Assets protection & Cross Securitisation
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quiggles said: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.
I am very interested in this idea. Is there any way of going into debt to your trust without physically taking the money from the trust? The trust would need a lot of spare cash laying around to lend you the equivalent of the remaining equity.
On the paperwork side, how would the trust document this loan and is there a requirement to pay a reasonable rate of interest back to the trust?
Where would you put the cash borrowed from the trust to keep it safe? Can you simply gift it straight back to the trust?
Ebbie
The responses from WBTHOM may make a bit more sense in the context of things than Quiggles response, as there is a more thorough explaination.
If you borrow money from a trust you are deemed to have that money. This way, you have an asset and a debt, which cancel each other out and you havent achieved anything much in terms of asset protection, unless you spend the money and you dont have it any more. I am fairly sure that the money would need to come out, but an accountant would be able to tell you exactly what mechanism is required.
If you are interested in a purely asset protection, the cross-securitisation method is a very good way of doing it, as it does not require an actual exchange of money, rather you are giving a bank a second mortgage over another property.
Having said that, a trust can lend you money. For example, if you have a property with $100k of equity in a trust, you can create a LOC against it, and your trust can lend you this money. You pay the trust back at commercial rates, which it uses to pay the bank.
I hope this has helped a bit. If not, please continue to ask questions.
Cheers
Tubs
The responses from WBTHOM may make a bit more sense in the context of things than Quiggles response, as there is a more thorough explaination.
If you borrow money from a trust you are deemed to have that money. This way, you have an asset and a debt, which cancel each other out and you havent achieved anything much in terms of asset protection, unless you spend the money and you dont have it any more. I am fairly sure that the money would need to come out, but an accountant would be able to tell you exactly what mechanism is required.
If you are interested in a purely asset protection, the cross-securitisation method is a very good way of doing it, as it does not require an actual exchange of money, rather you are giving a bank a second mortgage over another property.
Having said that, a trust can lend you money. For example, if you have a property with $100k of equity in a trust, you can create a LOC against it, and your trust can lend you this money. You pay the trust back at commercial rates, which it uses to pay the bank.
I hope this has helped a bit. If not, please continue to ask questions.
Cheers
Tubs
wbthom said:
If I understand this correctly there is no more actual money borrowed against your PPOR. All you are doing is displaying a higher loan figure on the property title than you have actually borrowed. As in the earlier example the title would say you have a loan for $500K on your PPOR when in fact you only owe $200K?
"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." wbthom
-So how is it that these cheats & opportunists can actually get to you? I would assume the judge would dismiss the case.
Any one have any examples?
-Also if you are judged to be negligent, then you are personally liable. Would'nt this put all your assets, shares and controlled entities "on the table" and be available for payout of compesation & fines?
-Trusts do not seem to offer any protection where the family court or the csa is involved. (according to the cases I've read on their site)
-Why do you need a trust to gear up your assets for protection? If the loan = the asset, does it matter what entity holds it?
-So how is it that these cheats & opportunists can actually get to you? I would assume the judge would dismiss the case.
Any one have any examples?
-Also if you are judged to be negligent, then you are personally liable. Would'nt this put all your assets, shares and controlled entities "on the table" and be available for payout of compesation & fines?
-Trusts do not seem to offer any protection where the family court or the csa is involved. (according to the cases I've read on their site)
-Why do you need a trust to gear up your assets for protection? If the loan = the asset, does it matter what entity holds it?
Beach Bum said:
Hi Beach Bum,
It's not always about cheats -somtimes there are simple everyday accidents and things you have no control over
eg Recent Peakhurst Inn case:
"A thief was trying to rob the Peakhurst Inn Hotel, in Peakhurst N.S.W. and tried to enter via the manager’s flat. The manager caught him and beat him up. The robber then sued the manager for the injuries inflicted upon him and won. The mother of the robber also sued and won, for the “undue mental anguish” she suffered when she saw how beaten up her son was in hospital! Now insurance doesn’t cover this type of thing and the manager didn’t have to pay the damages, the owner of the hotel did, who lives 20 minutes away and was not present at the hotel when the attempted robbery occurred."
Clearly this was a situation where the hotel owner is paying for something he had no control of and and did not directly cause.
Another example: Joseph Combs who was sued because a tenant of his had a party in his investment property, and a friend of his tenant (an underage drinker) drove home drunk and died in a car accident! (Mr Combs wasn’t at the party… and… in fact, didn’t even know the party was happening!)
I believe this ended up getting thrown out of court but even if you win you can lose - the legal fees can seriously hurt you even if you are completely blameless!!
If you have your assets in your own name and are judged to be personally liable then yes, you will have all of your assets vulnerable to pay the judgement. But you don't personally "own" the assets in a discretionary trust you control and so those are isolated and protected. You rightly mention that they are not protected from the actions of the family law court. But assets inside a discretionary trust (especially with a corporate trustee) are still very much better protected than if you hold them in your own name. Asset protection is like another layer of insurance - you might never need it but you could be very grateful some day if you have. In this day and age, if you look like you have very little "personal" wealth, you sleep better at night knowing you are less likely to be a target!
Bill
wbthom said:
I still can't quite get my head around this because I've been to the land titles website and tried my own title search. It says "Mortgage to ANZ...." but apart from the name of the lender there was no mention of the loan amount. How does a creditor know how much you owe on the property and better yet - how do they know how much equity is available?
Ebbie said:
I still can't quite get my head around this because I've been to the land titles website and tried my own title search. It says "Mortgage to ANZ...." but apart from the name of the lender there was no mention of the loan amount. How does a creditor know how much you owe on the property and better yet - how do they know how much equity is available?
Hi Ebbie,
Big brother is alive and well in Australia! A search of your credit reference association file and land titles will often tell who your lenders are. Creditors can find your assets and mortgages by using court examinations, subpoenas, depositions or professional asset searchers (who may have "back channel sources"). A curbside valuation will give a rough estimate of a property value. If you know the mortgage then you can estimate equity. They are not so much after exact amounts as estimates of whether you are worth pursuing.
Bill
wbthom said:
If he is personally liable he either pays or declares bankrupt.
If he declares bankruptcy, would the trustee be able to claim on company shares (corporate trustee), assets and assets in a trust controlled by the hotel owner? edit: Or any moneys he loaned any other person, company or trust?
wbthom said:
Frivilous cases get thrown out so no protection really needed, once again assets or not your still up for legal fees, or go bankrupt.
wbthom said:
Assets of a trust with a corporate trustee, are registered in name of the corporate trustee entity of which the name of the directors is very easy to find.
So if I want to sue Joe Citizen, I find out which companies he's a director of (baycorp) and then see if there are any assets in those names. So you would still "appear" to own assets. Also if the company or the trust owes you money (which you may have lent to it for investments), then it is a personal asset in your name.
"Better protection"? How much better and at what cost? (including fees, tax & CGT considrations)
Beach Bum said:
Hi Beach Bum,
The bankruptcy trustee can only access what a person owns or is owed - outststanding loans included. If there are assets inside a discretionary trust with a corporate trustee they can't be accessed as they don't "belong" to the hotel owner. Corporate trustees if well designed do not hold any assets so control of the "$2" share gives you nothing of value.
Not all malicious cases get thrown out of court- there are many weird cases where you are not guilty, but you can still get sued or a least may pay hefty legal fees. You keep missing the point of asset protection structures
- You cannot be 100% protected in all cases. Asset protection structures are in place to reduce your risk by making you a much harder target to attack. And equally important they compartmentalise the damage so that you do not lose the lot if sued.So what if you are named as the director of trustee company - you may control the underlying assets but you do not "own" them (they belong to the trust) and they cannot be sold to pay your personal debts. Yes with outstanding investment loans a creditor can arrange to call in the loan, but that is why I recommend cross-securitisation methods that avoid you having apparent equity or outstanding loans.
Asset protection structuring is like insurance - set it up early and your costs are minimal (eg the cost to set up a discretionary trust with a corporate trustee.) Setting it up later and selling existing assets into a trust could be prohibitively expensive with stamp duty and CGT. Sometimes you will just set up a minimal structure to protect new assets and use various inexpensive methods (eg cross securitisation) to protect the older assets without transferring them to a new entity. It's definately NOT a one size fits all concept!
cheers, Bill
The NEED for asset protection
I remember a story my chiropractor told me a couple of months ago. He was treating a patient a few years ago and all of a sudden the patient screamed out in pain. A few weeks later it turned out that the patient was sueing him for causing him a major back problem which meant he was in pain and couldnt walk properly. (I can't remember what the problem was now) but he had been to other specialists who said that he did have this problem.
Now the funny thing was that the chiropractor was driving down to Gippsland in Vic one day and pulled over at one of the beaches for a break. And who's car did he see there? The patient's. And what was this poor crippled guy doing? He was playing on the beach with his daughter. Anyway, the chiro took a whole roll of film of the guy. When it went to court it was looking bad for the chiro, until his barrister went up to the judge and showed him the photos. The judge called the other barrister over and said "It looks like this guys having us on". The other barrister went over and told his client who walked straight out, no limp, no pain.
So, you see how the chiropractor was going to have everything taken from him and he didnt even do ANYTHING wrong. He didnt even mistreat the patient.
Beachbum, I know that you think that as long as you act honestly then you dont have anything to worry about. I think you have to act honestly and ethically in your dealings with people, and have faith that people will do the same to you. But dont trust them. This kind of thing can happen to anyone. For example, if you hit someone in your car, its fair enough if you pay for their damage and medical expenses, but what happens if the person you hit only had a headache for a couple of days, but then comes back at you asking for a million dollars because you screwed their back up and they cant walk? See above, its easy to do. You only need to protect yourself against the dishonest ones.
Tubs
I remember a story my chiropractor told me a couple of months ago. He was treating a patient a few years ago and all of a sudden the patient screamed out in pain. A few weeks later it turned out that the patient was sueing him for causing him a major back problem which meant he was in pain and couldnt walk properly. (I can't remember what the problem was now) but he had been to other specialists who said that he did have this problem.
Now the funny thing was that the chiropractor was driving down to Gippsland in Vic one day and pulled over at one of the beaches for a break. And who's car did he see there? The patient's. And what was this poor crippled guy doing? He was playing on the beach with his daughter. Anyway, the chiro took a whole roll of film of the guy. When it went to court it was looking bad for the chiro, until his barrister went up to the judge and showed him the photos. The judge called the other barrister over and said "It looks like this guys having us on". The other barrister went over and told his client who walked straight out, no limp, no pain.
So, you see how the chiropractor was going to have everything taken from him and he didnt even do ANYTHING wrong. He didnt even mistreat the patient.
Beachbum, I know that you think that as long as you act honestly then you dont have anything to worry about. I think you have to act honestly and ethically in your dealings with people, and have faith that people will do the same to you. But dont trust them. This kind of thing can happen to anyone. For example, if you hit someone in your car, its fair enough if you pay for their damage and medical expenses, but what happens if the person you hit only had a headache for a couple of days, but then comes back at you asking for a million dollars because you screwed their back up and they cant walk? See above, its easy to do. You only need to protect yourself against the dishonest ones.
Tubs
tubs said:
Great point Tubs - The number of dishonest people may be small but they can have a devastating effect if you are the one attacked. I have a business practice in a shopping centre, and there are many stories of purported "injury" claims that are clearly falsified when viewed on security cameras. It's sad that we have to put up more and more barriers to protect ourselves but there are definately people out there that have little concern for your welfare when they think they can make easy money.
Bill
Hi all
Found this thread interesting i have read other threads where investors have not got a trust set up but have a few properties.
Which is the best way to protect yourself without having a trust apart form insurance.
If your properties are worth 1 mill and equity say 300000 you get a LOC for 300000 but dont use it does it show on searches that you owe 1 mil or the balance of the LOC?
cheers
BC
Found this thread interesting i have read other threads where investors have not got a trust set up but have a few properties.
Which is the best way to protect yourself without having a trust apart form insurance.
If your properties are worth 1 mill and equity say 300000 you get a LOC for 300000 but dont use it does it show on searches that you owe 1 mil or the balance of the LOC?
cheers
BC
bonecrusher said:
Hi BC,
Best way to protect a property when not using a trust is where possible have the property in the name of the partner that is least likely to get sued. Then have the property appear as highly mortgaged as possible - preferably using some form of cross-securitisation or 2nd mortgage technique
From a servicing approach, an LOC is treated by lenders as if you had fully drawn it, and the mortgage usually lists the full amount as if you had all the money, so I suspect most simple searches would see the full LOC value
Bill
It is my understanding that most personal injury cases in Aust relate to motor vehicle accidents.
If your car is unregistered, has bald tyres, driven by an unlicenced driver or someone over the alcohol legal limit, chances are your insurer will do their damn best to avoid paying out.
If they do not pay out and you own assets in your name, you are exposed.
A little bit of thought when structuring you investments and your loans can go a long way. You can never be 100% safe but you can sure try and minimise your exposure.
NickM
If your car is unregistered, has bald tyres, driven by an unlicenced driver or someone over the alcohol legal limit, chances are your insurer will do their damn best to avoid paying out.
If they do not pay out and you own assets in your name, you are exposed.
A little bit of thought when structuring you investments and your loans can go a long way. You can never be 100% safe but you can sure try and minimise your exposure.
NickM
NickM said:
Have heard of many instances where insurance claims have been denied. There are other insurance risks eg your insurance company could go broke like HIH, leaving you liable. You could be sued for an amount above the limits of your insurance coverage. (Greedy lawyers and plaintiffs want both your insurance and your assets!) After you pay your excess and your liability insurance is maxed out, guess who’s liable for any remaining balance - you are!
Insurance is absolutely vital but should only be the first of several layers of protection.
Bill
