BulletProof Asset Protection and Ed BURTON

[coastymike]

Bill,

Firstly just want to say Im enjoying the discussion and good to see someone who is willing to discuss these issues.

Now I am certainly not a lawyer so I'll qualify any comments I make by saying that I will defer to the experts. But let's assume someone gets hit by a rock in the eye while you are mowing your lawn and the insurance company for whatever reason (lets even assume you accidentially let the public liability insurance lapse for 3 days) and they want to sue you. Lets assume individual A owns nothing whereas individual b owns nothing except their special income units from the HDT.

Well the first thing a lawyer will do for them is conduct some searches under the individuals name and find out what assets they own. Now if both individual A and individual B own their investment properties in trusts with corporate trustee then the search is going to come up with nothing for both of them. The corporate trustee will be on the land titlte deeds and so the lawyer will say hmmm they dont seem to have any significant assets so you may as well leave them alone. This will occur in a lot of cases.

But lets say the lawyers arent satisfied and do dig deeper and they find out that Individual A has the property in a trust and Individual B in a trust. At this point the lawyer is going to say to the client this may or may not be a HDT. The HDT may or may not have special income units. Those special income units may or may not be worth something. In order for me to look into this for you I will need to see the trust deed to determine what sort of trust it is and that will cost money to that client. Even if that client agrees both individual A and individual B will have to engage their own solicitors to address the defendant's claims and so you will still be up for legal costs.

So both individual A and individual B will be in the same position up to this point in time. Now I do agree if things go on and it finally went to court (this is going to occur in the smallest number of cases) it may be determined that those special income units are assets and they are awarded to the defendant. Ive seen no cases to say what special income units are worth in a court case but they might be nothing. They might not either.

I personally think you will be flying under the radar so to speak UNTIL the clients lawyers dig further to find out whether it is a HDT and whether it holds special income units and how much they are worth (if anything). But this will still cost you money to engage your own solicitors to fight them. But this would be the same case if you had a discretionary trust with all the property in that trust and no special income units because again the lawyers dont know what sort of trust it is. Either way you are going to incur legal costs. What happens if you are advising someone that "If you are ever attacked you have two options - pay money so the problem will go away or pay solicitors to defend you - either way you LOSE" But then the lawyers come along to your client and say we want to see the discretionary trust you setup with Bill to determine whether it is a hybrid discretionary trust. At that point they are going to have to see their solicitor and incur costs. They might then come back to you and say Bill you told us we would never have to worry about solicitors with this structure it is now costing us money in legal fees and we were told this would not be the case. Then you might be sued.

 

[skater]

At what loss level must a family trust election be done, so losses can be carried forward .
I remember someone mentioning $5000. Under that amount it neednt be done. Is that true?

If you have an election are you saying that XXX person will get the losses? I thought losses were quarantined inside the trust & gains distributed at the end of the year with any accumulated losses offseting the gains. How does a capital gain get treated in relation to losses inside the trust?

 

[wbthom]

Bill,

Firstly just want to say Im enjoying the discussion and good to see someone who is willing to discuss these issues.

Thanks Coastymike - these sort of discussions are interesting and good at clearing the air!

Now I am certainly not a lawyer so I'll qualify any comments I make by saying that I will defer to the experts. But let's assume someone gets hit by a rock in the eye while you are mowing your lawn and the insurance company for whatever reason (lets even assume you accidentially let the public liability insurance lapse for 3 days) and they want to sue you. Lets assume individual A owns nothing whereas individual b owns nothing except their special income units from the HDT.

Well the first thing a lawyer will do for them is conduct some searches under the individuals name and find out what assets they own. Now if both individual A and individual B own their investment properties in trusts with corporate trustee then the search is going to come up with nothing for both of them. The corporate trustee will be on the land titlte deeds and so the lawyer will say hmmm they dont seem to have any significant assets so you may as well leave them alone. This will occur in a lot of cases.

I am also not a legal expert but a search for person B's assets would easily highlight the HDT units without first discovering the trusts - If he has borrowed money to pay for them then there are loan application bank records, stamp duty records and possibly credit reference notes. Theoretically privacy laws should limit availability of information but money and back channel resources can find out detail like this with little trouble.

As lawsuits are mainly all about money, solicitors want to know before they have a chance of getting paid if they take a case further. If a simple search shows A has no visible personal assets they will be unlikely to take further action and A will probably not need a solicitor. In B's case if their is a possible asset visible then they may require depositions etc that mean he will have to engage his own solicitor requiring some cost.

What happens if you are advising someone that "If you are ever attacked you have two options - pay money so the problem will go away or pay solicitors to defend you - either way you LOSE" But then the lawyers come along to your client and say we want to see the discretionary trust you setup with Bill to determine whether it is a hybrid discretionary trust. At that point they are going to have to see their solicitor and incur costs. They might then come back to you and say Bill you told us we would never have to worry about solicitors with this structure it is now costing us money in legal fees and we were told this would not be the case. Then you might be sued.

For starters I would never be silly enough to give people advice that they would never incur legal costs and have their structures examined. Asset protection advice is like insurance advice - you do the best to can to minimise the risk and to make yourself as unattractive a target as possible but you make people aware there are always risks!

Bill

 

[coastymike]

Bill,

Agreed that the individual with the loan in their own name will attract some interest. However if the loan to purchase the special income units has been secured by first mortgage to the trust then what will happen is that the individual would still have nothing available to creditors because they would go into bankruptcy. Let's say the special income units were worth say $100K then the trust would redeem these units and pay the individual the $100K. However since the trust is the secured creditor they will have first claims to any monies so that individual would then have to give the $100K back to the trust as the secured creditor.

As you say with anything there are pros and cons. Note that I am only talking about individuals who want to purchase property and obtain the negative gearing benefits. If the assets are positively geared then purchasing in a discretionary trust with the loan taken out by the trust would present no tax disadvantages.

Clients just need to be aware that any approach has its pros and cons. One structure may result in slightly compromised asset protection but provide taxation and estate planning benefits whilst another might provide "bullet proof" asset protection but be disadvantageous from a taxation and estate planning perspective. Like all things in life you sometimes can't have your cake and eat it to.

Thoroughly enjoyed the discussion.

 

[wbthom]

Bill,

Agreed that the individual with the loan in their own name will attract some interest. However if the loan to purchase the special income units has been secured by first mortgage to the trust then what will happen is that the individual would still have nothing available to creditors because they would go into bankruptcy. Let's say the special income units were worth say $100K then the trust would redeem these units and pay the individual the $100K. However since the trust is the secured creditor they will have first claims to any monies so that individual would then have to give the $100K back to the trust as the secured creditor.

Coastymike, you are right that a litigant is unlikely to gain any ultimate benefit by a lawsuit. My point however was that in a convoluted situation such as your HDT scenario, they may investigate you in more depth requiring you to pay a solicitor to represent you. I always find that in any scenario that involves solicitors they tend to end up with at least some of your money - something to be avoided where possible

As you say with anything there are pros and cons. Note that I am only talking about individuals who want to purchase property and obtain the negative gearing benefits. If the assets are positively geared then purchasing in a discretionary trust with the loan taken out by the trust would present no tax disadvantages.

Clients just need to be aware that any approach has its pros and cons. One structure may result in slightly compromised asset protection but provide taxation and estate planning benefits whilst another might provide "bullet proof" asset protection but be disadvantageous from a taxation and estate planning perspective. Like all things in life you sometimes can't have your cake and eat it to.

Thoroughly enjoyed the discussion.

Couldn't agree more with your comments Coastymike - as with good cakes the recipe for a good investment structure is determining what you want ahead of time, having the right mixture of strategies and getting them done in the correct way at the right time.

Cheers Bill

 

[Terryw]

Thank you Bill and Mike. This is an interesting discussion. I am just wondering how would the value of the units in a hybrid trust be determined? Surely it could not be the value of the trust assets divided by the number of units, as there is a discretionary component to the trust and the trust assets are held for all the beneificaries, not just the unit holder(s).

 

[coastymike]

Terry,

Id suggest you register for Chris Batten's site www.chrisbatten.com and download the article on negative gearing through a trust. All is explained in that article. A plethora of other information as well. For $99.00 (from memory) for 3 months it is excellent value for those seeking more in-depth discussions of these issues.

 

[austini]

Hi Bill & Mike,

A big thanks from me also - this is a very interesting discussion.

Cheers - Gordon

 

[tony100]

Hi coastymike,

"Well the first thing a lawyer will do for them is conduct some searches under the individuals name and find out what assets they own. Now if both individual A and individual B own their investment properties in trusts with corporate trustee then the search is going to come up with nothing for both of them. The corporate trustee will be on the land title deeds and so the lawyer will say hmmm they don’t seem to have any significant assets so you may as well leave them alone. This will occur in a lot of cases"

I am fairly new to trust structures so am still learning about asset protection issues. Someone told me recently that if someone was looking for this kind of information on someone they would do a search on the individual, as you mentioned above, then do a company search so see which companies the individual owns. If the individual owned a company called, say Capitol, the investigator would then do a search so see what properties Capitol (as trustee) owns. If this is the case then I imagine it would be quite easy for someone to find out what properties someone owns. Hopefully I am missing something and it is not so easy.

Would it really be this easy for someone to find out which companies a person owns thus which properties a person has interests in?


Tony

 

[NormH]

Bill/Mike hi,
not a bad discussion guys but thought I would just throw in some comments that appear to have been overlooked.

Bill your comments about the loans for the HDT being easily picked that that would/could cause further investigation, I don't believe that is isolated to the HDT. Unless the Discretionary trust has heaps of money and does not need either a trustee or directors guarantee then their name will also have records in the CRA files and their names will also be on loan documents.

Mike adding to your point about HDT's, the HDT gives you flexibility at the time of borrowing money and getting some tax offset, however if/when those "special units" are surrendered back to the trust then it again becomes a plain old DT that has not exercised an option available to it via the deed.

So we are really only talking about a small subset and a small added risk while "special units" are on issue. The advantage also of an HDT is they are not limited to income units, you could issue units for anything if the deed is written correctly, ie capital growth over and above inflation etc, the "terms conditions" of the special units are up to the trustee when issuing them. Well in my HDT anyway, I have that flexibility. The income units can be redeemed by the trustee, at the trustees discression, and the trustee can limit the maximum redeemable per year, ie 200 in any calendar year, and the trustee has the power to set the redemption price, but that price can never exceed the strike price. (so trustee could offer 1cent for each 1dollar unit on issue, but never offer more than the original 1dollar) The units are entitled to income only from Property x in the trust. Meanwhile the trustee has identified that property as the only +ve geared one in the trust and uses that income stream to cover the trusts costs etc, etc, hence nothing left anyway and all too hard and expensive for any litigant.

My HDT was set up by Chris Batten some time ago.

cheers

Norman

 

[NormH]

Oops sorry guys, I forgot to add my conclusion, I was distracted here.

So in closing, I really don't see the value of setting up a plain DT, when you can set up an HDT and then chose to not issue "special units" then all you have is a DT. But the beauty of it all is, if in the future things change, then the trustee has the discretion to raise money via you and you are able to get the tax benefits.

Cos in majority of cases you as an individual will be signing something somewhere anyway, if for no reason other than to keep a lender happy ie guarantee.

cheers

Norman

 

[wbthom]

I am fairly new to trust structures so am still learning about asset protection issues. Someone told me recently that if someone was looking for this kind of information on someone they would do a search on the individual, as you mentioned above, then do a company search so see which companies the individual owns. If the individual owned a company called, say Capitol, the investigator would then do a search so see what properties Capitol (as trustee) owns. If this is the case then I imagine it would be quite easy for someone to find out what properties someone owns. Hopefully I am missing something and it is not so easy.

Would it really be this easy for someone to find out which companies a person owns thus which properties a person has interests in?

Tony

Hi Tony,

If you are the director of a trustee company an ASIC search will show this up. Searching the titles office for what properies this trustee company owns I suspect would be a lot harder due to privacy issues. There would be some legal mechanism for allowing such a search I suspect. This would only show you however as being the director of a trustee company that controls an asset - it does not show whether you have a beneficial interest in the trust.

Bill

 

[wbthom]

Bill/Mike hi,
not a bad discussion guys but thought I would just throw in some comments that appear to have been overlooked.

Bill your comments about the loans for the HDT being easily picked that that would/could cause further investigation, I don't believe that is isolated to the HDT. Unless the Discretionary trust has heaps of money and does not need either a trustee or directors guarantee then their name will also have records in the CRA files and their names will also be on loan documents.

Hi Norm,

My comments are specifically related to loans taken out by a person to buy the HDT units that entitle them to an income stream, hence allowing the tax deduction. If they have a documented loan for this (or if they have borrowed to loan a trust money for any purpose) then this flags their asset protection as potentially lower at that time. Obviously if the HDT units are redeemed then you have the same protection as a DT.

If a DT you control (through a company trustee) borrows money on it's OWN behalf (even if you are guarantor or use existing assets as security) then you have NO personal liability. If you have any sort of outstanding loan to a trust it opens the door a crack.

Most of the people reading this who understand HDT's (or at least have good advisors who do) have negligible asset protection risks if they follow the systems exactly. But in a more complex trust structure such as an HDT I believe there is just more room for error. Does it matter - probably not in many cases, but I have worked with the public too long to assume costly mistakes can't happen!

Bill

 

[redwing]

Great Thread

Great Thread guy's..

I'm sure many people such as myself are enjoying the discussion, thanks to everyone involved.

I wish Dale was here to put in his input also..

REDWING

 

[wbthom]

I echo that comment Redwing - Dale would have been a very valuable contributor. I am also surprised that Nick has not joined in.

Bill

 

[Mry]

If a HDT can't be set up to allow someone to gain the tax benefits of negative gearing in order to maximise asset protection, then how would a normal salary and wage earner go about getting those negative gearing benefits? Or are they sacrificed / carried forward in a DT in order to obtain asset protection benefits?

And do you need the involvement of another individual such as a spouse or family member?

Does the distribution of assets into different entities involve a loss of control for the individual? Will it be a complete and utter mess should there be a divorce?

And it is nice to see someone actually discussing HDTs in more detail. If you can't answer if it would involve "showing your hand", a teaser would be appreciated!

 

[wbthom]

If a HDT can't be set up to allow someone to gain the tax benefits of negative gearing in order to maximise asset protection, then how would a normal salary and wage earner go about getting those negative gearing benefits? Or are they sacrificed / carried forward in a DT in order to obtain asset protection benefits?

And do you need the involvement of another individual such as a spouse or family member?

Mry, in a DT you can really only carry forward the losses until there is a profit to offset them against, thats why there is so much interest in HDT's - to try and gain a tax advantage. I'm not the person to detail the how's and why's of HDT 's, there are plenty of experts around here for that - I'm mainly interested in the asset protection systems.

You can setup a trust for a single person but having multiple beneficiaries to distribute to is where you get the tax advantages of a trust

Does the distribution of assets into different entities involve a loss of control for the individual? Will it be a complete and utter mess should there be a divorce?

And it is nice to see someone actually discussing HDTs in more detail. If you can't answer if it would involve "showing your hand", a teaser would be appreciated!

In a divorce situation the family law court has the power to ignore trusts and split family assets to the partners according to how the court decides.

Bill

 

[austini]

Hi Gang,

I occasionally see posts that seem to suggest that some form of negative gearing arrangement (for a typical wage and salary earner) can be done with a standard discretionary trust.

Of course a negative gearing situation is easy enough to do where for example a service trust arrangement exists which allows one of more of the primary beneficiaries to distribute part of their earnings to the discrectionary trust. However for the typical wage and salary earner I'm mystfied as to how this could be legally achieved.

The other option is where mutiple trusts exist and the primary beneficiaries are the same for the trusts involved and hence can distribute any profit to a related trust. But this would not relate to the typical salary or wage earner situation either as it would require at minimum a second trust with positive cash flow which could be distributed to other related trusts.

I have also heard of people using some form of lease arrangement (concurrent?) to have income from assets such as IPs owned outside the trust diverted to the disc trust to improve cashflow. No doubt there are probably all sorts of ways to get cashflow from external sources into a disc trust but as to whether it is cost effective and/or robust from a legal or ATO perspective is a mystery to me.

Hope this makes sense as I'm only a layperson with this stuff.

Cheers - Gordon

 

[ggumpshots]

GGump

That is incorrect. Trust loss provisions regarding carrying forward of trust losses start from the first dollar (or technically first negative dollar).

Perhaps I am confused . Why and when must a family trust election be made?
What happens idf it is not made . Are there consequences which follow.
I spoke to the tax office 2 years ago but couldnt fathom the jargon they were throwing at me. I was sure there was a magic figure involved when it camr to family trust elections. I am thinking of somrhting else re trusts

 

[monoply]

Perhaps I am confused . Why and when must a family trust election be made?
What happens idf it is not made . Are there consequences which follow.
I spoke to the tax office 2 years ago but couldnt fathom the jargon they were throwing at me. I was sure there was a magic figure involved when it camr to family trust elections. I am thinking of somrhting else re trusts

Hi,

I think you confusing losses, with imputation credits. 5k is the maximum in imputation credits you can use, unless you make a Family Trust election.

Cheers
mono