Family Trusts

[dollaman]

hi guys
this is my first post so bear with me
i have been investing for 4 yrs now and after my first 3 ip's i formed a family trust with myself and my wife as trustees.i now have a few ip's in the trust and i have noticed that some suggest to form a company as the trustee for more asset protection can someone please explain why this is so.i am a reckless investor as i dont worry about returns etc i just see a property crunch some numbers and either buy or don't and hold for the long term any advice about the trust would be appreciated

keep on keepin on

 

[Sim]

My understanding (this is not advice) - is that because a trust is not a separate legal entity, it cannot be sued itself. Any actions taken against the trust are directed at the trustee (since the trustee is the person/entity making all the decisions - therefore if something went wrong which lead to litigation, it is the trustees fault).

In the settlement of legal proceedings, the courts may ask the trustee to pay out money - which effectively means that the trustee (you !) have to find that money from somewhere or potentially be bankrupted, which would be bad.

If you use a corporate trustee, and the trustee is sued, you could sack the trustee and appoint a new one, thus isolating the action. There might be further liabilities in your capacity of director of the trustee, but assuming you don't have any personal assets, there's not much to lose there. I'm not exactly sure what the potential areas for loss are in legal proceedings - you would need some professional advice on that.

If you yourself are sued, neither your corporate trustee, nor the assets it keeps in trust for your benefit, are at risk, given that they are not your assets to be taken away. At least I think that's how it works.

I must go back and read my copy of Renton again, but I don't think it spent much time covering the legal and asset protection side of trusts. I must finish reading Dale's book too - I'm sure he covers it.

Someone please correct me if I've got it wrong.

 

[NigelW]

My understanding (this is not advice) - is that because a trust is not a separate legal entity, it cannot be sued itself. Any actions taken against the trust are directed at the trustee (since the trustee is the person/entity making all the decisions - therefore if something went wrong which lead to litigation, it is the trustees fault).

In the settlement of legal proceedings, the courts may ask the trustee to pay out money - which effectively means that the trustee (you !) have to find that money from somewhere or potentially be bankrupted, which would be bad.

If you use a corporate trustee, and the trustee is sued, you could sack the trustee and appoint a new one, thus isolating the action. There might be further liabilities in your capacity of director of the trustee, but assuming you don't have any personal assets, there's not much to lose there. I'm not exactly sure what the potential areas for loss are in legal proceedings - you would need some professional advice on that.

If you yourself are sued, neither your corporate trustee, nor the assets it keeps in trust for your benefit, are at risk, given that they are not your assets to be taken away. At least I think that's how it works.

I must go back and read my copy of Renton again, but I don't think it spent much time covering the legal and asset protection side of trusts. I must finish reading Dale's book too - I'm sure he covers it.

Someone please correct me if I've got it wrong.

Good summary Sim(e)!

Dollaman

There's been a few posts which have discussed this point. If you search on trust or hybrid trust or family trust or discretionary trust you should find them.

cheers
N.

 

[bicko]

Sim,

In my opinion I think you have given a better discription than either of those authors in their works.

No offence intended to Dale or Renton. Sorry guys, it s just that from memory neither book describes exactly why a corporate trustee is more beneficial in terms of asset protection.


cheers

bicko

 

[geoffw]

No offence intended to Dale or Renton. Sorry guys, it s just that from memory neither book describes exactly why a corporate trustee is more beneficial in terms of asset protection.

Renton states it- but it's just a throwaway sentence- "using a company [trustee] reduces risk by virtue of its limited liability" (p38, second edition).

That is a huge benefit of having a corporate trustee- it can mean the difference between losing your properties in a trust and keeping them.

Dale personally recommends having a corporate trustee for the same reason- but I don't have his manual to check.

 

[gekko_99]

To bring this thread back to life, my understanding of a corporate trustee is that it's main benefit is to offer a barrier between an action from something within the assets held by the trust. Eg if a tenant in a house your trust owns slips down the steps and they go to sue the trustee, then you can sack the corporate trustee and move on (barring the director being next in line for trouble).

Sim stated above and I was hoping to clarify this:

If you yourself are sued, neither your corporate trustee, nor the assets it keeps in trust for your benefit, are at risk, given that they are not your assets to be taken away. At least I think that's how it works.

My interest is that I have set up a discretionary trust to hold shares, unit funds, etc. The appointer role is shared though I personally am a trustee. I was of the opinion that if the trust held shares and was unlikely to blow up from the inside then a corporate trustee might be overkill.

I understand that a corporate trustee has the right (which I guess means not obligation) to be indemnified by the trust. I read this to mean the trustee is indemnified from an action bought on from something within the trust (eg above) and not an incident affecting the trustee in their personal capacity from outside of the trust (eg crashing their car with bald tires on the way to work).

I was of the opinion that with me as trustee, should I get sued for something unrelated to assets of the trust then (particularly with a shared appointer role) I can be sacked and a new trustee put in. Which effectively is the same as sacking a corporate trustee but leaves me to deal with my mess and the trust can carry on with a new trustee in place.

From other threads on the forum, my biggest risk might be mixing up transactions of the trust with my own which would weaken the trust to an outside action.

My question is, is a corporate trustee necessary to hold low risk assets such as shares, etc. And are my comments above correct, any comments would be appreciated.

 

[GreatPig]

I was of the opinion that if the trust held shares and was unlikely to blow up from the inside then a corporate trustee might be overkill.

I'm certainly no expert in asset protection, not even close, but I also have a trust where my wife and I are personally trustees, with the intention of never holding real estate in that trust. It's primarily for holding the shares of a family company, but also for other shares, managed funds, cash, etc.

I personally don't see much risk of the trustee being sued with this scenario, unless perhaps we somehow started insider-trading or manipulating the market (although I very much doubt we have the means to do that even if we wanted to). I guess the trust could go broke if we were highly leveraged at a bad time, but I don't know that we could be sued in relation to that. And for the sake of the family company, we intend to be rather conservative with investments in that particular trust.

So unless someone highlights a huge flaw in that thinking, I'm comfortable with this arrangement.

Cheers,
GP

 

[tubs]

Hi there

Great summaries so far. The big flaw in a structure that has people as trustees for a trust with property is:
- if somebody has an accident in that IP, then they can sue the trust, that is, its trustee. If the trustee is a person, then may be able to show that the trustee is responsible and therefore all their personal assets (house, car etc); however
- if the trustee is a company, the company cant have caused the problem, since all it does is control the trust distributions. If the trustee company is responsible, then it is only valued as a $2 company generally, so not worth going after.
To really get money out of sueing a landlord, the accident suffered would have to have occured because the landlord was 'criminally negligent'. However, if they have a good asset protection strategy, then they would not be worth anything and they would not be a target worth going after.

Tubs

 

[Kris Sheather]

Surely the directors of the trustee company would be personally liable? As most arrangements would have the directors of the trusteee company being yourself, that would mean that they could still get access to your personal assets would it not?

I know that if I was trying to sue a corporate trustee I would be suing the directors of the company rather than the company itself, as there is no value in suing the company.

I am certainly after some enlightenment regarding this subject, I can see logic to my argument, but I am after some informed opionion on the matter.

kris.

 

[Splinter Wood]

Dollaman,

Sims account appears pretty spot on.

When setting this stuff up, just make sure YOU are the appointor. If someone else is, they can 'run off' with your property etc !!

The Trustee Company (ATF Your trust) does work as above, as it is the legal way someone would sue anything related to your assets. The Trustee Co. is only worth a few $$ and as the Appointor, you can sack that damn Trustee (THe Company) and hire a new one and you are then distanced from any negative hits.

SW

PS ; Hi Sim, you are a major wizard !

 

[gekko_99]

What if the assets of the trust are shares, units, etc (not property) and unlikely to get the trustee sued. Would you need a corporate trustee or does a corporate trustee provide protection in other ways?

 

[Aceyducey]

Gekko,

The trust is PROTECTING the assets in the trust from being accessible if YOU are sued.

Certainly with property someone may attempt to sue the owner and find that as a trust their recourse is limited. But what if someone personally sues you?

If the assets in the trust have a monetary value you should consider the best possible protection.

And a second point - the purpose of your trust might change over time. Set it up so that it's flexible for your future needs.

Cheers,

Aceyducey

 

[GreatPig]

But what if someone personally sues you?

What difference does that make as far as being trustee of a trust goes?

Even if the appointer kept you as trustee, can the bankruptcy administrator take over that role and start making distributions?

GP

 

[tubs]

Why would the appointer keep you as trustee? Presumably you (or someone close to you) would be the appointer. I dont believe the trustee role can be taken over by a liquidator, given that the role is there for the benefit of the beneficiaries, not themself (ie the trustee controls the money, but doesnt own it). And before you ask, a liquidator cannot take over the role of appointer so they could appoint their own trustee.

However, a company as trustee is always safer, just in case an appointer can use your trustee role to distribute funds. If you are not the trustee, and a company is, you are further distanced from the actual trust.

Tubs

 

[gekko_99]

I saw in another post somewhere that its recommended that you should have a "clean skin" corporate trustee or a company with no previous history anywhere that might cause it to get into trouble. Also from the posts I see, in general a corporate trustee is safer. I guess if its a preference to have a company with no previous history and is unlikely to get sued as trustee then that might transfer to not having a personal trustee who might get sued.

I also guess that if you sack a trustee and then decide to appoint another because your getting sued then the sticking point might be putting distance between you and the trust. If your trust and its transactions are not independent of you personally then thats when its comes undone and your in trouble.

I'm not an expert on this so the above is more than likely wrong but this is what I suspect; I'm still learning!

 

[eddievanhalen]

This is a topic that interests me also - I too (as appointor and trustee of a DFT) see little difference to this situation and myself being the sole director of a corporate trustee. Either way I am protected if I am sued personally as most of my assets are within the trust. If the trust (trustee.......me again) is sued then my limited understanding leads me to believe that:

- if I am the trustee then I get sued ......and as most of my assets are not in my name I have some protection

- if a company I am the sole director of is the trustee then the same problem exists.


One interesting extra question I would like to pose , assuming I am sued personally or as trustee , is whether the court could force the trust to repay the starting capital I provided for the DFT which is effectively a loan that the trust owes me. That then becomes fodder for whoever is suing me. Any opinions there?

Cheers,

Ed.

 

[tubs]

GP

One further comment, in a bankruptcy the role of appointer cannot be taken over. I have had this advice from a number of experts, and you can also read about it on Chris Batten's website. There was a case in NSW (I believe) called Wiley's case where this was determined (according to my solicitor).

Ed,

If you lent the money to a trust then yes, it is exposed if somebody sued you, because it is effectively an asset of yours (ie you are owed the money). If you gifted the money to the trust then you're OK, but you can never get the money back out of the trust, its there forever. Unless, of course, the trust lends you the money and you pay it interest.
This assumes that you gifted the money to the trust well in advance of any sign of potential reasons for you to be sued (6/24 rule).

 

[gekko_99]

From what I've been able to find out if the trust is unlikely to get sued from assets it holds (such as liablility limited shares, etc - not property) then a personal trustee is as a safe as a corporate one. The assets in the trust belong to the beneficiaries and not the trustee so how can a creditor get at assets that don't belong to the person they are chasing.

I think the risk is if a personal trustee mixes up their own trasactions with transactions of the trust and a clear distintion beween who owns the assets is not shown. Documenting decisions and explaining actions is the important part, a corporate trustee would probably force this to happen which may be a benefit but its an added cost for what benefit?

I'm not an expert in this area, this is just how I see it though am keen to know if this is not a safe way to hold assets the reasoning behind it.

 

[paradox]

I have just started to look into all this asset protection arrangement and am I confused!

To my understanding, if I set up a trust for my IP:
-If I am sued personally, the asset in my trust including the IP's would be protected.
-If the trust is sued and I have a company set up as the trustee, I personally would be protected as the company has a limited liability.

However, my questions are:
-If the trust is sued(eg, a tenant falling off the stairs of one of the IP), would all the asset held by the trust not all be susceptable? Afterall, they are the asset owned by the landlord(the trust).
-If the trust is sued, as the director or the trustee company, would I not be personally liable still?

Would really appreciate some comments.

 

[GreatPig]

By my inexpert understanding only...

-If the trust is sued(eg, a tenant falling off the stairs of one of the IP), would all the asset held by the trust not all be susceptable? Afterall, they are the asset owned by the landlord(the trust).

Yes, I believe all trust assets could be susceptible. That's why many people limit the value of assets in any one trust, using multiple trusts for more assets.

-If the trust is sued, as the director or the trustee company, would I not be personally liable still?

From what I've seen, this appears to be a big "maybe" area. I believe directors are usually only liable if they've breached certain regulations while acting as directors. For a trading company, for example, one would be trading while insolvent. For a trustee company though, I'm not sure what sorts of things would count.

There have been a number of other threads on this topic, with some good posts by NigelW in particular. Do a search of the forum and you should find them.

Cheers,
GP