Asset protection - Structure

[devank]

Hello,
I have been looking into “Asset protection”. First picture is what I thought suitable based on the readings so far.

However, ‘Dymphna Boholt’ in one of her e-book suggesting the following 2nd format. I think if anyone sues one of the trust then all other trusts also vulnerable because the trustee company owns them all. That kind of defeats the purpose.

What do you all think? How did you setup your structure?

- devank

 

[Aaron_C]

What are you looking to achieve with this asset protection? You don't need so many trusts if it's just for a small sum of money

 

[devank]

Mainly one reason. I don’t want to loose all my assets because someone from one of the IP sues beyond the landlord insurance (10 Mil public liability).

Side benefits:
1. Distribute the income in tax effective way
2. Pay for stuff before tax

 

[Terryw]

Don't always believe the hype. View it critically.

Keep your eggs in separate baskets, or not too many in the one basket.

For good asset protection:
-Beware of the clawback provisions in the Bankruptcy Act.
-Be aware of the powers of the Family Courts.
-Be aware that wills can be challenged (and trusts attacked this way sometimes).
-Beware of risks for trustees' directors under the Corporations Act.
-Uncommercial transactions can be undone under the Corps Act, Conveyancing Act, Bankruptcy Act and Family Law Act so look out when doing popular techniques such as 2nd mortgages, gifts and loan backs etc
-Look out for unpaid present entitlements and Div 7A loans.

And don't call what you are doing "asset protection"!

 

[Terryw]

Also, should add:

- Maintain adequate insurance
- Take advice on the internal structure of your trusts and companies.

 

[Aaron_C]

Don't try and kill a fly with a bazooka. Who can claim for more than $10m from an IP?

 

[Terryw]

I think the structure in the 2nd diagram is pretty good and the way I have done my structure, pretty much.

There is a trading company with its own trustee which is good if this company is sued. The shares of this company are owned by a separate trust, the Piggy Bank trust.

The investment trust has a separate trustee. With the shares of this company being owned by the piggy bank trust. I would just have one director of this company as 2 or more would add unneeded risk.

Having a personal trustee for the Piggy Bank trust is ok as all this trust does is own shares and there are no risks with owing shares.

The bucket company can be set up later to take excess income from the trusts when the individual rates exceed 30%. Shares of this are owned by Piggy Bank trust which is ok.

It is a simple structure which can be added to later.

If a tenant is able to sue the landlord then that trust's assets can be at risk. The company will be hit with the lawsuit, but it will be indemnified out of the trust assets. There is a risk that the director could be liable in some instances such as criminal acts or OHS breaches, and the director could therefore possibly be sued (and/or imprisoned!) but the person would generally own nothing.

The person would own the shares held on behalf of the Piggy bank trust but this is as capacity as trustee and these would generally be unavailable to creditors of the person.

If the trustee of the investment trust is sued, the appointors of the other trusts would immediately sack that company as trustee (the deed would automatically remove the trustee usually if insolvency or administration etc) and appoint a new trustee. The other investment trust assets would usually be out of reach of the creditors of trustee company as trustee for investment trust 1.

overall, not a bad way to structure it.

 

[Marty McDonald]

I have to agree with ACE. If you are taking about commercial properties worth multi millions then maybe. For the average investor that second structure is over the top. Not to mention that you really are making it hard fir yourself to borrow money. Perhaps a compromise would be the better solution. Seek advice but be mindful of the fact that every entity needs it's own tax return, ASIC annual rego etc etc. It all costs money. The more returns you have to lodge the more the accountant charges.

IMO you need to be able to clearly explain the structure to your lender / broker (without referring to your accountant) and know why you are set up that way.

If you feel that what your accountant is advising is over complicated, don't understand it yourself and or it flies too close to the wind tax wise don't do it... Opt for something simpler.

 

[Terryw]

Hi guys

I can't see how it is over the top.

That is the structure someone with a business would use. It consists of one structure for the business (= trust with company as trustee). And one structure for the investing (= trust with company as trustee).

The shares of these companies could be owned by the individual though as they are just trustee companies.

The bucket company could be added later and the investment trust 2, 3 etc added later as more properties are purchased.

Ps I have assumed all those trusts are discretionary.

 

[devank]

Thank you Terry for explaining the 2nd structure. Honestly I didn't understand it until I read through your explanation word by word.

Don't always believe the hype. View it critically.

What do you mean by ‘hype’ in here? Are you refering to the use of "asset protection"?

Don't try and kill a fly with a bazooka. Who can claim for more than $10m from an IP?

Has it happened before?
Just say failure to fix a fence or late to check a smoke alarm caused a death. Would that be a more than $10m?

If a tenant is able to sue the landlord then that trust's assets can be at risk. The company will be hit with the lawsuit, but it will be indemnified out of the trust assets. There is a risk that the director could be liable in some instances such as criminal acts or OHS breaches, and the director could therefore possibly be sued (and/or imprisoned!) but the person would generally own nothing.

The person would own the shares held on behalf of the Piggy bank trust but this is as capacity as trustee and these would generally be unavailable to creditors of the person.

If the trustee of the investment trust is sued, the appointors of the other trusts would immediately sack that company as trustee (the deed would automatically remove the trustee usually if insolvency or administration etc) and appoint a new trustee. The other investment trust assets would usually be out of reach of the creditors of trustee company as trustee for investment trust 1.

That’s the core of this structure. Thank you very much.

If you feel that what your accountant is advising is over complicated, don't understand it yourself and or it flies too close to the wind tax wise don't do it... Opt for something simpler.

It is not over complicated to understand once I imagine to my own scenario with my own names and everything.
Having said that, is there any simpler structure to protect from losing everything?

 

[Terryw]

Really that structure is pretty simple.

It is just one trust for owning the trading business and a separate trust for investment property. A third trust is added for owning the shares.

A mortgage broker is probably likely to be using this structure themselves. No one would be, hopefully, buying properties in the same structure as their trading business.

With asset protection there is a lot of hype out there. A few promoters out there may it sound easy sometimes and then complicated at other times. One suggests you just use a second mortgage to secure any equity in your home. No need to transfer the home to a trust etc. Sounds easy, but is it effective?

 

[Terryw]

Having said that, is there any simpler structure to protect from losing everything?

Its not so much the structure but how you set it up and how you use it.

Discretionary trusts and superannuation are the two best structures for asset protection.

Discretionary trusts are good because no one has any entitlement to the income or capital of the trust (until the trustee makes a resolution at least). This means being a beneficiary of the trust doesn't amount to being property as defined under the Bankruptcy Act.

When a person goes bankrupt then their property is taken over by the trustee in bankruptcy and this property is then sold and money distributed to creditors. Assets in the discretionary trust will generally not be available to the trustee in bankruptcy because the trustee of the trust will not make any distributions to the bankrupt person. If he did then the money would fall into the hands of creditors.

But where people can get into trouble is if they lend money to the trust, maybe for deposit to buy a house. A loan is always returnable so this could be returned to benefit the creditors.

Another problem may be where the person gifts money to the trust, maybe for the deposit. This could be clawed back to the person under the Bankruptcy Act for a number of years, depending on intention. If someone thinking he might go bankrupt gifts all his money to a trust with the aim of keeping the money from creditors, then this could be clawed back indefinitely.

Another potential problem is acting as trustee or director of trustee for no remuneration and then going bankrupt. This is like working for free and it could be claimed that the trust owes the individual wages or money for work performed.

Another problem may arise with uncommercial transactions. Having you trust put a mortgage over you home for eg. What is the commercial reason for this? A mortgage usually secures a loan. What was loaned to whom, and what for, what rate etc.

There are also the Alter Ego arguments. Since Richstar case some people have argued that where one person controls a trust then it is good as certain that they can make a distribution to benefit themselves. So they argue that the trust assets are the assets of the person. I don't know any cases where this argument has succeeded, but I know of one where it was rejected (Smith, NSWSC). To strengthen a trust it may be wise to think carefully about who the appointors will be.

Many things to consider.

 

[Aaron_C]

Has it happened before?
Just say failure to fix a fence or late to check a smoke alarm caused a death. Would that be a more than $10m?

I don't know how you can be sued for in excess of $10m due to a fire or a broken fence. Don't believe all the scare tactics - they are there to make you over-insure and to create complex legal structures that have no real benefit to you. Plus, as McDonald has said, a complex structure makes it more difficult to borrow money and there are additional compliance costs.

 

[Player]

I am far from being the teflon man, however have a mix of trusts and personally held assets. Also my building and landlords insurance cover is always for 20 Mill.

There is some scare mongering amongst the purveyors of such structures and education, however given a choice for protection and flexibility of profit distribution and estate planning issues, the discretionary family trust is a nice thing.

Sometimes these things can be overdone particularly when holding (excessively) negatively geared assets to be fed with after tax dollars until such time as the quarantined losses can be applied to offset future profits. This can sometimes stifle portfolio growth via rapid acquisition and lending may be more difficult. For a positively geared or pos cashflow asset, it's a no-brainer.

The other way one can contribute to portfolio protection is with debt. Terry has explained the piggy bank trust scenario with shareholding purpose very well. I finally understand it.

Could we be sued for in excess of 10 Million dollars from a tenant? Unlikely (unless repeated negligence of a faulty safety issue), but not impossible.

Consider (even if in a very low litigious risk occupation) if you are responsible for killing or seriously injuring a person in a motor vehicle accident that was your fault, perhaps even inebriated/intoxicated. Do you think your assets may not be at risk?

I am not saying that everyone should go and transfer long held assets into trusts and trigger CGT events and stamp duty impost, however to dismiss the risk of owning assets and only consider the occupant of that asset to ever have a legal interest in one's portfolio/holdings is a tad simplistic........... a little bit here in one trust, a little bit there, some debt and the cost of being pursued versus the payout benefit starts to look more unattractive to potential plaintiffs.

 

[devank]

After considering pros & cons of above structures, I am planning to create the following structure (attached).
This is for a mum & dad who are on 100K wage each and also have two VERY small businesses.
I would appreciate any thoughts/advice before I put them in place. Also this could help anyone in similar situation.

 

[Terryw]

Its a bit hard to understand from your diagram.

Looks like your trading trust holder real property and shares in the piggy bank trust.

 

[coastymike]

Quite a number of issues with this structure

1. Business 1 and Business 2 in the same structure. Risk of Business 1 being sued exposes Business 2.
2. Having both businesses in the same structure exposes the cashflow positive IP's.

Structure is very poor for asset protection.

I agree with Terry I can't understand whether piggy bank trust is holding shares in the trustee company or whether it is holding passive shares in other companies.

also Prop, IP1, IP2 etc. Can't see how this works into the diagram.

 

[devank]

Small business, few high yielding shares and cash flow positive IPs come under the ‘Trading Trust’ which has the ‘Trading Trustee Company’ as its own trustee.

Shares of this ‘Trading Trustee Company’ are owned by the ‘Piggy Bank trust’.

‘Piggy Bank trust’ has personal trustees. These personals (mum & dad) holds other IPs (pprop, IP1, IP2, IP3) under their own names.

Having all under one umbralla may not be a good idea but since they are all small it doesn't make sense to create separate trusts. I'm trying to separate the personal assets (-ve geared & home) and other cash flow positive ones.

 

[Aaron_C]

What's the point of going to the trouble of a trust if the trustees are natural persons? Kinda defeats the purpose of asset protection..

 

[coastymike]

I can't understand why the negatively geared properties are not in some form of trust and profits flowed from trading trust into "negatively geared property" trust to obtain tax benefits.

Best off seeking professional advice. Need to work through calculations and figures.

Structure doesn't look that good to me but more facts would determine whether that is the case.