Asset Protectiion - Guarantor Risk

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From: Gordon Austin


Hi gang,

Given that my wife is a partner with a large firm we are looking at holding future investment properties in my name for greater asset protection. I am still considering a trust, but with no children I'll need further convincing that it is worth all the cost and overhead of setting up a trust and related company. Also, I've been led to believe that the courts can unwind the trust in certain cases.

However given that my income is low my wife's name will apparantly need to be on the loan application to meet the bank's serviceability criterea. However it will only be my name on the title deed. I assume this entails her acting as guarantor.

My question is that, because she is acting as guarantor can this put the assets in my name at risk if she is sued.

Thanks - Gordon
 
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Reply: 1
From: Michael Croft


It's known as STD - sexually transmitted debt. Whilst your partner will acquire the disease she (and her creditors/litigants)should not have access to 'your' assets. You should be immune (the carrier in fact), however a word of caution - divorce is both a symptom and cure of STD.

Always seek professional legal advice for your specific circumstances and do not rely on my ramblings.

Michael Croft
 
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Reply: 1.1
From: Paul Zagoridis


You cannot become liable for the debts of a guarantor. But you bank will charge you more to set the loan up with your wife as a guarantor (probably about the same as they'd charge for a trust).

The Family Court can ignore a trust in determining property settlements. But the can also ignore whose name it is in. They see it as dividing the assets of the marriage.

A court can also ignore a trust whose purpose is a sham or construction to deny legitimate creditors. Courts can also do this if the assets are in your name. They'll ask where did the deposit come from? Normally they'll do this if an asset transfer occurred shortly before the action. I have a vague memory thinking after 2 years history it should be fine.

I again stress that a trust is much safer than personal ownership of assets. Will you never have a car accident that is your fault? Will a tenant never be electrocuted on your property?

Gordon, you obviously have some advisors against a trust structure. Fine. You don't have kids? Also fine. If you plan on building a substantial portfolio, you will one day be a high income earner. Will your wife stop working when you retire? How will you split the income if the portfolio is in your name?

You are concerned about contingent liabilities and asset protection given your wife's employment. That is what trusts were created for. If your advisors are recommending personal holdings for asset protection you need a second opinion. Unless you plan on having a small portfolio, in which case ... fine. ;-)

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Reply: 2
From: Dale Gatherum-Goss


Hi Gordon

First, I strongly suggest that both you and your wife seek legal advice on this issue. It is very important.

Secondly, a trust is a far more flexible and powerful way to hold investments and reduce risks in your stated circumstances.

Please reconsider your stand.

Dale
 
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Are Trusts always the answer?

Reply: 2.1
From: Kevin Forster



Just a quick note because I'm expecting to get flamed for quoting heresy on this forum, but are trusts always the answer?

1. What percentage of IP owner owns a substantial portfolio of IPs? From statistics, the majority of people have 1-2. Losing 1-2 properties may be unfortunate but you can rebuild.

2. What is insurance for? Tenant electrocutes himself? (What the hell was he doing to have that happen?) Insurance covers it. Have a car accident? Insurance. Adequate insurance covers the majority of situations.

3. Let see some costs on owning a trust. If you have 1-2 properties is it worth putting it in a trust? Given that the majority of people have 1-2 IPs, is a trust always the answer?

My final point is that some people are so frightened of losing the little they have that they fail to have something that's worthwhile not losing.

Just some ramblings
 
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Are Trusts always the answer?

Reply: 2.1.1
From: The Wife


Kevin, that also applies to making a profit, some people are so frightened of losing money, they wont do a deal that means they have to pay 50ish% in cap gains. Hello....now they have 100% of nothing.

Strange.

TW
 
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Are Trusts always the answer?

Reply: 2.1.2
From: Paul Zagoridis


I lost 10 properties. I wouldn't have lost them all if they were structured in a trust.



On 3/27/02 4:55:00 PM, Kevin Forster wrote:
>
>Just a quick note because I'm
>expecting to get flamed for
>quoting heresy on this forum,
>but are trusts always the
>answer?

No flames hopefully Kevin.

Trusts are not for everyone. Especially not for someone planning to only have 1-2 IP's Not worth the cost. But if Gordon is worried enough about his wife being a partner in a firm, he could think of using a robust structure.

>1. What percentage of IP
>owner owns a substantial
>portfolio of IPs? From
>statistics, the majority of
>people have 1-2. Losing 1-2
>properties may be unfortunate
>but you can rebuild.

That's two different groups, substantial portfolios vs majority of people. Most deceased estates with multiple IP's (that I've seen) have a corporate vendor. That implies a trust or holding company.

My landlady is married to a "prominent Sydney racing identity". The landlord is a company.

I think trusts and/or holding companies are in significant use.

>2. What is insurance for?
>Tenant electrocutes himself?
>(What the hell was he doing to
>have that happen?) Insurance
>covers it. Have a car
>accident? Insurance.
>Adequate insurance covers the
>majority of situations.

I know of two car accident situations where the insurance company declined cover. 1) driver had a blood alcohol reading over the limit (this man did not normally drink and did not drink more than the formula commonly known). 2) Car rolled while driving on a private rural road.

Regarding electrocution? See the High Court in Northern Sandblasting Pty Ltd v Harris (1997) 188 CLR 313. While it now seems that the court is backing away from that stance, it was a rude shock to the landlord.

If you intend to have a significant asset base why wouldn't you protect it? Structuring is a form of insurance. The Packer's, Murdoch's, Moran's, Pitt's and most of the BRW Rich List families have trusts and/or holding companies. The Kennedy, Onassis and Gates clans are similar. I sense a pattern is emerging. They didn't structure themselves AFTER amassing their wealth.

Insurance should cover you. That's what it's for. But not everything you do is insured.

A successful accountant I know insisted that the executive of the Body Corporate be insured before agreed to join the executive. Good prudential planning.

>3. Let see some costs on
>owning a trust. If you have
>1-2 properties is it worth
>putting it in a trust? Given
>that the majority of people
>have 1-2 IPs, is a trust
>always the answer?

A trust is never always the answer. As a matter of fact it is rarely the answer unless one intends to amass a fortune.

Costs have been stated before by Dale and others. For 1-2 IP's in a trust with a corporate trustee it's would be $1K-$3K in setup fees and about the same in annual costs (including tax returns). So is $1K per annum too much? If you stop at 2 IP's it is.

>My final point is that some
>people are so frightened of
>losing the little they have
>that they fail to have
>something that's worthwhile
>not losing.

True. True.

But I don't think Gordon is in this situation. There is a difference between fear and caution.

>Just some ramblings

Very good challenges raised in them.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Are Trusts always the answer?

Reply: 2.1.3
From: Dale Gatherum-Goss


Hi Kevin!

No flames as I think your questions are well put and require careful answers. Well done for asking!

>but are trusts always the
>answer?

No, they are not. Trusts work well for people intending to buy a number of IP's (often quite a few more than 2) and to live of their passive income in the future.

I see the really wealthy people buy and hold IP's through trusts. Most professionals do as well.



>1. What percentage of IP owner owns a substantial portfolio of IPs? From
>statistics, the majority of people have 1-

I don't know the answer to this. I have a lot of clients who invest in IP's. Some are happy to take the negative gearing benefits for now and deal with the problems later. Others are more concerned about asset protection and the flexibility for the future. Each to their own.

2. Losing 1-2 properties may be unfortunate
>but you can rebuild.

Maybe. But, what if you can have your cake and eat it too? At 30, yes it is easy to rebuild, but, at 55? Can you get that wealth and comfort back in time for retirement?


3. What is insurance for?

Insurance should be the first line of defence, but, not your last line.


>Tenant electrocutes himself? (What the hell was he doing to have that happen?) Insurance covers it. Have a car
>accident? Insurance. Adequate insurance covers the majority of situations.
>

Maybe, but then again tonight's new showed how quickly this situation gets out of hand. In the original question it was mentioned that the wife was a partner in a large firm . . . as such, her personal assets are at risk in a way where insurance may not be possible, or enough to cover the problem.


>4. Let see some costs on owning a trust. If you have 1-2 properties is it worth
>putting it in a trust? Given that the majority of people have 1-2 IPs, is a trust
>always the answer?

A trust will cost you a minimum of $300 per year and the maximum will depend upon the issues involved and the records that you keep. The most expensive cost that we currently deal with is about $3,000 pa but then again, the trust has a $2m income, pays FBT and has other complications.


>My final point is that some people are so frightened of losing the little they have
>that they fail to have something that's worthwhile not losing.
>

I agree wholeheartedly.

>Just some ramblings

No, Kevin, you raised some excellent issues that are well worth considering for anyone who travels down this path. Well done.

I hope that I have answered your concerns and given you another perspective on this idea.

Have fun

Dale
 
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Are Trusts always the answer?

Reply: 2.1.3.1
From: Gordon Austin


Thanks Guys,

Fantastic responses and very much appreciated. Given that we certainly intend to own more than 1 - 2 IPs I will now definately obtain up-to-date professional legal advice. Struth, I'm almost converted already after reading this thread.

I'm convinced it's critical to get the structure right sooner rather than later. Hence all my questions - at least now I can seek legal advice armed with lots of questions I hadn't thought of till getting your kind responses. Will also pick up Rentons book this weekend.

Gordon
 
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Are Trusts always the answer?

Reply: 2.1.3.1.1
From: Sim' Hampel


Following on from Dale's comments about insurance being the first line of defence, but not the last... my opinion has always been that I use trusts as insurance for my insurance policies.

 
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Are Trusts always the answer (Long Post)

Reply: 2.1.3.1.1.1
From: Kevin Forster



Firstly I'm not against trusts. I think they play a valuable part in the investing process.

Most people do not start out investing and say I'm only going to have $10,000 in shares or only 1 IP. Somewhere along the way life happens and that's how they end up. Similarly most people don't want to end up working until 65 but they seem to.

I'm assuming, maybe wrongly, that on the forum we have the a broad cross section of the IP community and that some people are only going to have 1-2 IPs and for whatever reason not get anymore. I just see trusts bandied about as a solution without really finding out other details from the questioner. The questioner runs off and sets up a trust then happens to only buy 1-2 IPs and is in reality worse off than if they had carried them in their own name.

I borrowed this from Robert Allen "Creating Wealth" regarding two stages of asset acquisition - the accumulation stage and maintenance stage. The accumulation stage is characterised by acquisition of property and high debt levels. Once enough property has been obtained, then you go into maintenance mode which is protecting your assets via a company or trust or both and paying down debt. Maybe we should be trying to find out if the questioner is at the acquisition stage or the maintenance stage.

The only other thing that I notice is that the cons of trusts, besides costs, are never mentioned. Some of the cons is the loss of flexibility and that there are legal obligations that the trustee must carry out yearly or be at risk of having the trust wound up.

Another question is how lenders view finance with a trust. If the PPOR is outside the trust but the equity is to be used within the trust, how does that work? What about DSR levels for a trust and if a finance company wants somebody to guarantee the loans within the trust?

Kevin
 
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Are Trusts always the answer (Long Post)

Reply: 2.1.3.1.1.1.1
From: Gordon Austin


Thanks for the response Kevin.

We are definately in the acquisition stage.

Obviously every person's circumstances are unique. Armed with the views obtained here and lots of reading over the next few weeks (eg Renton's book on Family Trust) I have booked myself in to see a solicitor whom I'm led to believe is very knowledgeable about asset protection.

I'm am clearing summarising our wealth creation objectives, our current situation (family and assets etc), a list of our concerns about trusts and lots of questions to be answered by the solicitor. Then hopefully I will know whether the costs outweight the benefits for our circumstances.

I'm hoping the solicitor will be objective and not just be pro-trusts no matter what the circumstances. Some I imagine can be biased as they make good money setting up trusts for clients. However a few years back we obtained legal opinion on this matter by a solicitor recommended to me by a very wealthy individual (well known for this financial knowledge) and he advised against setting up a trust given our circumstances at that time.

A few things have changes since then so it will be interesting to see what happens.

Thanks - Gordon
 
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Are Trusts always the answer (Long Post)

Reply: 2.1.3.1.1.1.2
From: Dale Gatherum-Goss


Hi Kevin

You wrote: "The only other thing that I notice is that the cons of trusts, besides costs, are never mentioned. Some of the cons is the loss of flexibility and that there are legal obligations that the trustee must carry out yearly or be at risk of having the trust wound up."

Trusts provide MORE flexibility, they do not diminish it.

Thank you for your thoughts and for stimulating an interesting debate.

Dale
 
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Reply: 2.1.3.1.1.1.2.1
From: Kevin Forster


Dale

How do trusts provide more flexibility over owning assets personally?

Even from reading the trust bible by N E Renton it states that loss of flexibility is one of the cons of trusts.

I'm just sorry that this thread will soon drop off into the nether regions of the forum as active threads don't go to the top

Kevin
 
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Sim

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Are Trusts always the answer

Reply: 2.1.3.1.1.1.2.1.1
From: Sim' Hampel


If you use the new messages feature like the forum software was designed for, then discussion subjects that receive posts (no matter how old), always show up near to the top of the list.

 
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Are Trusts always the answer

Reply: 2.1.3.1.1.1.2.1.2
From: Dale Gatherum-Goss


HI Kevin

I must admit to never having read Renton's book. I never felt the need to do so as I had a brilliant teacher who is often used by the tax office to fight their tax law cases against people like me.

Trusts are principally used to protect assets. This has always been the major advantage of them since the days of the crusades about a 1,000 years ago.

Trusts provide flexibility because of the asset protection first and foremost; thereafter, they provide wonderful flexibility in reducing income tax legally by being able to distribute profits at a much lower rate of tax than would normally be the case if the profit was added on top of an individual's normal income.

Moreover, when the income mounts up, a trust (as a company) allows for tax deductions to be claimed that are not available to an individual as we have discussed only in the last couple of weeks.

A good accountant will always make the trust work to your advantage.

I hope that this helps

Dale
 
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Are Trusts always the answer

Reply: 2.1.3.1.1.1.2.1.2.1
From: Gordon Austin


I am keen to use a reasonable amount of OPM to fund property purchases and continue to refinance well into retirement years with the intent of consuming a significant portion of the property's capital appreciation (both realised and unrealised) prior to natural death. I felt comfortable with this approach with the assets held in an individual's name but I am bloody confused as to whether this will still work under a discretionary trust structure.

I have been ploughing through Renton's book but there are still many questions left unanswered in relation to our circumstances. This is to be expected because authors have to generalise. Anyhow, first stop the solicitor then next stop Dale. Look out Dale, my list of questions is growing.

Gordon
 
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Are Trusts always the answer

Reply: 2.1.3.1.1.1.2.1.2.1.1
From: Dale Gatherum-Goss


HI Gordon!

I look forward to your questions. At the risk of being difficult, can I suggest that you look at the archives over the last month as we discussed the "possibilities" to quite an extent only recently.

Rest assured though, that your goals are absolutely compatible with a family trust.

For example, the trust can pay for many of your normally thought of private expenses before tax. This gives you the benefit of needing less cashflow for personal reasons, and, paying less tax which means your capital should last longer.

The trust can pay for alcohol, chocolate, greeting cards, music, movie tickets and a host of other things per a list that I placed on the forum a little while ago.

Good luck!

Dale
 
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Reply: 2.1.3.1.1.1.2.1.2.1.1.1
From: Gordon Austin


Thanks again Dale,

I did read all the threads you mentioned a while back but I will go back and read them again. But from memory I can't remember anything along the lines of reverse gearing type scenarios. That is, prior to anticipated natural death (being conservative of course) we want to use up the majority of equity in the properties (realised and unrealised). No doubt there are solutions to most problems.

However after reading Renton's book and reading a summary of some of the initial proposed changes to family trusts it was nothing short of damn right scary. I can't help but be concerned that at some time in the future our politicians might legislate something stupid. I know that that this would affect some the them directly (many reasons have been given on the forum also) but the pressure on governments to take a hard stance of family trust seems to be increasing all the time. And in the world of politics one can never be so sure as to say these things will never happen. Also, as Rention points out, it is very unlikely that authorities would legislate to penalize those who are not abusing the system but because the legislation needs to be quite general there can quite often be unintended negative consequences. In the end though we don't live in a perfect world so when it comes to risk management all one can do is seek expert advice, weigh up the pros and cons, decide accordingly and hope for the best.

Thanks - Gordon
 
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Are Trusts always the answer

Reply: 2.1.3.1.1.1.2.1.2.1.1.1.1
From: Kim Heaver


I've got a question on this subject.
Taking into account asset protection verses accounting costs, is there an ideal no of investment properties to be held in a trust. I'm wondering if instead of having 1 trust owning say 10 properties, is it better to have a number of trusts each holding say 1 or 2 properties and using the same corporate trustee.
Then if someone sues the property owner (trust)maybe this structure would reduce the risk to the other properties.

Kim
 
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