Help understanding asset protection with discretionary trusts

Ok, I think im missing something here. Everyone keeps touting asset protection as one of the major benefits of discretionary trusts but I dont see it.

I'll use the purchase of a commercial property as an example as it is cashflow positive in order to illustrate my lack of understanding.

To start with the trust needs money. So you loan $1M to the trust. The trust then gears it 50:50 and purchases a $2M factory. This means that creditors can still claw back $1M worth of assets.

Secondly, since it is cashflow positive the trust has annual income to distribute. Distributions are paid. Now, to get the distributions back into the trust the beneficiaries make another loan to the trust. This leaves even more money that is available for creditors to access.

Yes the value of the asset will eventually grow but that will take a long time and means many years where asset protection is minimal.

Is there another aspect to the asset protection story that I yet dont understand?
 
If I understand correctly, it is not about protecting the assets from within the trust, but the impact of things OUTSIDE the trust.

My understanding: You get sued for something you have done. The people come after the your assets, but there is nothing in your name - it is all held in a Trust to which they cannot trace anything to (other than being a beneficiary).

The Y-man
 
To start with the trust needs money. So you loan $1M to the trust. The trust then gears it 50:50 and purchases a $2M factory. This means that creditors can still claw back $1M worth of assets.

Creditors of who?
Creditors of the person that loaned the money to the trust can always get this back because a loan belongs to the lender.
Creditors of the trust however will have to stand in line behind the bank which will be a secured creditor because of its mortgage. However any general creditors of the trust will include the person that loaned the money to the trust in the first place. They would all likely share in recouping money and may get back x cents in the dollar.

Secondly, since it is cashflow positive the trust has annual income to distribute. Distributions are paid. Now, to get the distributions back into the trust the beneficiaries make another loan to the trust. This leaves even more money that is available for creditors to access.
There is another way to get the money into the trust and that is to gift. Gifts can be clawed back because they are under market value transfers. However as time progresses any gifts will be harder to claw back.

Yes the value of the asset will eventually grow but that will take a long time and means many years where asset protection is minimal.

Is there another aspect to the asset protection story that I yet dont understand?
Yes, probably many aspects you are not aware of.
Who lends money to the trust may be important.
e.g. gift to trust A which then lends to trust B
or
Spouse A lends to the trust. Or Spouse B gifts to the trust.

Security for loans:
Trust A lends to Trust B with Trust A taking a mortgage over property of Trust B.
Trust A lending money to spouse B to buy a main residence and Trust A taking a 1st mortgage giving good asset protection if B ever went bankrupt.

Also some tax advantages to the above.
 
Hi y-man. Yes I was referring to asset protection from things happening outside of the trust.

Terry, you've given me some things to think about. Will mull it over tonight :)
 
I should also point out the obvious - not all discretionary trusts are the same and the wording of the deed is important.

broadly there are 4 different types of discretionary trusts with some more stronger if the person behind controlling the trust were to become insolvent.

So type and and wording is both important. e.g. Removing the trustee automatically on insolvency, removing the appointor automatically upon insolvency. same for insanity or other legal incapacity.

Don't forget you are not only wanting to protect from potential creditors, but also from attack within - other beneficiaries gaining control of the trust.
 
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