Discretionary trust and asset protection

[Aaron_C]

The big boys can hire expensive legal aid to structure their affairs properly. All the best legal minds at Mallesons, Freehills et al doing the work for them to make sure that even if the **** hits the fan, that he is still going to walk away with something.

TMNT - you don't seem to understand how trusts work. There is no such thing as the 'Trust ABC'. The only legal thing that exists is Company XYZ. Company XYZ appears on the title of the property, it appears on the mortgage documents and it appears on the bank accounts. If someone sues the owner of the property, they will sue Company XYZ which is then entitled to indemnify itself for legal proceedings using the trust's assets in accordance with the trust deed. Trusts merely are a relationship that is created by something called a trust deed between the trustee (Company XYZ) and the beneficiaries (you, family etc). If someone sues you personally in this instance, it will probably be because you are a director and guarantor of the trust, so you can never exonerate yourself fully. If you have no direct assets then I guess that's not really an issue but this is where the issue of control is so important.

 

[TMNT]

TMNT - you don't seem to understand how trusts work. There is no such thing as the 'Trust ABC'. The only legal thing that exists is Company XYZ. Company XYZ appears on the title of the property, it appears on the mortgage documents and it appears on the bank accounts. If someone sues the owner of the property, they will sue Company XYZ which is then entitled to indemnify itself for legal proceedings using the trust's assets in accordance with the trust deed. Trusts merely are a relationship that is created by something called a trust deed between the trustee (Company XYZ) and the beneficiaries (you, family etc). If someone sues you personally in this instance, it will probably be because you are a director and guarantor of the trust, so you can never exonerate yourself fully. If you have no direct assets then I guess that's not really an issue but this is where the issue of control is so important.

okie, so assuming multiple IPS, how is one supposed to protect themselves who is not millionaire??? my accountant has suggested a setup for Company XYZ where am the sole shareholder, and a group trust where me personally and company xyz are beneficiaries

which is then entitled to indemnify itself for legal proceedings using the trust's assets in accordance with the trust deed. Trusts merely are a relationship that is created by something called a trust deed between the trustee (Company XYZ) and the beneficiaries (you, family etc). If someone sues you personally in this instance, it will probably be because you are a director and guarantor of the trust, so you can never exonerate yourself fully. If you have no direct assets then I guess that's not really an issue but this is where the issue of control is so important.

so if the properties are bought under company xyz as per above and I get sued, since XYZ is a trustee for the trust, then nobody (other then family courts) can touch it? isnt that a bit of "having your cake and eating it"scenario, on the assumption that im a sole director and I have no assets under my name?

 

[Terry_w]

If you set up trusts and these trusts own property and then you are later sued it is possible that they can attack the trust assets in many cases.

It all depends on how it is set up, the terms of the deeds, how you conduct yourself and the trusts.

some ways trusts can be attacked:
- transferring assets to the trusts
- loans to the trusts
- uncommercial transactions
- under remuneration for work done for the trust
- gifts to the trust
- shares of trustee company owned individually and falling into hands of creditors
etc

 

[TMNT]

ok ,fair enough,

so terry/aaronc, what would mr gun investor with say 10-30 IPS, just him and his wife, no businesses, how would they (or a smart gun investor) be setting up there structure?? Would it be company xyz acting as trustee for trust, with all teh properties under the company?

also I think terry vs aaron seems a bit contradcitory, one says the trust is not a legal entity and cant buy properties under, but one says you can....or am i confused

 

[Terry_w]

ok ,fair enough,

so terry/aaronc, what would mr gun investor with say 10-30 IPS, just him and his wife, no businesses, how would they (or a smart gun investor) be setting up there structure?? Would it be company xyz acting as trustee for trust, with all teh properties under the company?

also I think terry vs aaron seems a bit contradcitory, one says the trust is not a legal entity and cant buy properties under, but one says you can....or am i confused

You must be confused!

A trust isn't a legal entity and cannot buy property. What happens is the trustee buys the property.

The easiest way to understand this is say you have a 1 year old child and open a bank account for the child. The child doesn't even know what money is so you put the bank account in your name as trustee for the child.

This is a trust. It is a relationship between you as the legal owner and the child as the beneficial owner. If you went bankrupt it is not your money and generally wouldn't be available to creditors because the child is the beneficial owner, you are just holding the money for her.

 

[Terry_w]

But, I should add, that in every day conversation we say "the trust" owns property. It doesn't really, because it is the trustee that owns the property for all the beneficiaries of the trust.

To confuse things more the ATO treats trusts as semi persons and trusts have to do tax returns!

As for the question about multiple properties - there are multiple answers.

Some will have all in their own names,
others will have a few properties in one trust,
others maybe all in the same trust,
others maybe one trust per property!

There is no one correct answer or a 'best' way. How they are structured will depend on when they are purchased, family situation, state purchased in (land tax rules) etc.

If you have 3 kids it may be easier to pass on control by having 3 trusts with roughly equal holdings so that one trust could be passed on to one kid, rather than 3 kids controlling the one trust (maybe 2 could gang up on the 3rd one!)

 

[Trickytimes]

Hi everyone, I am a newby, so sorry for crashing the thread.

Yes, you have to pay Land Tax from the first dollar if the property is in a DT. This doesn't come off the profit when you sell either, so you are up for CGT on the profit, but you can split this income through the DT. If you receive child benefit payments, you may have to pay these back to Centrelink.

I ended up being personally sued so the trust, etc are all in the wifes name as I had to go bankrupt. Our house is mortgaged with no equity, however, the Trustee put a caveat on it and apparently it remains in effect for 14 years.

There seem to be only 2 ways out.
1. My wife buys my share of the house from the Trustee, which we argue is less than 50%, which would get rid of the caveat, but I would still be Bankrupt for another 18 months.

2. We apply for a Section 73 which wipes my bankruptcy and gets rid of the caveat, but we need a 75% majority vote, which we may or may not have.

My solicitor introduced me to the bankruptcy Trustee prior to bankruptcy, and everything he said has now gone out the door as he left the company. There was never any mention of the caveat or the 14 years.

They won't give us a final creditors list, won't agree on a figure - we were told $15k but it now seems like $40 - $50k, etc

Now I am told they are sending a letter to threaten to sue for my share of the house, even though there is no equity in it. Will they try to sue me, the wife, the trust or the company??? Maybe this will open them up to being countersued.

Is there a way my wife could by my share and pay it to a Barrister to defend the legal actions?

 

[Aaron_C]

Is your house in your wife's name, or the trustee's name? Who is the trustee?

 

[Terry_w]

Hi everyone, I am a newby, so sorry for crashing the thread.

Yes, you have to pay Land Tax from the first dollar if the property is in a DT. This doesn't come off the profit when you sell either, so you are up for CGT on the profit, but you can split this income through the DT. If you receive child benefit payments, you may have to pay these back to Centrelink.

I ended up being personally sued so the trust, etc are all in the wifes name as I had to go bankrupt. Our house is mortgaged with no equity, however, the Trustee put a caveat on it and apparently it remains in effect for 14 years.

There seem to be only 2 ways out.
1. My wife buys my share of the house from the Trustee, which we argue is less than 50%, which would get rid of the caveat, but I would still be Bankrupt for another 18 months.

2. We apply for a Section 73 which wipes my bankruptcy and gets rid of the caveat, but we need a 75% majority vote, which we may or may not have.

My solicitor introduced me to the bankruptcy Trustee prior to bankruptcy, and everything he said has now gone out the door as he left the company. There was never any mention of the caveat or the 14 years.

They won't give us a final creditors list, won't agree on a figure - we were told $15k but it now seems like $40 - $50k, etc

Now I am told they are sending a letter to threaten to sue for my share of the house, even though there is no equity in it. Will they try to sue me, the wife, the trust or the company??? Maybe this will open them up to being countersued.

Is there a way my wife could by my share and pay it to a Barrister to defend the legal actions?

Since there is no equity there is no point in the trustee trying to take your share. The caveat is there to protect the trustee in bankruptcy's share of the house. ATM you own your share as trustee for the trustee in bankruptcy!

I guess they may be hoping for an increase in value before your bankruptcy period ends.

s 73 is where you can make an offer to pay the creditors some funds to release you. You may be able to get some money to do this from family or the trustee of the family trust etc

Don't know about the caveat lasting 14 years.I would have thought it would lapse after your bankruptcy ends.

Your wife could buy your share of hte property at any stage, but if there is no equity this may be difficult and no real point. If she did buy share and there would money owed to you this would go to the bankruptcy trustee.

They could sue you or the trustee company if there are any grounds for it. eg. transferred property to the trust prior to bankruptcy, uncommercial transactions, not cooperating with the trustee in bankruptcy etc.

 

[D_One]

While trying to gain more information about discretionary trust, I cam across this.

"I have heard that ASIC treated the assets of a discretionary trust as the personal property of a beneficiary?"

Apparently, ASIC was able to gain control of the assets in the trust because the beneficiary was an effective controller due to:

1. the beneficiary was the director and secretary of the trustee company, and the original appointor (with his wife being the current appointor);
2. the beneficiary was current trustee and the current appointor was his wife; and
3. the beneficiary was the appointor

Since most discretionary trust structures are setup like as above, It appears that based on that decision, discretionary trust provides no asset protection?

 

[Terry_w]

While trying to gain more information about discretionary trust, I cam across this.

"I have heard that ASIC treated the assets of a discretionary trust as the personal property of a beneficiary?"

Apparently, ASIC was able to gain control of the assets in the trust because the beneficiary was an effective controller due to:


Since most discretionary trust structures are setup like as above, It appears that based on that decision, discretionary trust provides no asset protection?

The above is incorrect.

The case you refer to is Richstar. Do a good on Richstar and asset protection and you will find heaps - good information and misinformation. Richstar was a case involving an ASIC prosecution and involved the corporations act not the bankruptcy act which would apply in most situations. It was a restraining order too I think, and doesn't involve ASIC getting at the assets of the trust. I don't know what happened subsequent
to that.

After this case there was a case involving a deceased doctor who mistakely left a house owned by a trust in her will. She was sole director/shareholder and appointor of the trust and the only one to ever benefit as a beneficiariary from it. The Richstar argument was used and several other arguments that there was no trust etc. All of these failed. NSW Supreme Court case. Smith v Pubic Trustee I think.

(interesting to note that the public trustee became the appointor of the trust as the executor of her estate and they quickly changed the trustee. Imagine having the public trustee take control of the trust after your death. Care must be taken with Trust succession)

 

[Trickytimes]

Since there is no equity there is no point in the trustee trying to take your share. The caveat is there to protect the trustee in bankruptcy's share of the house. ATM you own your share as trustee for the trustee in bankruptcy!

I guess they may be hoping for an increase in value before your bankruptcy period ends.

s 73 is where you can make an offer to pay the creditors some funds to release you. You may be able to get some money to do this from family or the trustee of the family trust etc

Don't know about the caveat lasting 14 years.I would have thought it would lapse after your bankruptcy ends.

Your wife could buy your share of hte property at any stage, but if there is no equity this may be difficult and no real point. If she did buy share and there would money owed to you this would go to the bankruptcy trustee.

They could sue you or the trustee company if there are any grounds for it. eg. transferred property to the trust prior to bankruptcy, uncommercial transactions, not cooperating with the trustee in bankruptcy etc.

The house is in joint names with my wife, but mortgaged to the bank for more than it is worth.

My wife would have to buy my share off the Bankruptcy trustee. We are disputing the 50/50 as my wife got an inheritence and put it into the house. Also, as there is no equity, we argue that the amount to be paid would be low. If she buys my share, I don't have any assets, so when the 3 years is up, that's it, but my credit file will show I was bankrupt.

A Section 73 erases the bankruptcy from my credit file as I understand it, but I have to have a 75% vote in favour.

We heard from another Trustee in Bankruptcy that the caveat lasts for 14 years if a bankrupt owns a property. 3 years is no problem and 14 years came as a shock to us. At some stage we have to pay down the debt so we can retire, which will leave my share of the house exposed. How can I find out for sure about the 14 years as this is the major problem?

 

[Terry_w]

The house is in joint names with my wife, but mortgaged to the bank for more than it is worth.

My wife would have to buy my share off the Bankruptcy trustee. We are disputing the 50/50 as my wife got an inheritence and put it into the house. Also, as there is no equity, we argue that the amount to be paid would be low. If she buys my share, I don't have any assets, so when the 3 years is up, that's it, but my credit file will show I was bankrupt.

A Section 73 erases the bankruptcy from my credit file as I understand it, but I have to have a 75% vote in favour.

We heard from another Trustee in Bankruptcy that the caveat lasts for 14 years if a bankrupt owns a property. 3 years is no problem and 14 years came as a shock to us. At some stage we have to pay down the debt so we can retire, which will leave my share of the house exposed. How can I find out for sure about the 14 years as this is the major problem?

I don't understand, if your loan is more or equal to the value of the property then there is no equity, so it shouldn't matter if you own 40% or 50%. There could be capital growth which they are after.

Bankruptcy lasts just 3 years. So even if they could lodge a caveat for 14 years, what would this be for? Their interest would probably lapse after bankruptcy has ended. If they caveat is still there you could apply to the courts to have it removed.

 

[D_One]

After this case there was a case involving a deceased doctor who mistakely left a house owned by a trust in her will. She was sole director/shareholder and appointor of the trust and the only one to ever benefit as a beneficiariary from it. The Richstar argument was used and several other arguments that there was no trust etc. All of these failed. NSW Supreme Court case. Smith v Pubic Trustee I think.

(interesting to note that the public trustee became the appointor of the trust as the executor of her estate and they quickly changed the trustee. Imagine having the public trustee take control of the trust after your death. Care must be taken with Trust succession)

Hi Terry,

Was the public trustee able to take control of the trust because they used the Richstar argument or because of the deeds of the Trusts in regards to succession? Doesn't the appointor automatically get transferred to the children or it has be directly worded into the trust deeds or will?

 

[Terry_w]

Hi Terry,

Was the public trustee able to take control of the trust because they used the Richstar argument or because of the deeds of the Trusts in regards to succession? Doesn't the appointor automatically get transferred to the children or it has be directly worded into the trust deeds or will?

No, the public trustee was the executor of the estate of the deceased doctor. The trust deed probably had a clause which said the next appointor of the trust will be the legal personal representative of the last appointor.

Appointorship passes according to the deed.

When planning your own demise you have to consider passing on control of any trusts you may now control.

Also plan for incapacity too as if you are incapacitated (ie legally disabled) your role as appoint may automatically pass to someone else such as your attorney.

 

[Trickytimes]

I don't understand, if your loan is more or equal to the value of the property then there is no equity, so it shouldn't matter if you own 40% or 50%. There could be capital growth which they are after.

Bankruptcy lasts just 3 years. So even if they could lodge a caveat for 14 years, what would this be for? Their interest would probably lapse after bankruptcy has ended. If they caveat is still there you could apply to the courts to have it removed.

Hi Terry,
If a Bankrupt has property, then the Trustee has extra time to try to recover debts from the increasing equity - at least 6 years + 3 years of Bankruptcy, but I was told 14 years total.

Our house is in joint names, but the company is in my wife's name, and it is trustee for a trust which owns other property. The loans for the company and other property outweigh the house value by 2>1 and the house secures the personal guarantees.

How can I apply for a copy of my file from the Trustee Company under the Freedom of Information Act?

The trustee is asking us to make an offer within 21 days, otherwise they will seek orders to seize and sell the property.

I was told $15k for a S73 prior to Bankruptcy, but the costs associated with my file are now $30k - $40k, and Court action would cost another $50k. If the house is sold, the money goes to the Bank who holds a mortgage.

This is a big mess - bigger than Ben Hur, so I don't want to bore you with too many details.

I was promised "silver bullet - you have won", not "fair chance". The appeal was going to cost around $20k and we lost after 5 minutes. The solicitor was paid $36k. They devised the bankruptcy strategy and arranged the meeting with the trustee. In the end, I ended up with another bill for $25k which I couldn't pay, and if I did it would have been clawed back. All up it cost me $90k in legal fees with 3 solicitors firms + $25k unpaid. The $36k + $25k did not improve my situation and would have nearly covered the settlement from losing.

The solicitor was upset at not being paid the full amount, and said they could blow my bankruptcy out of the water, even though it was their strategy. I have now heard it is them driving these complications, and they may have breached client confidentiality.

The FOI request may scare them, as I believe there has been questionable behaviour in all of this, and I am the one being hung out to dry.

Any suggestions????

 

[Terry_w]

Hi Terry,
If a Bankrupt has property, then the Trustee has extra time to try to recover debts from the increasing equity - at least 6 years + 3 years of Bankruptcy, but I was told 14 years total.

Our house is in joint names, but the company is in my wife's name, and it is trustee for a trust which owns other property. The loans for the company and other property outweigh the house value by 2>1 and the house secures the personal guarantees.

How can I apply for a copy of my file from the Trustee Company under the Freedom of Information Act?

The trustee is asking us to make an offer within 21 days, otherwise they will seek orders to seize and sell the property.

I was told $15k for a S73 prior to Bankruptcy, but the costs associated with my file are now $30k - $40k, and Court action would cost another $50k. If the house is sold, the money goes to the Bank who holds a mortgage.

This is a big mess - bigger than Ben Hur, so I don't want to bore you with too many details.

I was promised "silver bullet - you have won", not "fair chance". The appeal was going to cost around $20k and we lost after 5 minutes. The solicitor was paid $36k. They devised the bankruptcy strategy and arranged the meeting with the trustee. In the end, I ended up with another bill for $25k which I couldn't pay, and if I did it would have been clawed back. All up it cost me $90k in legal fees with 3 solicitors firms + $25k unpaid. The $36k + $25k did not improve my situation and would have nearly covered the settlement from losing.

The solicitor was upset at not being paid the full amount, and said they could blow my bankruptcy out of the water, even though it was their strategy. I have now heard it is them driving these complications, and they may have breached client confidentiality.

The FOI request may scare them, as I believe there has been questionable behaviour in all of this, and I am the one being hung out to dry.

Any suggestions????

Mate, sounds like you have been exploited by lawyers. I have never heard about the thing about the trustee having extra time to get at equity in a property. I doubt it could be true.

FOI requests would only apply to government bodies. You may have to apply under the Trustees Act of the state you are in. First think to do would be to ask them for access to your file.

You should also probably get some more legal advice, being wary of the sharks...

 

[Trickytimes]

Hi Terry,
I asked somewhere else, and this is what they had to say:

1. You are no longer joint tenants as bankruptcy is an act of alienation causing you to become a tenant in common.
2. When there seems to be no equity in the property, the trustee lodging a caveat is common practice. This is due to that according to the Bankrupct act, the trustee has 6 years to "deal" with the property if it was listed in your statement of affairs....so effectively 9 years from the day you lodge your statement. This can be extended by the trustee under some circumstances.
What the caveat effectively means is that the trustee is taking an interest in the property so they can determine later if any equity develops.

My CPA has a friend who works at another Trustee company, and he told her that they can come back up to 14 years later.

 

[Terry_w]

Hi Terry,
I asked somewhere else, and this is what they had to say:

1. You are no longer joint tenants as bankruptcy is an act of alienation causing you to become a tenant in common.
2. When there seems to be no equity in the property, the trustee lodging a caveat is common practice. This is due to that according to the Bankrupct act, the trustee has 6 years to "deal" with the property if it was listed in your statement of affairs....so effectively 9 years from the day you lodge your statement. This can be extended by the trustee under some circumstances.
What the caveat effectively means is that the trustee is taking an interest in the property so they can determine later if any equity develops.

My CPA has a friend who works at another Trustee company, and he told her that they can come back up to 14 years later.

You need to ask these people for any legislation to back up their claims.

There is provision under s127(2) for a trustee to commence an action for up to 6 years, if there is a charge or charging order.
http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s127.html

 

[Trickytimes]

Hi Terry,
Hopefully I will find out more by the end of the week.

Cheers