Discretionary trust and asset protection

[D_One]

I'm still trying to understand properly how discretionary trusts offer asset protection. Please correct me if the scenario below is way off...

Person A is the Trustee and Beneficiary of a discretionary trust, Trust A.
Person B is only a beneficiary.

Say a big bad company (Company Bad) sues Person A and Person A files for bankruptcy.

Is it then possible for Company Bad to become the trustee of that discretionary trust (Trust A) and sell off all assets to pay off Person A liabilities?

 

[RPI]

Person A resigns as trustee at the hint of any action. New trustee appointed, preferably a company controlled by a friendly.

If bad company is suing the trust, different story.

Also compare to a straight company.

Person B as shareholder of the company has assets, shares. Person b gets sued and creditor gets those shares, and therefore gets company and assets it owns

Person B as a beneficiary of a disc trust has no fixed interest in the trust, it is not his assets credito cant touch trust assets.

 

[alexlee]

That whole scenario can be avoided by having a $2 company as trustee and that's all it does. It has no other activities that can result in litigation.

 

[D_One]

That whole scenario can be avoided by having a $2 company as trustee and that's all it does. It has no other activities that can result in litigation.

If a $2 company is the trustee, someone still has to be the director of the company. What if the director of the company gets sued? Does that affect asset protection of the trust? What if the company gets sued? Is the director then personally liable? Can a trust be sued as it is not a legal entity?

 

[alexlee]

If a $2 company is the trustee, someone still has to be the director of the company. What if the director of the company gets sued?

If the suit is for something the director does that’s unrelated to the trustee company and the trust, the trust is not affected. The shareholder of the trustee company can appoint new directors, or the Appointor can change trustees. The shares in the trustee company are only worth $2.

What if the company gets sued? Is the director then personally liable? Can a trust be sued as it is not a legal entity?

What would the trustee company get sued for? It’s a completely passive $2 company. It doesn’t do anything that can get itself sued. That’s the whole point. If the suit is against the trust, it would be against the trustee as trustee for the trust.

Does that affect asset protection of the trust?

Do you actually understand what using a trust for asset protection means? It’s to protect the assets OF the trust. For a trust with a $2 company as trustee and holding passive assets (e.g. shares in listed companies), what would the trust ever be sued for? The point is to put assets into the trust and then make the trust blameless and not liable for anything done by the people.

 

[D_One]

Thank you Alexlee.

I think I finally get how using discretionary trust can help with asset protection.

Thanks again.

 

[RPI]

The trustee can be indemnified out of the assets of the trust if the issue is with the actual trust. A $2 company will not avoid that situation.

But would definitely always recommend a corporate trustee.

I would say that it is not just to protect the assets of the trust, it also aiming to protect the assets of the individual by not making them available to creditors/ litigants of the trust.

Asset protection is a complex area and it would benefit you to read as much as possible and then sit down with a lawyer. Terry W on this forum is based in Sydney so not too far to go.

But please keep asking questions and others will chime in

regards

Darryl

 

[Terry_w]

Under the bankruptcy act assets you hold in trust for someone else are not assets that can be seized if you go bankrupt.

Being a trustee is a role and not property. So if A is trustee and goes bankrupt the assets legally owned by A cannot be used to satisfy A's debt. At the same time A can no longer be trustee as a bankrupt cannot be trustee. So a new trustee must be appointed and this must be done according to the rules in the trust deed or under the trustee act of the state which the trust is governed by.

If A had set up a discretionary trust with XYZ Pty Ltd as trustee with A owning the shares himself then these shares are property and will fall into the hands of the trustee in Bankruptcy. The trustee in bankruptcy will then control the trust and it is possible that they will wind up the trust or make large capital distributions to A - they will be A during the bankruptcy. So the creditors can get their hands on the trust assets if this happens. A trustee only needs to make a resolution for this to happen.

To prevent this the appointor of the trust can sack the trustee at the first with of trouble and a new trustee can be appointed. There is caselaw to say that being an appointor does not amount to property so this role cannot be taken over by creditors.

But you have to be careful still as a beneficiary has the right to be properly considered when the trustee is making distributions. There is generally no requirement to distribute to anyone under a discretionary trust (but depends on the deed) but if the new trustee doesn't consider the bankrupt A then the trustee in bankruptcy (as A) could then mount a challenge to the distribution and then may even be able to apply to the supreme court to change the trustee.

Another thing to watch out for is unpaid present entitlements or unpaid loans. A lot of people get distributions on paper each year, but do not take the money. It is left in the trust and is like a loan from the individiaul - it is still owed to them. So if A goes down and he is owed money from the trust then the creditors will get this money. The trustee in bankruptcy can sue the trustee of the trust. I had a client who mother had died with $150k owed to her from the trust. The executor of the estate was under a legal obligation to get this money back from the trust to the estate - trust didn't have funds available so this resulted in litigation.

Since trust assets are not your own they do not form part of your estate at death (generally). So you need to plan control of your trust and super (which is a trust) if you die, or lose capacity. Another client lost control of the family trust for about 5 years before he realised that he was actually the appointor after his father died and he could have changed trustee. No one told him and no one was obliged to tell him - so make sure you have back up appointors and let the back ups know they have this role on your death on incapacity.

Also consider a beneficiary could apply to the Supreme Court to have the trustee changed. look at the recent court cases involving Reinharts.

 

[Terry_w]

Now if the trust is sued that is different. A trust is not a legal entity so it will be the trustee that is sued. If a trustee is sued and they have a judgment against their name then they must personally pay the debt. Most trust deeds allow the trustee to be indemnified out of the trust assets. That is reimbursed by the trust assets, but if the trust does not have enough assets the trustee wears any shortfall.

This is one reason why you should have a company as trustee as usually the liability of the company is limited.

 

[RPI]

Great explanation by TerryW

 

[DaveM]

Terry if a PPOR is bought in a DT, does it pay land tax and CGT or is there an exemption like if owned directly?

Also on slightly different note... if a person is a director of a Pty Ltd with a paid up share value of $10 and a company "market" value of far more than that, if the director is personally sued and the other party tries to claim the Pty Ltd shares as assets, is the limit of the value of the claim against the shares the paid up value or the market value of the business?

 

[Terry_w]

Terry if a PPOR is bought in a DT, does it pay land tax and CGT or is there an exemption like if owned directly?

Also on slightly different note... if a person is a director of a Pty Ltd with a paid up share value of $10 and a company "market" value of far more than that, if the director is personally sued and the other party tries to claim the Pty Ltd shares as assets, is the limit of the value of the claim against the shares the paid up value or the market value of the business?

Yes, land tax and CGT are payable for discretionary trust owned main residences in NSW. In QLD i believe there is a land tax free threshold. CGT applies to all states.

If a trustee in bankruptcy gets hold of your shares in a private company they would then control the company as if you. They can vote and make payments of dividends to the shareholder or sell your shares or wind up the company etc.

 

[RPI]

Yep Qld has land tax free thresholds for DT, not just fixed trusts like NSW

D

 

[D_One]

That is top explanation Terryw.

Thank you.

 

[D_One]

RPI, thanks for your explanations as well.

Legal mumbo jumbos normally doesn't make sense to me, but you guys have helped.

 

[TMNT]

hey terry , great post thanks for that, kudos to you

am a complete newbie, and I have 2 questions,

hypotehtically, If I own a take away shop and a few IPS, if all hell breaks loose in the shop, and I want to legally protect myself (even though I think what Tinkler has done is morally not very good, however if its legal Ill do it) do I set up a trust, put me and say a wife/brother/partner/parent as both a trustee and beneficiary, and if the take away shop gets sued or cant pay any of its debtors, or if I forsee a problem, I simply get kicked off as a trustee, and remain as a beneficiary and since the trust is owned by not me, then the assets within are safe???? is this how it works????? will this be the same if it were all IPs,and I couldnt pay off one IPs repayment, do I simply let the bank reposses,while my others remain safe?



hypothetically, Tinkler who has just said that he owns nothing and he has a trust with his wife and gets dividends from then, assuming that its just him and his wife as a trustee (and no other comp;licated setups), and the business is actually all his and his wife doesnt have anything to do with from a practical side of things, how has he gone abouts doing that, has he put him and his wife as trustess and beneficiareies,and when he suspected that things were going sour, he removed himself or got his wife to kick him off as a trsutee thus keeping the assetsin the trust now owne by his wife?

 

[Terry_w]

TMNT,

If you own the takeaway show in your own name then it is 'property' available to creditors if you go down. That means the trustee in bankruptcy can seize the property and sell it to satisfy your debts.

If you set up a trust and transfer existing property to the trust then you later go bankrupt then creditors could still get at that money depending on a few things:
- date of the transfer and bankruptcy - the longer before bankruptcy the safer.
- whether it was sold at market value
- whether you were solvent at the time
- whether the trustee of the trust knew you were going down or not
etc
If the trust purchased the property itself using its own funds then, depending on the terms of the deed, the property may be relatively safe if you were to go bankrupt.
-
Now, if the 'trust' is sued it is different. The above was if you were sued.
Firstly the trust itself is not a legal person and cannot be sued. It is the trustee that is sued. If the trustee has a judgment against them then they can be reimbursed by the trust assets. If the trust assets are not enough to satisfy the debt then the trustee's personal assets can be seized to satisfy the debt.
This is why it is better to have a company as trustee as this adds more protection. If you don't want a company then it is dangerous if business is being conducted, less dangerous but still risky if owning property and relatively safe if just owning shares as shareholders cannot generally be sued for debts of the company. So it may not be a good idea to have husband and wife as trustees.

If the trustee of a trust buys investment properties then it is the same but the banks will insist on personal guarantees. This means if the trust doesn't pay the loan then you must and you can be sued if things go wrong. If other assets are owned in the same trust then all the assets will be at risk if the trustee is sued and/or cannot pay its loans (which means it will be sued!).

I don't know how tinkers has set up his affairs but it sounded like his wife is the trustee. Not sure why a billionaire would set up this way, but he probably wasn't a billionaire when set up.

If a person goes bankrupt then assets they hold as trustee for others are not 'property' and generally cannot be seized.

 

[Aaron_C]

As Terry somewhat alluded to the drawback of having your wife (who is not involved in the business) controlling/owning your assets is - what if she leaves you??? Then you are screwed

 

[Terry_w]

As Terry somewhat alluded to the drawback of having your wife (who is not involved in the business) controlling/owning your assets is - what if she leaves you??? Then you are screwed

I think Aaron is half kidding. This is a danger, but it is the appointor of the trust that controls the trust by having the power to hire and fire the trustee. So if this did happen you would just sack the spouse as trustee (unless they are the appointor whereby they sack you).

And in the event of a divorce or separation there are many ways the Family Courts can attack the assets of the trust.

 

[TMNT]

I think Aaron is half kidding. This is a danger, but it is the appointor of the trust that controls the trust by having the power to hire and fire the trustee. So if this did happen you would just sack the spouse as trustee (unless they are the appointor whereby they sack you).

And in the event of a divorce or separation there are many ways the Family Courts can attack the assets of the trust.

well serves me right for starting that thread about protecting my assets being a male,

ok, got most of it, so terry or aaron, assuming I have 3 Ips, and to protect myself from situations such as I get sued because the swimming pool in one of them's gate wasnt up to standard or the electrcian I hired 5 years ago wasnt fully qualified etc.

is there a way to protect 2 or 3 of them? assuming I get caught in a multi million dollar law suite?

from my research, is the best way, to have a Company XYZ as trustee for Trust ABC, and to buy all IPs under the name of the trust, and to have me as sold director of XYZ???
so if you get sued, then you only own CompanyXYZ which is $2 company, whilst all the assets are in the trust, and are a separate company, in which case, me being a sole director, I would file for bankruptcy and not have to pay the law suit,
but didnt aaronc say that a trust cannot be sued since its not a company?

geez, im learning so much from this thread, fascinating stuff



and finally, I assume that tinkler is now officially bankrupt on paper since his company has collapsed, and cant be a director for 7 years?? I find it strange how all of these big shots seem to grind a company to the ground, owing heaps, but they still ahve assets hidden and live the high life and yet they are back in the papers the next day on the next super deal!