Asset protection - trusts and mortgages

[beachside]

Hi

I recently went to one of Dymphna's free seminars - gave the old brain a bit of a reboot so worthwhile. She pulls a reasonable crowd.

One segment was particularly interesting although nothing new, just got me thinking about it again - asset protection. Here is an interesting video done at one of her boot camps (not much different to what we got for gratis) It goes for 90 min so if you want to skip the examples of how you can come unstuck etc and go straight to the examples of structuring FF to 1h:08m

I have spent several days reading threads going back to 2005 plus other sites from accountants, magazine articles etc. Gee, TerryW certainly has contributed a lot over the years, a bit like our own resident solicitor, very appreciated!

When you hear trusts discussed as a way to protect assets it is made to sound simple - some say it is, others the opposite. The corporate trustee and discretionary trust seems the most liked and promoted, but it certainly has its costs and disadvantages, and the slightest balls up in executing can bring any protection crashing down. Just looking at the asset protection aspect it is a way of partitioning all your assets if you have a trust/corp trustee for each asset so in the worst case scenario all that is at risk is the equity in any asset within each trust if a claim is made against the trust, ie as owner of an IP. (This is my understanding put in a simplistic way)

My interest is purely asset protection, and although of greater importance to those in high risk, anyone can get unlucky. A trust structure can be used for future purchases, but those who already have property in your own name it is suggested that they be mortgaged to minimize equity at risk (2nd mortgaged to yourself for any vulnerable equity not held by bank). From what I read in old threads this also involved utilising a trust, but there was a question of having to account for where the borrowed money goes and loan had to be in place for 2 years for protection to exist????????.

I would be interested in what options are available, or practical for my situation.

If using a trust, the only people involved would be me, myself and I. I am not sure if being the sole director of a corp trustee with me as the sole beneficiary (would specify sole!!) is any different to multiple people involved. No need to go into too much detail, just the basics

If utilizing mortages, how can this be done. I did read a couple of 2005 threads on the topic, but they are quite old.

This is what it can be based on:

PPOR with inv loan of approx 55% (current) LVR. Money used for IP.
Some cash in bank offsetting about 40% of those borrowings.
IP with loan of 60% LVR, funds currently in 100% offset account waiting to be used for next purchase.
Negligible current income other than rental - neutral.
So, both properties have mortgages, although plenty of equity left, and cash in bank - (cash in one account = 1 loan payout). Different lenders, no X.
Next purchase might be a reno and flick, or used in a JV of some description (might post about that later)

What is my risk, and how best to minimize it/protect assets?? Appreciate suggestions from our resident experts ..... or those who have been burnt!

To what extent is info available to people who want to sniff around, who can access it, how, what does it cost. I guess the info available has an influence on risk/vulnerability. I would be interested in the details available because I know some people also use this info to assess deals - peoples situation, properties which are crossed, etc etc.

Thanks

 

[Terry_w]

As far as I know the person in the video is not a solicitor. I would suggest getting proper advice.

I guess there are 2 aspects to asset protection
1. Deterring people from suing you.
2. Being bankrupted and having things structured so as to prevent them falling into the hands of creditors.

Deterrence. Before someone tries to sue you it would be reasonable to expect that they did searches to see what assets you actually have and they could potentially take. There is no use spending $50k on a court case and winning and then find out that the person has no money from which to satisfy the judgment. You will then have lost the original amount you were suing for and the legal costs.

But I have found this rarely happens. Just a few weeks ago one of my clients was in court and if he lost they judgment could have been for $130k. He had no assets.

Bankruptcy. This is ultimately what you are protecting from (could also be spouses and death succession related). If someone sues you and wins they will get a judgment. You would then have to pay this in x days and if you don't then the creditor can begin bankruptcy proceedings. You then have x days to pay, if you don't you are bankrupted.

Once bankrupt a trustee in bankruptcy steps in your shoes. He/she takes over your financial affairs. Your property title is transferred to their name and it is generally then sold. Any money released is then used to pay their massive fees and then the creditors.

If there is not enough money to go around then they may start to look into other aspects such as questioning you about transactions etc. To do this the trustee in bankruptcy will need funds for the time and resources spent. They may even ask the creditors to put in some cash to enable them to do this. Most may think this is throwing good money after bad and not want to fund this. It could be that some of the funds from the sale of assets is retained to do this too.

Any mortgage on the house such as a second mortgage to a trust would generally be a secured creditor and would be paid out ahead of non secured creditors. But if it is clearly related parties then questions will be asked. Mortgages are used to secure interests. What was the mortgage securing? If it was a loan to the trust then this is an asset of the individual and must be paid back. If the trust had borrowed money and used the individual's property as security then the trust may be requested to refinance its loan and to release the security.

Other ways trusts can be at risk:
- loans to the trust
- gifts to the trust
- trustee not remunerated
- uncommerical transactions such as $1 per week long term leases, options, transfers, rent free arrangements etc
- default beneficiaries could be attacked
- shares of the trustee company could be held in the individual's name and the trustee in bankruptcy could seize these and take control of the trust and instantly vest the trust assets to the bankrupt so that the creditors can get this money. (appointor could and should immediately sack the trustee if this could happen, well in advance).
etc

 

[Aaron_C]

Btw you cant have a trust if you are the sole beneficiary. Then there is no trust.

 

[Terry_w]

Btw you cant have a trust if you are the sole beneficiary. Then there is no trust.

This is true, but beachside probably meant they would be one beneficiary out of many potentials.

 

[beachside]

Thanks Terry ...and Aaron for clarifying I could not use a trust if I was the sole beneficiary which would be the case.

So what is the best way for the average person to protect assets, and particularly in my case where I don't have a spouse ...or family I would want to involve.

And as per original email -
To what extent is info available to people who want to sniff around, who can access it, how, what does it cost. It would be nice to know what others know about me

thanks

 

[Terry_w]

The best way to protect assets is to not have any. An interest in a discretionary trust is generally not an asset (ie not 'property' as defined under the bankruptcy act). But if you are a default beneficiary of a discretionary trust then this is something amounting to property. So you need a well thought out trust deed.

You also need to consider how you are going to get money into the trust. Best to gift, but if you go bankrupt these gifts can be clawed back. Generally the longer ago the gift was the stronger the gift is and the less chance of clawback.

Consider how you operate the trust too.

Also consider a SMSF. Funds in a SMSF are generally very safe from creditors - unless you start making sudden large contributions just before bankruptcy.

For existing assets there is not really much you can do of any substance. Sell them to discretionary trusts at full market value maybe. But then subject to the clawback provisions too. And this will be costly. Allow a trust to mortgage your personal property for a LOC etc. Put a caveat showing an interest by a second unregistered mortgagor etc. Long term lease registered on title. This is really just for show and deterance value though.

 

[Terry_w]

And as per original email -
To what extent is info available to people who want to sniff around, who can access it, how, what does it cost. It would be nice to know what others know about me

thanks

Anyone can do an ABR search for free. This will show the ABN of the trust when it was registered, GST status etc. Need the name of the trust to do this and it doesn't show much.

Anyone can do an ASIC search on a company name
This will show directors, DOBs, place of birth, current home address.
Then an ASIC search on the person's name. This will show what companies they are directors of and what companies they own shares in.

Trusts cannot be searched as they are not legal entities, but are some sort of private arrangements.

So if you have a unit trust you can find the trustee and search on this, but you cannot find out who the unit holders are.

But, in some states when buying a property as trustee of a trust the land titles office wants a copy of the deed. This may be available if a search is conducted, I am not sure. But there is no way to know if the unit holders have changed.

Property searches can be done by anyone easily. This includes address searches to find the legal owner or searching under a name to find out what addresses are owned by this person or company. You cannot search under a trust name as trusts don't own anything, it will be the trustee that owns things on behalf of the trust.

ASIC searches cost money, maybe $30. Each property search costs money and only covers one state. It is amazing how a $30 expense can stop people from looking further.

I have a mate suing someone now I suggested he conduct searches to see if there is any point in suing (ie no assets probably no point). He doesn't want to...

 

[CHAOS]

I have been reading through the posts of trusts also to try and understand how they work etc befoer jumping in.

TerryW
you wrote that trusts can be at risk if
there is a loan to the trust
or a gift to the trust

Would this not mean that all trusts are at risk?

How does a trust purchase property? It needs to get cash or equity from somewhere. Would this either be via loan or gift?

 

[Terry_w]

Yes. Any trust is at risk with loans or gifts or initial settled property.

But this risk will depend on a lot of things.

eg. I know I am going bankrupt, so I transfer $100,000 into the trust as a gift. This is at risk of being clawed back because the transfer is designed to defeat creditors.

I loan $20,000 to the trust. 100 years later I go bankrupt. This loan is still my asset and belongs to me so can be called in.

I am solvent and I gift the trust money. No with of trouble. 5 years later I go bankrupt. This would generally be safe and unable to be clawed back.

 

[Aaron_C]

Yes what Terry is alluding to is something called, inter alia, 'voidable preferences' in the Bankruptcy Act. However, the test for that is whether the person giving the money knows that they are going bankrupt/insolvent so it doesn't apply to people without that knowledge.

 

[Terry_w]

I think a gift would fall under s120 of the Bankruptcy Act and be void as no consideration is given. Subsection 3 says not void if

(i) the transfer took place more than 2 years before the commencement of the bankruptcy; and

(ii) the transferee proves that, at the time of the transfer, the transferor was solvent.

This would mean a gift within 2 years of the commencement of bankruptcy could be void or a gift after 2 years if the giver cannot prove solvency.

 

[RPI]

The point Terry made about looking for assets before starting litigation is a great one.
Not all lawyers will do it, but all good lawyers will.

When we start civil litigation (suing for money to put our client back in the financial position they should have been had that not be wronged in some way) we ask the following questions.

1. Is there a loss?
2. Can we identify who caused the loss?
3. Has the person at 2 got the assets to pay for the loss?

If any of those 3 are a no, then the case has no legs and we won't go any further.

D

 

[beachside]

The best way to protect assets is to not have any. An interest in a discretionary trust is generally not an asset (ie not 'property' as defined under the bankruptcy act). But if you are a default beneficiary of a discretionary trust then this is something amounting to property. So you need a well thought out trust deed.

Do you mean one of a few beneficiaries but the only real beneficiary by original wording of the deed - so by default the only beneficiary unless trustee changes where benefits are directed? This leads to question I was going to ask on a sole beneficiary not being able to have a trust for themselves (as I previously asked about myself). Thinking outside the square to get around not being able to have a trust for yourself, what if there was an additional person listed as beneficiary but who received nothing from trustee - a Claytons beneficiary?

The person to be the trustee and appointer is a tricky one, trustee has the power to do what they want with trust, appointer has ultimate power to hire and fire trustee but no direct power over trust ......hmmm, I can really see how the terms TRUST and TRUSTEE came about! A bit like a Mexican standoff!

. Generally Put a caveat showing an interest by a second unregistered mortgagor etc. Long term lease registered on title. This is really just for show and deterance value though.

Ah yes, I had forgotten about caveats. In the above example do you mean a caveat for the lease or are you talking two different deterrents. Wouldn't a lease be easily confirmed in a number of ways if tenanted, and seen as BS if owner lived in property.

Anyone can do an ABR search for free. This will show the ABN of the trust when it was registered, GST status etc. Need the name of the trust to do this and it doesn't show much.

Anyone can do an ASIC search on a company name
This will show directors, DOBs, place of birth, current home address.
Then an ASIC search on the person's name. This will show what companies they are directors of and what companies they own shares in.

Trusts cannot be searched as they are not legal entities, but are some sort of private arrangements.

So if you have a unit trust you can find the trustee and search on this, but you cannot find out who the unit holders are.

But, in some states when buying a property as trustee of a trust the land titles office wants a copy of the deed. This may be available if a search is conducted, I am not sure. But there is no way to know if the unit holders have changed.

Property searches can be done by anyone easily. This includes address searches to find the legal owner or searching under a name to find out what addresses are owned by this person or company. You cannot search under a trust name as trusts don't own anything, it will be the trustee that owns things on behalf of the trust.

ASIC searches cost money, maybe $30. Each property search costs money and only covers one state. It is amazing how a $30 expense can stop people from looking further.

I have a mate suing someone now I suggested he conduct searches to see if there is any point in suing (ie no assets probably no point). He doesn't want to...

Yeah I have done searches on ABN etc, but not for this purpose. Good to keep in mind. So if you have assets in a discretionary trust and not the trustee/director of corp trustee and sued for something unrelated to trust, the trust will never get picked up? What about a paper trail???

Property searches??? I did this many years ago when working in recoveries for a while. I think I just used RP Data from memory - does that also provide a list of properties owned by a person ...assuming you have narrowed down the correct John Smith? I can't remember. Any other avenues for search of property assets, especially if no access to a subscription data base. And on a related issue, how does anyone (or a solicitor) search for a persons loans and loan balances.

I was going to ask another question but in writing it I think I worked it out. Lets say an incident occurred which you became aware that you may be sued for $100k and transferred all assets into trusts to hide. You would not have any money and therefore nothing to sue for. But not having any money would cause you to go bankrupt if sued - which would uncover disposal of assets and then reversed and creditor gets money. This reminds me of hide and seek!!!!! Ah, the penny has dropped. DOH! I think the word "bluff" may be relevant too!

 

[Terry_w]

Do you mean one of a few beneficiaries but the only real beneficiary by original wording of the deed - so by default the only beneficiary unless trustee changes where benefits are directed? This leads to question I was going to ask on a sole beneficiary not being able to have a trust for themselves (as I previously asked about myself). Thinking outside the square to get around not being able to have a trust for yourself, what if there was an additional person listed as beneficiary but who received nothing from trustee - a Claytons beneficiary?

Lets break it up.

A default beneficiary is one who receives a distribution on some event occuring such as the trustee failing to make a distribution or the winding up of the trust. This will all depend on the wording of the deed and it could be that the default beneficiary has something almost approaching 'property' in the trust. This significantly reduces asset protection.

A trust where X holds for Y absolutely is called a bare trust and there is not asset protection benefits at all. But with a discretionary trust the deeds are usually worded so that the beneficiaries are defined as X and then any spouse of X (past present and future), any children, step children etc.

This means you may be one of the main ones and possibly the only one named, but you won't be the only one, even if the other beneficiaries are yet to come into existance - grandchildren, companys in which you are a director or a shareholder etc.

 

[Terry_w]

Ah yes, I had forgotten about caveats. In the above example do you mean a caveat for the lease or are you talking two different deterrents. Wouldn't a lease be easily confirmed in a number of ways if tenanted, and seen as BS if owner lived in property.

A caveat is a warning to the world that someone else has an interest in the property. In this case it may be a related entity which has an interest because of an unregistered mortgage. If there was no caveat then someone getting a judgment and lodging a writ on title would take priority.

A long term lease may also be registered on title. Someone doing a title search would see this straight away, along with some caveats maybe.

If owner lived in the property this doesn't mean anything. A bank has a mortgage over most property with owners living in the property.

 

[Terry_w]

Yeah I have done searches on ABN etc, but not for this purpose. Good to keep in mind. So if you have assets in a discretionary trust and not the trustee/director of corp trustee and sued for something unrelated to trust, the trust will never get picked up? What about a paper trail???

If you are bankrupted then you can be examined - the trustee in bankruptcy may ask to see your tax returns for the last 10 years. These may show distributions from trusts. You may be asked questions such as are you the beneficiariary of any trust, the appointor etc. You cannot lie as you would be committing offenses.

 

[Terry_w]

Property searches??? I did this many years ago when working in recoveries for a while. I think I just used RP Data from memory - does that also provide a list of properties owned by a person ...assuming you have narrowed down the correct John Smith? I can't remember. Any other avenues for search of property assets, especially if no access to a subscription data base. And on a related issue, how does anyone (or a solicitor) search for a persons loans and loan balances.

Not sure about RP data.

You can not search to find what balances are on loans. You could possibly find what the original loan amount was and then make assumptions. If a matter has started in the courts you could subpoena statements perhaps.

 

[beachside]

Thanks for all that Terry.

What avenues are usually used for property searches on a person, other than what is already suspected and can be checked though council I assume. How do you search for mortgages on property, apply and pay for a title search? It is obviously easy and accessible to anyone, and in bulk as I regularly get overseas phone calls "re my loan."

How would you go about putting a deterrent caveat on your own properties, if at all possible?

 

[Aaron_C]

Use property searches like SAI Global to find out what properties someone owns.

 

[Terry_w]

How would you go about putting a deterrent caveat on your own properties, if at all possible?

You generally wouldn't put a caveat on your own property. If another entity had an equitable interest such as an unregistered mortgage then it could want to register a caveat. The entity should have a mortgage agreement drawn up and a caveat application prepared. Stamp duty could be payable in some states too.