HDT's and asset protection....does it exist
- Thread starter the_captain
- Start date
cu@thetop, I'm certainly not the first person to do it. If you do some further reading on the board i think you'll find others have done the same.
As joanmc said,
As for me, i gave up collecting property after i had reached a point that i was comfortable with. I have now reached that stage where my priorities have changed and want to enjoy more important things in life and not spend so much energy on property related stuff.
Last edited:
The whole premise of asset protection via trusts is the argument that you don't own the asset, therefore nobody can make demands on it from you.
In a real simple scenario, you can be sued but they can't demand you pay from your neighbour's assets, nor demand him sell to pay your liabilities.
And so the the argument is that the asset you control is not owned by you, but by others, and that your only administering the asset on behalf and for the benefit of the beneficiaries, who are others.
On the other side courts have already ruled that if you control the asset, administer the asset and are the beneficiary, then it's pretty much your asset.
So you (and your lawyers) would need to convince a judge that you don't own the asset, that it's not yours.
So if your the appointor, trustee and beneficiary and the only recipient of distributions (self or solely owned entities) then it's pretty obvious that there no trust.
On the other hand if over ten years of distributions none went to yourself or solely owned entities, you may well have a case that they are not your assets, but you hold them and administer them for the benefit of beneficiaries other than yourself.
As for negative gearing, the ATO said:
34. A loss or outgoing is not deductible where it is incurred to gain or produce benefits for other persons
So you want to convince a judge that you don't own them, and at the same time convince the ATO that you do own them so you get deductions.
I hope you see the paradox in it.
The trust still has it's place, and still makes for convenient distributions of income, and offers some asset protection, but what most seem to believe of it's powers of asset protection & negative gearing were myths promoted by those who sold them for 3-5k + whatever other consultancy fees.
So if that ruling is 14 yrs old, then I would consider legal action against those who sold me those trusts for the costs involved + the costs of dissolving + costs, for giving information that was clearly contrary to a ruling many years prior, which they should know and been aware of as practitioners.
imo
In a real simple scenario, you can be sued but they can't demand you pay from your neighbour's assets, nor demand him sell to pay your liabilities.
And so the the argument is that the asset you control is not owned by you, but by others, and that your only administering the asset on behalf and for the benefit of the beneficiaries, who are others.
On the other side courts have already ruled that if you control the asset, administer the asset and are the beneficiary, then it's pretty much your asset.
So you (and your lawyers) would need to convince a judge that you don't own the asset, that it's not yours.
So if your the appointor, trustee and beneficiary and the only recipient of distributions (self or solely owned entities) then it's pretty obvious that there no trust.
On the other hand if over ten years of distributions none went to yourself or solely owned entities, you may well have a case that they are not your assets, but you hold them and administer them for the benefit of beneficiaries other than yourself.
As for negative gearing, the ATO said:
34. A loss or outgoing is not deductible where it is incurred to gain or produce benefits for other persons
So you want to convince a judge that you don't own them, and at the same time convince the ATO that you do own them so you get deductions.
I hope you see the paradox in it.
The trust still has it's place, and still makes for convenient distributions of income, and offers some asset protection, but what most seem to believe of it's powers of asset protection & negative gearing were myths promoted by those who sold them for 3-5k + whatever other consultancy fees.
So if that ruling is 14 yrs old, then I would consider legal action against those who sold me those trusts for the costs involved + the costs of dissolving + costs, for giving information that was clearly contrary to a ruling many years prior, which they should know and been aware of as practitioners.
imo
This has only been the case in one case that I know of:
Richstar Enterprises Pty Ltd v Carey (No.6) [2006] FCA 814)
http://www.austlii.edu.au/au/cases/cth/federal_ct/2006/814.html
This case involved breaches of the Corporations Act and not general bankruptcy so the result would be different for the average person.
Subsequent cases have proved this.
For example see:
Kawasaki (Australia) Pty Ltd v ARC Strang Pty Ltd [2008] FCA 461
And
ASIC v Burnard [2007] NSWSC 1217.
This one was also one where ASIC argued along the Richstar line that the person is the alter ego of the trust but it was ruled that the assets of the trust were not the property of Mr Burnard.
http://www.lawlink.nsw.gov.au/scjud...15560b0a474a6832ca2573830018e17e?OpenDocument
So, I think discretionary trusts are still very safe and can be made safer by a few precautionary measures.
With unit trusts and Hybrid trust the interest is deductible (depending on the wording of the deed) because the individual owns the units in their own name. The above would apply to someone trying to deduct interest for a DT against their personal income.
I havent said there is no protection.
The units in the individuals name are assets available to creditors.
As are any shares in any company or scheme.
The whole process & principle of asset protection is not to have assets in your own name.
I've seen a few other cases, and some in the family court.
The units in the individuals name are assets available to creditors.
As are any shares in any company or scheme.
The whole process & principle of asset protection is not to have assets in your own name.
I've seen a few other cases, and some in the family court.
From the posts above one could conclude that asset protection does not exist through a unit trust or HDT structure. If holding a particular property would result in a loss then a DT is also not attractive, despite this structure offering relatively certain asset protection.
So...if you are a high income earner and have bought a property in your own name, how can you best achieve a degree of asset protection? Previous posts on other threads have suggested leveraging the property as highly as possible (say 95% lvr for full-doc in current market). But how can you protect the remaining 5% equity and then any capital growth each year or so? I have heard of the idea of the low/nil income partner registering an interest (2nd mortgage?) over the remaining 5%, but I am not sure how this operates in practice. If it can work, you could achieve 100% asset protection (with the exception of any unprotected capital gain) against creditors suing you. i.e. 100% mortgaged = nothing to gain. Any thoughts?
Angela
So...if you are a high income earner and have bought a property in your own name, how can you best achieve a degree of asset protection? Previous posts on other threads have suggested leveraging the property as highly as possible (say 95% lvr for full-doc in current market). But how can you protect the remaining 5% equity and then any capital growth each year or so? I have heard of the idea of the low/nil income partner registering an interest (2nd mortgage?) over the remaining 5%, but I am not sure how this operates in practice. If it can work, you could achieve 100% asset protection (with the exception of any unprotected capital gain) against creditors suing you. i.e. 100% mortgaged = nothing to gain. Any thoughts?
Angela
I wouldn't conclude this. For a normal creditor style situation a simple DT does provide protection
forget the family court, nothing will save you there.
the practicalities of leveraging your hosue to 95% on a permanent basis would not make it possible IMO. A detrimental lease is one idea, but if you are protecting against bankruptcy then the claw back period is many years anyway
My comment -
Ausprop, I think we are actually agreeing. My comment concluding that asset protection does not exist related to UT's and HDT's. I agree that DT's do provide protection (see my comment above).
Ausprop, I think we are actually agreeing. My comment concluding that asset protection does not exist related to UT's and HDT's. I agree that DT's do provide protection (see my comment above).
Terry, in the case you posted, notice that the trustee of the trust was a different person to the person being sued and so were the beneficiaries.
I stated clearly "if you control the asset, administer the asset and are the beneficiary, then it's pretty much your asset." and there is no trust.
This was also ruled in the family court.
The family law court can look into any asset you legally own, not are rumored to own, or the ex thinks you own.
And it may not be so easy with a long term trust held for other beneficiaries long before the partnership formed, for which you are the trustee/appointor.
I'm still not sure on the actual difference between a HDT with no units issued an a DT with respect to taxation and protection, if some can shed more light.
I stated clearly "if you control the asset, administer the asset and are the beneficiary, then it's pretty much your asset." and there is no trust.
This was also ruled in the family court.
The family law court can look into any asset you legally own, not are rumored to own, or the ex thinks you own.
And it may not be so easy with a long term trust held for other beneficiaries long before the partnership formed, for which you are the trustee/appointor.
I'm still not sure on the actual difference between a HDT with no units issued an a DT with respect to taxation and protection, if some can shed more light.
My comment -
Ausprop, I think we are actually agreeing. My comment concluding that asset protection does not exist related to UT's and HDT's. I agree that DT's do provide protection (see my comment above).
yep sorry - I see your point!
I'd like to get to the bottom of all this. Do you disagree with this then?
------------------------------------------------------------------------------
this suggests the appointor is a bit safer... but you know what law is like...
http://www.lawcentral.com.au/LearnAb...=17&pageID=140
What happens if an Appointor goes broke?
Appointor is God and is the real controller of the Family Trust. If you go broke can the creditors then try to attack your Family Trust just because you are the Appointor?
When you go into bankruptcy your Trustee in Bankruptcy collects up all your assets and gives them to your creditors.
However, as Appointor you may "control" the assets in your Family Trust. You do not "own" those assets. Therefore, the assets of the Family Trust are usually not available to creditors if the Appointor is bankrupt.
However, as Appointor you may have mortgaged or lent against the assets of the Family Trust. The Family Trust may have guaranteed some of your debts. In these cases the creditors can go the Family Trust assets up to the value of your guarantee.
Appointorship is not really an asset.
And a trust is not really a separate legal entity but a series of relationships.
So the real issue is the relationship between the settlor, appointor, trustee and beneficiaries.
Which of course is contractualised by the trust deed.
If assets held in trust are used to guarantee a loan for anybody, be it the trustee or appointor or anyone else, then it would seem normal that those assets will be called upon if the loan is defaulted on.
I see nothing out of the ordinary in that.
And that link really does'nt give any answers.
And a trust is not really a separate legal entity but a series of relationships.
So the real issue is the relationship between the settlor, appointor, trustee and beneficiaries.
Which of course is contractualised by the trust deed.
If assets held in trust are used to guarantee a loan for anybody, be it the trustee or appointor or anyone else, then it would seem normal that those assets will be called upon if the loan is defaulted on.
I see nothing out of the ordinary in that.
And that link really does'nt give any answers.
Richstar is the basis for the advice that you need to have a DT structure that does not have the appointor, trustee(s) and beneficiaries all appearing to be the same parties.
There are several ways in which this can be achieved. In our case, our appointor is our accountant. Yes, they can then put in a new Trustee etc and have effective control of the asset. But an accountant (your solicitor would also be an option) also have professional ethics and fiduciary responsibilities towards you, making such a course of action highly unlikely, due to the enormous consequences for them as a professional if they breach. They'd end up deprived of the ability to practise, having to compensate you for loss, and/or in jail.
If you believe that you're so wealthy that your assets in Trust would be attractive to such a professional notwithstanding the consequences, then:
1) You need to split ownership of such a huge asset base amongst multiple Trusts, with different appointors.
2) You need to find an accountant/solicitor that you trust.
and for 99% of us who feel this way
3) You need to get over yourself; you're not as big a fish as you think you are.
There are several ways in which this can be achieved. In our case, our appointor is our accountant. Yes, they can then put in a new Trustee etc and have effective control of the asset. But an accountant (your solicitor would also be an option) also have professional ethics and fiduciary responsibilities towards you, making such a course of action highly unlikely, due to the enormous consequences for them as a professional if they breach. They'd end up deprived of the ability to practise, having to compensate you for loss, and/or in jail.
If you believe that you're so wealthy that your assets in Trust would be attractive to such a professional notwithstanding the consequences, then:
1) You need to split ownership of such a huge asset base amongst multiple Trusts, with different appointors.
2) You need to find an accountant/solicitor that you trust.
and for 99% of us who feel this way
3) You need to get over yourself; you're not as big a fish as you think you are.
My understanding is that there is no difference, you can use a HDT as a usual DT if no SIU's are issued. So even if you're stuck with a dud HDT structure so to speak, you can still use it like a normal DT eg. for CF+ investments.
lol ozperp, Richstar was 2006, are you reinventing the wheel?
I could've told you that >10 yrs ago. There were plenty examples before that, including Bond, Murdoch etc.
JIT that's what we're been told by those who sell HDT's, but they also state that you can negative gear through a trust, and promote asset protection while issuing units.
btw some promote buying units in another trust, so that a trust holds the IP, and another trust then holds the units.
I could've told you that >10 yrs ago. There were plenty examples before that, including Bond, Murdoch etc.
JIT that's what we're been told by those who sell HDT's, but they also state that you can negative gear through a trust, and promote asset protection while issuing units.
btw some promote buying units in another trust, so that a trust holds the IP, and another trust then holds the units.
Well, yes, but I was responding to Ausprop who mentioned Richstar. I meant that the take home message from Richstar (and other cases) is the importance that not all parties - appointor, trustee(s) and beneficiaries - are the same.
If you were the sole beneficiary, then there would be no trust as the definition of a trust is someone holding some property for someone else.
But, even if there were other beneficiaries, and they had never obtained any distributions, you would still have a trust.
The Richstar case argued that the trust was the alter ego of the person ASIC was chasing -Carey I think his name was.
But subsequent cases haven't followed this line or argument.
once recent case in the NSW Supreme Court involved a Doctor. She set up a trust to own her own home. Seems like she didn't understand trusts at all and she left the house in her will to someone. The Dr died and the someone sued her estate for the house. The argument was that the Dr was the appointor, sole director of the trustee, sole shareholder of the trustee and she was the only one to ever receive a distribution from the trust - though other beneficiaries were named. So the lawyers for the other party argued that the trust was the 'alter ego' of the person. They used the Richstar arguement. But this didn't work and it was deemed the assets of the trust were not the assets of the Dr.
This case is Public Trustee v Smith [2008] NSWSC 397
(incidently, this trust was set up in a way the doctor was not even a beneficiary of the trust. She behaved as if she was in terms of tax returns etc for many years and the court determined there was a mistake made in the deed and that it was intended to have her as a beneficiary from the begining and the court ordered the deed to be amended to reflect this).
As for the Family Law court. They can look at assets you legally own as well as assets legally owned by others - such as trusts if you control that trust.
A HDT without units issued is just a DT.
