How to structure discretionary trust for asset protection

[eggnog]

I remember discussing with my accountant a while back that if you have a discretionary trust with:

- yourself as appointer and
- yourself as sole director of company as trustee

then under this structure the trust will not provide asset protection. His reasoning was that the courts will see it as just being yourself (as all positions being held are yourself only) and wipe the structure clean if you are being sued. Is this correct? If you are just a single person going this PI road alone then how can you structure the discretionary trust to provide asset protection.

 

[The Y-man]

I understand it's the appointer bit that's the problem - there is an issue where a creditor may take control as appointer, and appoint a new trustee (themselves)

I believe the laws in this section are being (have been?) reviewed.

Cheers,

The Y-man

 

[eggnog]

interesting Y-man. didn't think about that. will have to ponder on this new viewpoint.

how my accountant explained it is in regards to being personally sued and not to do with creditors. He says that if you hold all positions in a trust (appointer and sole director) then you cannot justify asset protection through non-ownership (even though the property is held in a DT and not personally under your name) because the courts will say since there are no other interested parties then the trust doesn't really exist.

I ask again if this this correct. If so, then how can an individual gain the benefits of a DT.

 

[joanmc]

That is the same as what both my accountant and solicitor said to me. The solicitors position was to have really comprehensive insurance and be a good landlord. I know there are a lot of seminars out there that really push this structure and that structure but all the advice I have received is that they are mostly overkill and don't offer as much protection as their advocates say they do. by the way both my accountant and solicitor are property investors.

that being said I am sure there are situations where different structures are beneficial but each persons case needs to be assessed individually.

I would stick to the advice you get from your professionals regarding your specific situation.

 

[Ausprop]

this suggests the appointor is a bit safer... but you know what law is like...

http://www.lawcentral.com.au/LearnAboutLaw/CategoryDetail.asp?ID=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.

 

[eggnog]

Hi joan. Could you be more specific on what did your accountant and solicitor suggested to gain asset protection.

 

[joanmc]

Hi Cashflow,
our solicitor said that most people who sue do it for negligence i.e. something was unsafe or unfit for purpose and we knowingly left it that way. (for example rotting timber in a staircase, faulty electricals, shoddy workmanship). You as a landlord have a duty of care to your tenant to provide a safe dwelling. So his solution is have a safe property, document everything, if a safety issue is raised attend to it promptly, perform general maintenance. Have liability insurance. Don't break the law.

Also he said that to be effective for asset protection you would need a separate trust for each property because if you had say 3 houses in one trust and that trust got sued ALL the assetts in that trust are at risk ( not sure if I am paraphrasing that clearly), this is where it can become costly and complicated maintaining a lot of trusts and associated companies.









How many houses do you have? If you only have one and have borrowed100% for it the other question you might want to ask is: am I WORTH a law suit? what is my net worth that someone can get out of me? If you are leveraged up to the eyeballs the lawyers will look at that and say "not worth it".

What type of lawsuit are you worried about? Are you in a profession that gets sued regularly? footy player?, doctor? Are you likely to be doing something that people will consider you a target worth coming after?

I nearly drove my accountant and lawyer nuts with this because every seminar I went to some bloke would be telling me that "professional " investors all had asset protection and REAL investors bought in this structure or that structure. I have met a lot of people that are so busy "setting up" their professional structures because they are "serious investors" that they never actually got around to buying a property! It now has a bit of a **** factor for me, you know don't babble on about all your structures when you have a net worth of 20 bucks.

Now don't get me wrong, I have various structures myself including a family trust(nothing in it yet except a BIG loss) and 2 companies, but so far ALL our properties are in either my name, his name or our names.

If you are happy with your professional advisors who have looked at your situation then why not follow their advice?

There are so many variables in this journey that what is right for one isn't right for someone else. So you need to really look at what you are doing, what are you trying to achieve and what will be the most effective structure to do that with. Good luck. I hope that helps a bit.

Joan
this is not advice, just my opinion and probably poor paraphrasing, seek your own advice blah blah blah, covering my butt...hehe

 

[DebtEquity]

What I am reading is it is more important to see if you can get the finance for your IP deals before you set up any Trust Structure. Also to make sure that you can claim losses if negatively geared.

So what do others do for estate planning in the future! Do you think of this before purchasing multiple purchases.

 

[eggnog]

sorry joan. still not seeing the picture properly. maybe just me

reading your posts, sounds like your solicitor/accountants are giving you contradictory advice, which is what others have told me and is confusing me.

my initial post was a question on wether a discretionary/family trust with a single person as both the appointer and trustee (either as an individual or as a sole director of a company) actually provided adequate asset protection as everyone keeps saying. What my accountant adviced me (and what you have agreed to on your first post) was that no it doesn't do squat because there are no other parties involved. The courts will just view the entity as non-existant or as you personally holding all assets within that trust under your personal name.

however, on your second reply you said that this same accountant/solicitor adviced you

that to be effective for asset protection you would need a separate trust for each property

. This seems contradictory to your first post. I get people (both professionals and investors) telling me both cases, which I guess is whats confusing me. Hence why I thought I mights post the question on the board to get a general consensus on which is correct.

 

[Ausprop]

I think the more complex you make it the more protection you are likely to have, hence it is a trade off.

no trust = no protection

trust with you as appointor and trustee = minimal protection. but as I posted above some would argue it is

trust with your wife as appointor and a pty ltd co as trustee with only one property in the trust = max protection

 

[Piston Broke]

CF+ there are other parties involved, they are the beneficiaries.
The assets are held in trust for the beneficiaries.
If there was only one beneficiary, then it is all the same.
But the trust exists for the beneficiaries, not the appointor or the trustee.
The appointor is not owner of the assets, nor is the trustee.
It is a legal issue, not an accounting one.

Ausprop, I don;t agree with what you call "max protection".
If the trust has no debts, the assets are unecumbered, and the appointor & trustee are at arm's length (not wife or family members), and >10yrs in existence, and no units issued, I'd cautiously say "max possible protection".
And afaik it's the trustee who makes the decision of borrowing from a bank to fund purchases, not the appointor.
If the appointor or trustee uses trust assets as collateral and goes broke, then those assets will be available to creditors. As any trust units & company shares (ie trustee P/L) will be.
The lack of protection usually comes from the time the trust is setup and loans are taken out in the appointor's name with trust assets as collateral.
And when units are issued.
Only when the loans are paid or refinanced (with diff collateral) and all units repurchased and a few years passed will there be a reasonable protection imo.

 

[Piston Broke]

CF+ there are other parties involved, they are the beneficiaries.
The assets are held in trust for the beneficiaries.
If there was only one beneficiary, then it is all the same.
But the trust exists for the beneficiaries, not the appointor or the trustee.
The appointor is not owner of the assets, nor is the trustee.
It is a legal issue, not an accounting one.

Ausprop, I don;t agree with what you call "max protection".
If the trust has no debts, the assets are unecumbered, and the appointor & trustee are at arm's length (not wife or family members), and >10yrs in existence, and no units issued, I'd cautiously say "max possible protection".
And afaik it's the trustee who makes the decision of borrowing from a bank to fund purchases, not the appointor.
The lack of protection usually comes from the time the trust is setup and loans are taken out in the appointor's name with trust assets as collateral.
And when units are issued.
Only when the loans are paid or refinanced (with diff collateral) and all units repurchased and a few years passed will there be a reasonable protection.

 

[joanmc]

HI CF+
LOL It kinda depends WHAT you are trying to protect the asset FROM to a degree.

Are you worried about going under financially and losing assets that way OR are you worried that a tenant will trip on loose carpet and sue you for pain and suffering OR are you in a business that has a high litigation rate?
All of these are ways to potentially lose a property but they can require different types of protection, this is where a trust can come in handy or be completely useless.

I agree with PB in that IF you are the ONLY beneficialry, the appointer, the owner of the company etc, if it is all just YOU, there isn't that "arms length". and a trust could be a pointless exercise.

Have you asked your solicitor who is familiar with your circumstances?

Sorry to not be clearer but it isn't actually black/white. what sort of litigation are you afraid of?

 

[joanmc]

Also , and I am happy to be corrected on this, my understanding from discussions with "them that know" is that a trust doesn't actually protect you from litigation it only limits which assets they can go after.
For example joe blow has Trust A, which has 3 properties in it worth1 mill, and Trust B, which has 1 house in it worth 300k,
tenant of trust B sues for tripping on carpet. He can only go after assets owned by Trust B i.e. 300k less any debt, assets in trust A are still safe.
tenant of trust A trips and sues can go after ALL assets in trust A, yep the whole 1mill. but the house in trust B is safe.

Hence if all your assets are in one trust, all your assets are at risk. You would need a seperate trust for each property.

Again depending on the type of litigation you are expecting. This is how it was explained to me.

Disclaimer again! all this talk of suing makes me nervous!!!

 

[tubs]

This is from Chris Batten's Website (and he is considered one of, if not THE expert in this area in Australia).

http://www.investorone.com.au/index.aspx?p=assetProtection

"The power of appointment in relation to a trust is not property and therefore does not pass to a trustee in bankruptcy. "

The way I understand it is this.

If somebody sues you, they can only sue you for being negligent. A trust cannot be sued, because a trust is only a bit of paper, and a bit of paper can't be negligent.

So if they sue you and everything is held in a trust with a corporate trustee, then the only asset you have is a $1 company. The company does not own the house, it just holds it as trustee for the trust. The appointer simply has the role of deciding who the trustee/s should be.

So unless anything has changed in the last few years then it appears that this structure is still safe.

 

[eggnog]

cheers all for the replies. really insightfull and has made my understanding of trust that much more complete Joan, not really concerned about being sued. just wanted to more thoroughly understand trusts and how they are and can be implemented.

 

[Piston Broke]

This is from Chris Batten's Website (and he is considered one of, if not THE expert in this area in Australia).

Is that because he told you so, or because you read it in the brochure?
The way he sets up many trusts (as mentioned in his free downloads) compromises asset protection from day one. Unless it's changed recently.

So if they sue you and everything is held in a trust with a corporate trustee, then the only asset you have is a $1 company.

Judges have shown this not necessarily to be the case.
If it were that easy any business owners could go broke and not have to pay anyone.
Of course those who charge a few thousand bux don't seem to mention that.
Maybe you should ask Mr Batten if he guarantees his asset protection by offering to pay out any award against his customers.
Everything else must have warranty, why not him too?

 

[Ausprop]

The way he sets up many trusts (as mentioned in his free downloads) compromises asset protection from day one. Unless it's changed recently.

where do you think he is going wrong? I would like to know if I am/have done it too.

 

[Piston Broke]

As soon as you issue a unit to yourself, then that unit is an asset and may be entitled to income. There was a previous thread on the ATO's view of distributions which are pretty much targeted at this type of arrangement.
That a HD trust has flexibility, there is no doubt, but the scare tactics of losing all your assets is what sells them.
But to negative gear an IP, which is what most people do, you expose your assets. Dale G also mentioned this a few times as well.

 

[tubs]

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?