hi Bill, thanks for the explanation though, I have some more questions:
Going back to the same example as above, let's say that I have a LOC open against the $300k exposed equity of my PPOR (let's ignore LVR levels for simplicity of calculations). Then, I over stamp my PPOR as you mentioned for protection. Do I still have access to the $300k LOC??
Thanks,
James.
agent007 said:
Hi James,
If you have an LOC with the same lender that overstamped the PPOR mortgage then I believe you would still have access to the $300K as they already have the "security". If you had an LOC with another lender you would have to terminate it as part of the cross securitisation. As far as everybody but your first lender is concerned your property appears "mortgaged to the hilt" -so they would believe there is no available equity to draw down for a LOC.
Bill
I don't really understand why anyone would sue you to try to win all your assets. There would have to be some legal charge made, ie negligence for compensation via handing over all your assets, wouldn't there?
Say something like that did happen, ie person falls down your IP steps because you didn't keep them in good repair and they broke. I say you deserve everything you get because you were negligent, although whether compensation would be equivalent to all you net worth may be debatable.
If the person who fell down the stairs simply slipped due to their own undue attention, then they may sue subject to your insurance company agreeing whether a payout is due or not. Ten million dollars is the maximum payout of my insurance on each IP, so I'd doubt the person would need to sue me personally for the little bit more they might get of my net worth.
If my spouse sued me as part of divorce settlement, then I imagine we'd have to sit down and agree to dividing everything equally before courts became too involved and our respective barristers got rich than us.
What if someother scenario came up whereby we were sued. Again, negligence would have to be proven first. If the case looked like it was 50-50 and could be in courts forever, we'd still have an option of settling out of court, would we not?
I tend to think that if people could spend as much attention to making good investments in the first place, rather than technical and potentially expensive asset protection structures which may or may not work in the future, they'd be far better off.
I believe honesty, openness, and integrity are the most important factors of asset protection.
Say something like that did happen, ie person falls down your IP steps because you didn't keep them in good repair and they broke. I say you deserve everything you get because you were negligent, although whether compensation would be equivalent to all you net worth may be debatable.
If the person who fell down the stairs simply slipped due to their own undue attention, then they may sue subject to your insurance company agreeing whether a payout is due or not. Ten million dollars is the maximum payout of my insurance on each IP, so I'd doubt the person would need to sue me personally for the little bit more they might get of my net worth.
If my spouse sued me as part of divorce settlement, then I imagine we'd have to sit down and agree to dividing everything equally before courts became too involved and our respective barristers got rich than us.
What if someother scenario came up whereby we were sued. Again, negligence would have to be proven first. If the case looked like it was 50-50 and could be in courts forever, we'd still have an option of settling out of court, would we not?
I tend to think that if people could spend as much attention to making good investments in the first place, rather than technical and potentially expensive asset protection structures which may or may not work in the future, they'd be far better off.
I believe honesty, openness, and integrity are the most important factors of asset protection.
agent007 said:
Hi James,
When you borrow for an IP but have an existing asset (eg your PPOR) tied as direct security for this loan that is cross collateralisation at it's simplest. The lender has both properties as security and if you default they can sell either or both to recover their loan. If you own the PPOR (and or the IP) in your own name any remaining equity is still exposed. Most experienced investors avoid this by establishing an LOC or loan on the PPOR and using cash from this as a deposit on the new IP - this unties the securities but still leaves excess assets exposed. You have in effect loaned money to buy a new property and in a lawsuit such money can be clawed back to pay liabilities.
Cross securitisation is a specific procedure that has some similarities to cross collateralisation but a very different legal effect. Here the lender has mortgages on both properties as added security but any money borrowed is taken ONLY from the trust. You have NOT loaned anything directly against the PPOR and so there is no money for a lawsuit to claim against. If a lawsuit were attempted and the PPOR was ordered sold ALL proceeds (assuming 100% equity mortgaged) would go to the lender first to satisfy the IP loan. You can still get sued but it makes you a very unappealing target for a lawsuit. This is the crux of asset protection - to allow you control of the assets but NOT be the owner of them.
Bill
PS I will send you a PM with the other strategy.
Brenda Irwin said:
Brenda most ethical asset protection consultants insist that insurance is the first line of protection. I agree that if you are truly negligent you should pay. If you own an IP inside a trust and the trust gets sued, any assets inside the trust are still available for damages. Asset protection is more to compartmentalise the damage and to stop the growing group of cheats and opportunists around from getting a free go at you.
Sorry Brenda it doesn't work like that. Even if your insurance company agrees to a settlement (and they often do just to make problems go away) you may have a very large initial excess payout that you have to find first. Even if it is not your fault some claims are deemed by insurance to be criminal negligence which insurance will not pay on. If you go to court even if you win you can have tens of thousands of dollars in legal fees to find.
A few weeks before Christmas on Today Tonight Melbourne they mentioned a case that will make my point.
A tradesman (concreter) built 2 concrete steps for a house (he charged $85 for the job). Builder comes along and adds some shoddy timber stairs above this to complete a staircase. Later tenant falls down timber section of stairs and seriously injures himself. Solicitor's making a claim for the tenant find the builder is bankrupt so he takes action against the only other party available with assets - the poor concreter! Insurance claims criminal negligence was involved so don't want to pay out. Now even thought the concreter is not at fault and will probably win in a court case he is having to mortgage his house just to pay huge legal fees - huge amount of family and personal distress!
Brenda, I thoroughly agree with your last sentiments on honesty, openness, and integrity and wouldn't have it any other way but also feel there are enough predators out there now that you have to set up extra layers of protection for people who are at risk. Most on this forum would agree that half of good investing is setting up a good structure in the first place. Asset protection has a similar need and the costs are negligible compared to what some people could lose without a good structure.
Bill
Billwbthom said:
Thank you for the explanations. I certainly didn't differentiate cross securitisation and cross collateralization in my mind and was talking and thinking about cross collateralization only. I stand corrected.
I understood from your posts that cross securitization is a specific procedure where money borrowed is taken only from the trust. Talking about cross collateralization, if a PPOR is provided as a security for the IP(s) than only excess of equity is exposed. I thought that it makes you unattractive target as well. Does it make a difference from the way you look as a target though (cross securitization vs cross securitization) ?
I think I understand that cross securitization will provide much better protection if in fact there is a court case against you(though from your example it is unclear why somebody wouldn’t go ordering selling IP(s) if PPOR sell proceeds went to lender to satisfy IP(s) loan).
M.
Brenda Irwin said:
Sadly Brenda some personal injury plaintiffs don't uphold your high values
In a perfect world you wouldn't need to protect your assets...
Structuring to protect your assets is just like having additional insurance.
Rarely is liability as black and white as you may think. One wo/man's reasonable job is another's shoddy workmanship...how safe is safe?
As has been alluded to in other posts there are a number of layers (and far too many lawyers
) to asset protection:1) attend to all repairs and preventative maintenance promptly
2) maintain adequate insurance
3) use various asset holding structures to quarantine any claims from impacting all your assets.
Cheers
N.
Mikhaila said:Bill
Thank you for the explanations. I certainly didn't differentiate cross securitisation and cross collateralization in my mind and was talking and thinking about cross collateralization only. I stand corrected.
I understood from your posts that cross securitization is a specific procedure where money borrowed is taken only from the trust. Talking about cross collateralization, if a PPOR is provided as a security for the IP(s) than only excess of equity is exposed. I thought that it makes you unattractive target as well. Does it make a difference from the way you look as a target though (cross securitization vs cross securitization) ?
I think I understand that cross securitization will provide much better protection if in fact there is a court case against you(though from your example it is unclear why somebody wouldn’t go ordering selling IP(s) if PPOR sell proceeds went to lender to satisfy IP(s) loan).
M.
Thanks Mikhaila,
You are correct, cross collateralisation itself does offer some partial asset protection in that you have reduced equity available but it is not as clear cut legally as there is usually no official mortgage over the property used as backup security (eg your PPOR).
You mention in your second part that my comment confused you. It is just me trying to be tongue in cheek - as any solicitor worth his salt would not take such an unattractive case to court - he may not get paid!
Bill
