Bank Settlement Conditions for a Trust

[setunge]

We have setup a discretionary trust for property investing following the guidelines given in Dale Gatherum's Tax Battles.

We have appointed a company owned by myself and my wife as the trustee. Currently we are in the process of purchasing an IP for the trust. Bank has approved finance subject to the condition that written consent and indemnity should be obtained from all adult beneficiaries before the settlement.

I am a little concerned about this condition since I have included two of my relatives as beneficiaries of the trust. I would appreciate it if some body who's been through this path could advise me whether it is usual practice and what effect it has on the beneficiaries.

 

[duncan_m]

Hi Setunge,

I've borrowed a number of times for properties that are held in Trust and have never had this condition imposed.. It seems a little anal to me.

Which bank is it?

Regards,

Duncan.

 

[setunge]

Thanks for the response. Bank which impose this condition is Citibank

 

[Rolf Latham]

Hi Setunge

A common problem, but shows the ignorance of the lender on some very basic legal and structuring issues.

With the help of Dale's own left hand woman (Sharon) we have even managed to send mortgage insurers running for cover and changing "policy".

The logic is so simple that even a dumbo like me could figure it out.

The follwing is an extract from a document that did the trick.

ABC Trust is DISCRETIONARY Family Trust, not a unit or Hybrid trust.

This means, no named beneficiary in a trust can have any claim on capital within the trust, as the discretionary/exeutive powers of the trustee might exclude those beneficiaries completely.

The Company (Corporate Trustee ABC P/L) has complete executive powers of the distribution of not only the income from the trust but also the capital distribution if any of the capital items are sold. This then also applies to a mortgage or recovery under foreclosure.

We therefore see no difference between personal ownership or indeed having 50 primary named beneficiaries.

My basic line has always been that you cant ask someone with no "beneficial" capital or income interest in the asset to provide a guarantee on the loan secured by the asset. While it may not be "illegal" in most instances it is at the least unethical and ignorant and in the extreme unconsionable conduct.

There are some exceptions to this, seek proper legal advice, as obviously the lenders dont.

ta

rolf

 

[Rolf Latham]

PS

I should add that an indemnity is not the same as a guarantee. What the lender is asking for is that if they go you for the asset that the beneficiaries have previously agreed to that if you default.

Ta

Rolf