Asset protection and 'trust-busting'

[Alex_1]

Dale GG,

In an earlier messages you and others have pointed out, quite correctly, that in creating any structure or transaction, it's important to be able to demonstrate a valid commercial reason for doing so other than just reducing tax, otherwise the ATO can challenge it. I can't locate the exact thread, but I think in your earlier message you said that your official 'commercially valid' reason for a particular trust structure was asset protection, not just tax minimisation.

My question is - by saying that the primary purpose of your trust is to protect assets (e.g. defeat creditors), could you be opening up an avenue by which a future bankruptcy trustee could get at the assets in your trust?

There is a good discussion of this issue at http://www.slp.net.au/ed2_6_01_newsletter.html.

Essentially, it seems that bankruptcy trustees have a number of trust-busting techniques at their disposal to access the assets in trusts where it can be shown that the primary purpose of the trusts is to put assets out of the reach of creditors. (e.g. Official Trustee v Baker & Ors No. NB72 of 1990 FED No. 530/94.)

If you have, for example, told the ATO that your trusts & transactions aren't designed to avoid tax but rather to protect assets, couldn't this statement come back to haunt you if later on, you had a bankruptcy trustee trying every legal avenue to 'see though' your trusts and get at the assets within?

If this is true, this begs the next question - if the primary purpose of your trust really IS to protect your assets and the trust structure isn't going to give you any tax advantages (e.g. all the beneficiaries are in the maximum tax bracket, etc.), what can you give as a valid reason for setting up the trust?

You can't say it's just to minimise tax, or you'll have tax problems. You can't say it's just to protect assets, as if you got sued later on, a bankruptcy trustee could use this against you later on to get at the assets in the trust.

I'm not by any means an expert on this issue; I'm considering setting up a trust and these are some of the questions I've come up with. Anyone have any comments/thoughts on this?

 

[Nicholas H]

My 2c on this is that each trust would have a different trustee (a company) .. so you could sue the company and get the assets possible which are held in that trust. If you had 3 trusts (each with a different trustee) and one went bankrupt because some underlying problem in them, then your other 2 trusts and all assets in them are safe.

if you personally are sued then the assets in the trusts are safe, it is basically settings them up to be different pools instead of one big pool.

if you owned a business through a trust, and things just went bad then it could go bankrupt, if I have done my job to the best of my ability and have acted ethically, then the rest of the assets are safe. If you had them in one pool.. it would keep draining the big pool till it was all empty

 

[Alex_1]

Nicholas,

Thanks for your fast reply and comments.

I'm still not sure I understand how the number of trusts would protect your assets if you are sued, if the purpose of all (or most) of the trusts can still be shown by the bankruptcy trustee's legal arguments to have the primary intent of defeating creditors.

If you personally (not the trustee of any of your trusts) are named in a lawsuit and a large judgement is awarded against you, I would imagine the first thing the bankruptcy trustee would do is start looking at your trusts and transactions and see if a case can be made that any (or all) of your trusts & prior transactions have the primary purpose of defeating creditors. If so, the court may "see through" the trusts and then you've lost your assets.

In the SLP newsletter I mentioned in my original post above (by the way, this link only works if you remove the full stop from the end of the URL), it says "There are a number of legislative provisions which permit the bankruptcy trustee to pursue assets concealed in [discretionary] trusts in the event they are genuinely those of the bankrupt and placed in the trust solely for the purpose of defeating creditors."

If you're a high-income individual and it's clearly your own income which has paid for the assets within the trusts, and you also effectively control the assets by being, say, both the Appointor and a primary beneficiary of all the trusts, it seems to me the bankruptcy trustee would have little problem arguing that the trust's assets are 'genuinely your assets' and would have a good chance at getting hold of those assets, unless you can demonstrate for each trust that it's not just there to defeat creditors.

In some circumstances trusts formed purely to protect assets may confer no tax advantages, and may even have some negative tax consequences which may be viewed by the beneficiary as a fair price to pay to have the assets protected from creditors. However, my original question was that if this is the case, are the assets really protected? It seems that, if you're sued personally, you'd need to be able to make a powerful argument for EACH trust that its primary purpose was not to put your assets out of reach of creditors. If the trust isn't giving you any tax advantages and you're not using it for something like income-splitting, it seems to me these reasons may be hard to find.

 

[Nicholas H]

If the trust was holding things like artwork, jewellry, etc .. then It could be seen to be just holding your valuables .. if it was holding income producing assests .. then it is performing a business.. if say someone other than you was running it ..

I think it just comes down to making sure it is an arms length from you .. if they could not get the money from the high flyers in the 80 (Like alon bond) then I do believe it protects you.

I think they can chase it more if you borrow money put the money in the trust and go bankrupt then they might be able to get to it.

If you gave a friend $100,000 before you went bankrupt, as far as I know they can not ask your friend for it back as long as it is very clear that you were never getting it back .. but like I said I could be wrong .. dale will be a lot better at answering this

 

[Alex_1]

Perhaps it also depends on exactly who is named in the lawsuit.

For example, if you hold your IP in a trust and the corporate trustee is the landlord of the property, a tenant who injures himself, calls a Personal Injury lawyer and wants to bring a big claim against the landlord would be suing a $2 company with no assets (the corporate trustee.) Perhaps the appointor could just sack this company as trustee and appoint another. You, a natural person, as the Appointor are not even in the firing line legally. I think this is the 'gist' of how it works, but I could be wrong.

In other words, the trust structure seems to quarantine litigation (e.g. damage awards) within the trust structure.

However, I'd like to know what the situation is when you personally are joined in the lawsuit, not just a corporate trustee of a particular trust. This is where a bankruptcy trustee would try to go after ALL your assets, trusts, etc. and would seek to prove that all (or some) of them were created for the sole purpose of putting assets out of reach of creditors. If the court accepts that your trusts have no other purpose than to shield your assets, then your assets are probably gone.

 

[sbe]

I think you may be missing the point a little.

The trust is not to defeat bankruptcy, rather anyone sueing you.

 

[Alex_1]

>If you gave a friend $100,000 before you went bankrupt, as far as I know >they can not ask your friend for it back as long as it is very clear that you >were never getting it back ..

Actually, in my (non-expert) opinion, I imagine the bankruptcy trustee would have no problem clawing back a transaction of this nature. The Bankruptcy Act provides fairly wide-ranging powers to prevent people dissipating assets when they know bankruptcy is imminent, and to claw back these transactions when they do occur. Otherwise bankrupts facing impending financial oblivion would just give all their property to their mates rather than letting the bankruptcy trustee get his hands on it.

 

[Alex_1]

>I think you may be missing the point a little.
>The trust is not to defeat bankruptcy,
>rather anyone sueing you.

sbe,

Yes, I take your point. In terms of using trusts to protect assets, it seems there are two separate situations -

1) Using trusts to try to retain assets when you personally are facing bankruptcy (e.g. Alan Bond, various barristers who refuse to lodge tax returns, etc.) In this case, it seems that trusts may protect your assets PROVIDED none of them can be shown to have been set up solely for the purpose of putting your assets out of reach of creditors.

2) The second scenario is where, by effectively making the (expendable) corporate trustee take the financial 'hit', you don't even get sued personally in the first place; e.g. my example earlier of a tenant in a trust-owned IP only being able to sue the property's owner (a $2 company) and not you personally.

Does this sound reasonably correct?

 

[DaleGG]

Hi

You do not need a commercial reason for establishing a trust and I apologise if I have somehow misled you.

Every Australian has the right, and even the obligation, to structure their affairs in any way that they wish to legitimately reduce tax. This is a very old, and very protected legal principle. Even Kerry Packer stated this in a Government enquiry not that long ago without repercussions.

Now, having said this, if there is a commercial reason for using a trust then asset protection is a proven one as very rcently proven in court.

A trust is not bullet proof in terms of asset protection, but, it is much more effective than any other alternative.

Dale

 

[Alex_1]

Dale,

Thanks for your comments - they've been very helpful.

I have a meeting with my tax lawyers soon to decide if I should put my PPOR into a discretionary trust for asset protection purposes. From what I've read on this Forum it looks like holding IP's in a trust is a great idea, and I'll go that way for investment properties.

However, at the moment (pending legal advice) I'm leaning away from putting my PPOR in a trust, and may instead transfer 50% ownership of it to my partner, but keep the ownership in individual names (e.g. not a trust.)

There are three main reasons I don't want to put my PPOR in a trust.

The big one is land tax (I'm in Qld.) At the moment, I pay no land tax on this property as it's my PPOR. The minute it goes into a trust my land tax liability goes from zero to around $4,000 per year for this property. Ouch!

The secondary reason is the loss of the PPOR CGT exemption. As you've mentioned elsewhere there may be ways around this (long-term lease, etc.) so the land tax is the real killer.

The third reason is that (pending advice from my lawyers) I am having trouble coming up with a valid reason for placing this property into a trust OTHER than asset protection (after all, it would cost me heaps more to have it in a trust.) A bankruptcy trustee can usually get to assets in a trust if it can be shown that the sole purpose of the trust is to put the assets (in this case, my PPOR) out of the reach of creditors... and at the moment I'd have trouble showing any other reasons I was using the trust. Therefore, my main goal - asset protection - might not actually be achieved.

I realise that, by ditching the trust idea and giving my partner a 50% interest in the property, my 50% interest is exposed to creditors. However, my partner is in low-risk area for litigation, so presumably his 50% interest is secure. In my trust scenario above it's possible that all of the asset (my PPOR) would be exposed to creditors.

In terms of asset protection strategies for PPOR's, I've also heard that giving a 99% interest in the property to the low-litigation-risk partner and a 1% interest to the high-risk partner is also an option, so we'll have a look at that possibility as well.

 

[geoffw]

Alex_1

Another reason for not putting an existing property into a trust is that it will (I think) also trigger a stamp duty expense.

It seems to me to be best to put a new acquisition into a trust- not an existing one.

 

[Yourmortgage2t]

trust Busting

Hi

The Rich have a rule

Don't own anything, but control it.

This is why they discretionary trust to protect their assets

The purpose of an trust is to protect assets from being sued, not from liquiadation.

How a good reason for ultising trust to hold your assets.

Image that over the long weekend, you copped red light camera or caught speeding by radar, or even parking tickets.

If these go unpaid, eventually they take away your ldriving licence.

When this happens you are probably are unaware of this.

If then drive and have accident, you are now uninsured.

As you are uninsured, the injureg victum, will look to find compensation. How can they get a return.

The first thing they do, is find out what you own, so that they can make claim.

If you own your assets, you are vunable, If they are protected by a trust, this makes it lot more difficult to sieze your assets.

That's why the rich control the assets, not own them.

That's the advantage a trust can provide.

You would need to seek legal advise on your own circumstances


regards

 

[NigelW]

Originally posted by Alex_1
Dale GG,

In an earlier messages you and others have pointed out, quite correctly, that in creating any structure or transaction, it's important to be able to demonstrate a valid commercial reason for doing so other than just reducing tax, otherwise the ATO can challenge it. I can't locate the exact thread, but I think in your earlier message you said that your official 'commercially valid' reason for a particular trust structure was asset protection, not just tax minimisation.

My question is - by saying that the primary purpose of your trust is to protect assets (e.g. defeat creditors), could you be opening up an avenue by which a future bankruptcy trustee could get at the assets in your trust?

There is a good discussion of this issue at http://www.slp.net.au/ed2_6_01_newsletter.html.

Essentially, it seems that bankruptcy trustees have a number of trust-busting techniques at their disposal to access the assets in trusts where it can be shown that the primary purpose of the trusts is to put assets out of the reach of creditors. (e.g. Official Trustee v Baker & Ors No. NB72 of 1990 FED No. 530/94.)

If you have, for example, told the ATO that your trusts & transactions aren't designed to avoid tax but rather to protect assets, couldn't this statement come back to haunt you if later on, you had a bankruptcy trustee trying every legal avenue to 'see though' your trusts and get at the assets within?

If this is true, this begs the next question - if the primary purpose of your trust really IS to protect your assets and the trust structure isn't going to give you any tax advantages (e.g. all the beneficiaries are in the maximum tax bracket, etc.), what can you give as a valid reason for setting up the trust?

You can't say it's just to minimise tax, or you'll have tax problems. You can't say it's just to protect assets, as if you got sued later on, a bankruptcy trustee could use this against you later on to get at the assets in the trust.

I'm not by any means an expert on this issue; I'm considering setting up a trust and these are some of the questions I've come up with. Anyone have any comments/thoughts on this?

Hi Alex_1

There are a couple of distinct issues here:

1) tax planning
2) investment structuring

With regard to tax, whilst we are no longer in the heady days of the Sir Garfield Barwick led High Court (God bless 'im) it is still the law that (subject to one proviso) every taxpayer has the right to structure their financial affairs so as to minimise the incidence of taxation. Ie you can choose to use a trust, company, partnership or any combo you like. Even the dreaded Part IVA anti-avoidance provisions of the ITAA haven't changed that.

So in short, no, you don't need to provide a reason for why you've structured something in a particular way.

The proviso is that the transaction must not be a sham, fraud or pretence. Shams are transactions that never actually have the legal effect they purport to have. These types of transactions don't even make it to the anti-avoidance provisions because they are NOT a real transaction. A court can just strike them down because they never really existed in the first place.

But what you're proposing is entirely legitimate and doesn't even come close to that...

As to "trust busting" well, if you try to divest yourself of assets within certain periods prior to your bankruptcy or enter into transactions for less than full value then your insolvency trustee may be able to "claw back". If you're outside the relevant time periods then there's no issue. If you're within those time periods then you just need to establish that you haven't engaged in the prohibited conduct.

Merely establishing a trust and then acquiring investments through the trust is not within the kind of shady dealings that the insolvency clawback provisions are aimed at.

To be frank, I think asset protection is important, but many people get hung up on the semantics of whether they are doing something with an impure motive. There is an important distinction. Setting up your affairs from the outset to give you the kind of flexibility and asset protection that trusts can provide is entirely proper and VERY different from you trying at the 11th hour to pass assets to a trust or sell things for undervalue to related parties or obtain improper benefits when you know that financial difficulties are rapidly approaching...

If you're a law abiding citizen who meets their legal obligations then you've got nothing to worry about.

Of course you should raise all your concerns with your legal and financial advisers.

Good luck
N.