How to structure discretionary trust for asset protection

[Perp]

1) For the DT to provide asset protection, you want the appointor to be an unrelated party. Ours is our accountant.

2) If the Trust deed lists plenty of other potential beneficiaries - such as your relatives and future offspring, related companies and Trusts, etc - then you're not the sole beneficiary. Of course you may choose, as Trustee, never to distribute to any of those other beneficiaries, but it does provide an additional separation between yourself and the Trust.

3) I'd be very wary of people who minimise the legal risks. Driving/owning a motor vehicle, and owning property, are two of the most litigious activities in existence. If you also operate a business, you'd be mad (IMHO) to not protect substantial assets with structures. Insurance and debt protection are essential, but as the equity in the property builds over time, it wouldn't be adequate for me to sleep well. The whole "keep your property safe" and "don't be negligent" is all very well, but there are plenty of things that can happen inadvertently that leave you exposed. Some examples:

a. You let a friend or relative borrow your car. They drive drunk and/or without a licence. If they have an accident and you have more assets than them, you're exposed.

b. You get some electrical work done by phoning an electrician in the local rag. He performs some work on your IP. He screws up and somebody's electrocuted. Turns out the electrician's licence had expired a few weeks before he did the work on your place. Guess who's exposed?

c. You're in a car accident, where you're deemed to be at fault. (Of course you're a careful driver, but hey, accidents happen - that's why they're called "accidents" ) Turns out the direct debit on your insurance bounced last fortnight because - I dunno - some oversight... and the insurer uses this to deny coverage. Or your registration expired and they'd sent the renewal to your old address and you'd overlooked it, and thus your insurer denies your claim because you were driving an unregistered vehicle. Or your drivers' licence has expired because you forgot to renew it... and so on ad infinitum.

d. You buy a beautiful IP on the top of a hill with a swimming pool. The swimming pool wasn't constructed and underpinned properly, and one night it cracks and sends a torrent of water down the hill into the neighbour's home. It turns out the swimming pool was put in negligently by an unlicenced contractor by the previous owner, who did it "on the cheap", and the swimming pool's illegal. Your insurer doesn't cover illegal swimming pools. Guess whose assets are exposed again?

I know - or know of - people who've been in all of these situations (or substantially the same). Even if you ultimately aren't found to be liable, you're highly likely to end up in court trying to argue your case. I'd rather have the litigant's solicitor look up my name and find out that I own nothing, and save the hassle.

Then there are also the benefits associated with transferring property after death. I think the "complications" and "expenses" of maintaining a discretionary trust are way overstated by the critics. It costs us about $1500 a year to maintain a discretionary trust and corporate trustee, and I consider that worthwhile. If you don't worry about the risk of being sued, then I guess, don't!

 

[Piston Broke]

I'm not talking about unit trusts, only discretionary trusts.
And I've heard the same advice from various other experts in the area. And that is that the role of appointer is not considered property. Otherwise the whole trust system would completely break down because nobody would ever appoint an appointer!
Which cases has this level of protection not worked?

I agree with ozperp, but you also need to look at how the assets got there as well.
If the assets are unencumbered and have been there many years that way, it raises the safety of the assets.
If the only distributions have been to the appointor and nobody else, I'd say it diminuishes the safety.
The appointer is not considered to actually own property, but is considered the controller of the trust. And if that control is used, or has been used solely for the benefit of the appointor (thru wateva entities), than a judge may consider the trust & appointor to be the same person. One judge called a trust an "alter ego" of the controller, therefore making no distinction between personal & trust assets.
Assets recently moved into the trust by way of gift are also up for grabs if there's any hint of it being done to avoid creditors.

If you loan money to a trust, which then buys assets, that loan to the trust is also an asset.
Which is why all the negative gearing through a trust schemes don't offer as much as protection aspeople think, more expenses and little protection.
Asset protection is expensive and long term, much more than $1500 yr ozperp.

 

[eggnog]

hey ozperp. how come you use the accountant as appointer. this seems kinda dangerous as they ultimately have absolute control of the trust through their powers to appoint a trustee.

 

[Piston Broke]

The appointor has control over appointing a trustee, who must run the trust for the beneficiaries.
Sure some damage can still be done, but I'd say he'd be a long time friend or relation.

 

[joanmc]

1) For the DT to provide asset protection, you want the appointor to be an unrelated party. Ours is our accountant.

2) If the Trust deed lists plenty of other potential beneficiaries - such as your relatives and future offspring, related companies and Trusts, etc - then you're not the sole beneficiary. Of course you may choose, as Trustee, never to distribute to any of those other beneficiaries, but it does provide an additional separation between yourself and the Trust.

Very true and I agree with these point however not all poeple set up their trusts like this and CF+ was specifically saying he was Sole beneficiary as well as appointer etc so not much protection there I was refering to,

b. You get some electrical work done by phoning an electrician in the local rag. He performs some work on your IP. He screws up and somebody's electrocuted. Turns out the electrician's licence had expired a few weeks before he did the work on your place. Guess who's exposed?

d. You buy a beautiful IP on the top of a hill with a swimming pool. The swimming pool wasn't constructed and underpinned properly, and one night it cracks and sends a torrent of water down the hill into the neighbour's home. It turns out the swimming pool was put in negligently by an unlicenced contractor by the previous owner, who did it "on the cheap", and the swimming pool's illegal. Your insurer doesn't cover illegal swimming pools. Guess whose assets are exposed again?

In these cases from what I understand even if the IPs were in a trust they are still at risk. Your PPOR is safe if it isn't in the trust. But any asset in the trust of the property that is the subject of the litigation is at risk. so if you had 10 IPS in there you could kiss them all goodbye. to maximise the effectiveness of trust structures you need a seperate one for each property. If your solicitor says different that's fine but that is how mine explained it to me. it was also discussed this way in a thread here back in 2003 (google is truly amazing isn't it!!!) with NigelW

I just don't agree with trust being touted as total protection for assets when that isn't the complete truth. They have a place as a part of a strategy, but they are not the be all and end all IMHO.

I think this thread shows just how much conflicting advice is out there on this stuff! Still loving it!

 

[Perp]

CF+ was specifically saying he was Sole beneficiary as well as appointer etc so not much protection there I was refering to,

Agreed.

b. You get some electrical work done by phoning an electrician in the local rag. He performs some work on your IP. He screws up and somebody's electrocuted. Turns out the electrician's licence had expired a few weeks before he did the work on your place. Guess who's exposed?

d. You buy a beautiful IP on the top of a hill with a swimming pool. The swimming pool wasn't constructed and underpinned properly, and one night it cracks and sends a torrent of water down the hill into the neighbour's home. It turns out the swimming pool was put in negligently by an unlicenced contractor by the previous owner, who did it "on the cheap", and the swimming pool's illegal. Your insurer doesn't cover illegal swimming pools. Guess whose assets are exposed again?

In these cases from what I understand even if the IPs were in a trust they are still at risk. Your PPOR is safe if it isn't in the trust. But any asset in the trust of the property that is the subject of the litigation is at risk.[/quote]
Quite right, and exactly why you only put a limited number/value of assets in each Trust. I should have been clearer that it's not preventing you from losing any assets, so much as putting them in separated silos, to negate the chance of any one incident resulting in the loss of everything.

If you have your assets split into several Trusts, and then also have insurances and debt protection (with mortgagee and/or friendly debt), then you're "quite well protected".

I just don't agree with trust being touted as total protection for assets when that isn't the complete truth. They have a place as a part of a strategy, but they are not the be all and end all IMHO.

I don't think anybody's touting them as the "be all and end all", but they certainly provide a lot more protection than having everything in personal names and relying purely on insurances and mortgagee debt. In any of the scenarios I outlined, you could lose everything if you only have things in personal names. If you're comfortable with that level of risk, then great! I don't sell Trusts; I have no vested interest in anybody using or not using them. I'm not comfortable with all my assets sharing these risks, and thus find the benefit of at least compartmentalising potential losses if I found myself in one of these unenviable situations, worthwhile.

It also has to be said that my husband is in a potentially very litigious profession, so we particularly need for him to own nothing.

 

[Dazz]

Post # 21 was a cracker Tracey - well done. Thanks for the read. You express yourself very candidly with obvious practical knowledge.

 

[Terryw]

I think reason asset protection of discretionary trusts are being questioned is the case ‘Richstar’ : Richstar Enterprises Pty Ltd v Carey (No.6) [2006] FCA 814)
Which can be read here, http://www.austlii.edu.au/au/cases/cth/federal_ct/2006/814.html

In this case Justice French said:
“…. that a beneficiary who effectively controls the trustee of a discretionary trust may have what approaches a general power and thus a proprietary interest in the income and corpus of the trust.”

Previously it was considered that no beneficiary has a vested interest in the trust – this is because the trustee is not obliged to distribute to any particular trustee (in a discretionary trust). It is a ‘mere expectancy’ and not classed as property under bankruptcy laws.

There is a good summary of Richstar here http://lawyerslunch.blogspot.com/


There are a few things to consider in applying this case.

1. It was regarding a major failed company
2. the company made some large payments to various entities before going under
3. it involved Corporations Act offences and an ASIC investigation
4. it involved the restrain of trust assets
5. It was not a High Court case, only Federal Court

For the average person they will want to protect their assets from creditors if they go bankrupt. They won’t be running companies or be under an ASIC investigation.

Some possible ways to increase the strength of your discretionary trust may be to
- Consider having an independent appointor, or at least one.
- Immediately when things start going bad change trustees, transfer shares in the corporate trustee and distance yourself from the trust.
- (make sure your deed allows this).
- If you are a director, and could be subject to an ASIC investigation, consider not playing any role in the trust.
- Have one spouse as the risk taker, and the other spouse as the asset holder (via discretionary trusts of course). (however, even this may not be enough as you may still be the ‘alter ego’).

There is probably no fool proof 100% all the time protection, but having a carefully thought out DT is the safest you can get.

 

[Piston Broke]

Good points Terryw.
It may establish a precedent that all courts will follow (that post was 2006).
If distributions have only been made to the appointor & trustee and no one else, then it could be argued they are all the same.
Same if nobody else has ever benefitted.
And don't forget that it may be a spouse, future spouse or de facto partner that you may want to shield the assets from, which of course is a more difficult (and long term) task, but not impossible.
If your single, you need to start the process very early.

 

[kissfan]

What is the approximate cost of setting up a discretionary trust assuming someone wanted to put his/her business in that trust AND.....if that same person was to buy a second business, I'm guessing it would be preferable to buy the second business under a different company name but be held within the one discretionary (or family perhaps???) trust?

Regards
Marty

 

[Terryw]

I should also point out there are cases after Richstar in which the Richstar reasoning was not followed.

Public Trustee v Smith [2008] NSWSC 397
This involved a doctor who set up a trust and later died. She was sole trustee (or director of trustee?) and was the appointor and only beneficiary to ever receive a distribution. She had no family either. She left her house, which was actually owned by the trust, to a friend not realising you cannot do this. The friend argued that the trust assets were the doctor’s assets following the Richstar argument. This was rejected.
http://www.lawlink.nsw.gov.au/scjud...4de829e369881e6fca25743b0017d5da?OpenDocument



Another recent case is ASIC v Burnard [2007] NSWSC 1217
This is another case where ASIC sought restraining orders for trust property as being the property of the individual behind the trust. ASIC lost this one with it being ruled the assets were not the property of Mr Burnard.
http://www.lawlink.nsw.gov.au/scjud...15560b0a474a6832ca2573830018e17e?OpenDocument


By the way, Justice French of the Richstar case is now the chief justice of the High Court.

 

[Terryw]

What is the approximate cost of setting up a discretionary trust assuming someone wanted to put his/her business in that trust AND.....if that same person was to buy a second business, I'm guessing it would be preferable to buy the second business under a different company name but be held within the one discretionary (or family perhaps???) trust?

Regards
Marty

KF

Discretionary trusts cost from as little at $200 to set up to around $1000 with some advice. Stamp duty may also need to be payable on the deed in some states (like NSW where it is now about $550).

If you want to transfer an existing business, then you need advice as there may be stamp duty and CGT issues.

If you buy a second business it would be adviseable to set up a completely new trust and new trustee company. This way if one goes down the assets of the other are not at risk.

You could also have the shares of the company held in a trust, but best not to use the trading trust.

 

[kissfan]

Thank you Terryw for that info, much appreciated

 

[evand]

Has anyone had their IP(s) threatened by legal action and had them saved by having them in a trust structure? No? Didn't think so.

Does anyone know of anyone in the same boat? No? Didn't think so.

They are overrated and pushed by accountants, solicitors etc for financial gain. The cost to setup and maintain one for the supposed benefits is ridiculous. And i have one!

Trusts are for the wealthy, not for the average mum & pop IP investor. Although they are recommended by professionals in the industry to people with one or two IP's. Its a dead set scam.

 

[Ausprop]

Has anyone had their IP(s) threatened by legal action and had them saved by having them in a trust structure? No? Didn't think so.

just to go against the grain - yes I do.

why you would suggest such a relatively easy and cheap structure is the preserve of the wealthy is beyond me.

 

[Terryw]

Hi Evand

Yes, i know someone that has just gone bankrupt. He still has all his trust assets in place with no problems there. It is fairly common for small business owners to go bankrupt.

The cost of running a trust can be as little as a few hundred dollars per year. Why wouldn't it be worth it? I cannot understand this line of thinking.