# Hybrid Discretionary Trust Analysis

#### triple_j

Hi people,

I'm a beginner looking into the best structure for asset protection. I've been doing some research into discretionary trusts and hybrid discretionary trusts and wondering which one would be the best? Looking at the poll, lots of people are buying through these two structures. I hope there are some experts out there willing to share their experience.

Also, I heard you can -ve gear into hybrid discretionary trusts. Wondering how this is done?
Say the trust bought a new property worth \$100,000. There are \$100,000 of existing assets in the trust. To negatively gear into the new property, a beneficiary will borrow from the bank to purchase x of units equivalent to \$100000 and get distributed 50% of the income of the trust? What if the existing asset generated more income than the property? How do you portion the distribution?

From asset protection's perspective, if you borrow to purchase units, then the units are under your name again. So does this defeat the purpose of protection under a trust?

Thanks!!

#### NigelW

Originally posted by triple_j
Hi people,

I'm a beginner looking into the best structure for asset protection. I've been doing some research into discretionary trusts and hybrid discretionary trusts and wondering which one would be the best? Looking at the poll, lots of people are buying through these two structures. I hope there are some experts out there willing to share their experience.

Also, I heard you can -ve gear into hybrid discretionary trusts. Wondering how this is done?
Say the trust bought a new property worth \$100,000. There are \$100,000 of existing assets in the trust. To negatively gear into the new property, a beneficiary will borrow from the bank to purchase x of units equivalent to \$100000 and get distributed 50% of the income of the trust? What if the existing asset generated more income than the property? How do you portion the distribution?

From asset protection's perspective, if you borrow to purchase units, then the units are under your name again. So does this defeat the purpose of protection under a trust?

Thanks!!

Hi JJJ

You're starting to get a handle on it, but could I make 2 suggestions to iron out the issues for you:

1) use the search function and read some of the numerous previous threads on this very issue

2) buy Dale GG's book. His website is www.gatherumgoss.com

Cheers
N.

#### bubbleroo

hi triple_j,

I got a hybrid disc trust set up not long ago. I approach an accountant & he had a looked at my trust deed & told me that he's not 'comfortable' doing my tax return or the trust tax return because of the structure of my trust deed is that it's 'too discretionary' rather than 'unit'. What he's saying is that the tax man might not be comfortable to the fact that i am getting the best of both world - I am claiming negative gear when it's making a lost & i am out of the picture when trust start to make a profit.

Under hybrid disc trust, one can claim negative gear by buying units in a discretionary trust then at a later day, when the properties rise in value the trust could buy back these units from me & hence pay me out, then distribute the capital gain to other lower income beneficiaries. Apparently, the tax man won't like this procedure i am adopting.

So be careful when you set up a trust & be very clear as to what you need.

And if anyone could reassure me that a hybrid disc trust is all that good afterall. This accountant really got me worried.

bubbles

#### NigelW

Originally posted by bubbleroo
hi triple_j,

I got a hybrid disc trust set up not long ago. I approach an accountant & he had a looked at my trust deed & told me that he's not 'comfortable' doing my tax return or the trust tax return because of the structure of my trust deed is that it's 'too discretionary' rather than 'unit'. What he's saying is that the tax man might not be comfortable to the fact that i am getting the best of both world - I am claiming negative gear when it's making a lost & i am out of the picture when trust start to make a profit.

Under hybrid disc trust, one can claim negative gear by buying units in a discretionary trust then at a later day, when the properties rise in value the trust could buy back these units from me & hence pay me out, then distribute the capital gain to other lower income beneficiaries. Apparently, the tax man won't like this procedure i am adopting.

So be careful when you set up a trust & be very clear as to what you need.

And if anyone could reassure me that a hybrid disc trust is all that good afterall. This accountant really got me worried.

bubbles

ignorance is the root of fear (and comfort zones!)

Cheers
N.

#### Nominees

Can any one comment on this:

From asset protection's perspective, if you borrow to purchase units, then the units are under your name again. So does this defeat the purpose of protection under a trust?

I have been wondering the same too?

can someone sue you for your "units" and then have rights to the income?
Cheers,

Nom

#### bundy1964

Originally posted by Nominees
Can any one comment on this:

I have been wondering the same too?

can someone sue you for your "units" and then have rights to the income?
Hi Nom

I think they can

I think the trustee can repurchase the units as well at their discretion

Expences may just eat up the profit in those units

bundy

#### bbg2003

You need to take a long term view to it all.
Only when the trust buys back your units you will achieve the most of the benefits the trust offers.

There is no problem with hybrid trusts for "asset protection" with the ATO.

Dale's book "Trust magic" is a great way to learn the basics of how it all works.

I would also recommend you search & read NigelW's past posts. He is one the few professionals tha posts *real advice* here for FREE.

good luck
bbg2003

#### triple_j

Nigel, thanks for the two points. I'll follow them up

Bubbleroo: your story is one of many similars I've been hearing. That's why I've been hesitant. Looks like more research and homework is due in order to feel confident

I heard that Chris Batten is one of the trust gurus. Anyone had experience of his teachings ?

Jess

#### DaleGG

HI

The individual buys "special income units" from the hybrid trust which entitles the individual to the income from the trust.

This is important, because it means that should someone sue the individual, the real asset (the IP) is still safely protected from attack within the trust.

Now, before you ask, the individual's units within the trust are at risk in that same law suit. However, there are ways around this including:

The trust buying back the units from the individual at a nominal value (this depends upon the words and clauses within the trust deed)

Specialist advice is best when it comes to asset protection and as such I would strongly recommend that you talk to your solicitor about the issues and your concerns.

Have fun

Dale

#### bbg2003

Hi Dale, the legal questions I ask myself.

If the trust buys back the units at a "nominal" value:

1. Can this transaction be deemed as not being at "market value" and being done only to avoid paying a creditor?

2. Will it be subject to the clawback rules?

bbg2003

#### triple_j

Hi there again, in particular Nigel, Dale, Nick

I went through almost all threads with the word "trust" in it and went to Christ Batten's web site and went to Dales web site and went to Nick's web site and Trust Magic is on its way to my apartment

I must say that my entire perspective on property ownership has changed ( for the better )! But I still have questions Hope you guys can help:

1. Scenario: any trust type with a company as trustee. Can income be distributed to the trustee company and be taxed at 30%? My main concern is the company is specifically set up to take advantage of 30% tax rate on income distributed from the trust. Will the tax office stomach this kind of thing? Everything will be legally set up and at arms length, the tax office can't really say anything right?

2. Scenario: I want to set up a unit trust which acquires mum's two IPs currently under her name. Then set up a self managed super fund for her and allocate units to her fund. Any income, which was previously taxed at her top bracket rate, will now be taxed at 15%. Let's leave CGT, stamp duty, lad tax, admin costs aside for now. My questions are
2.1 Are the procedures and structures set out above legal? I read that a superfund cannot buy assets from members when the members are in the structure of a person, a partnership, a company or a hybrid/discretionary trust. In this case the fund acquires from a unit trust and the unit trust will not have mum as a beneficiary. So mum's fund is not buying from a member. However indirectly the fund is doing exactly that. So is it legal?
2.2 15% tax rate on income and 10% tax rate on CG only apply when the fund is converted into an allocated pension fund. When can a fund be converted and start issuing pension? I'd like mum to have income as soon as possible. Is there a way to get the income earlier than 55? The earliest age is 55 right? Or is it 65?

3. Does the issuing/purchasing/redeeming of units raise a stamp duty or CGT event?

Thank you heaps!!!!

You'll probably hear from me soon to get structures set up

Best regards,
J

#### triple_j

Just a quick but sincere thank you to Dale, Nigel, Nick and other experts contributing their wealth of knowledge!! As some one once posted "You've gotta be a Packer" to know trusts from primary school , but as long as you have the dream and experts like the ones we have, any one can do it !!

Cheers,
Jess.

#### D.T.

Hi triple j

I'll admit I dont know much on this subject myself, but I believe the answer to your question 2.1 is on Chris Batten's website. Look up the demo video's section, theres one called "Poisoning Assets", or something to that effect.

-Hope this helps

Dave

#### NigelW

Originally posted by triple_j
Hi there again, in particular Nigel, Dale, Nick

I went through almost all threads with the word "trust" in it and went to Christ Batten's web site and went to Dales web site and went to Nick's web site and Trust Magic is on its way to my apartment

I must say that my entire perspective on property ownership has changed ( for the better )! But I still have questions Hope you guys can help:

1. Scenario: any trust type with a company as trustee. Can income be distributed to the trustee company and be taxed at 30%? My main concern is the company is specifically set up to take advantage of 30% tax rate on income distributed from the trust. Will the tax office stomach this kind of thing? Everything will be legally set up and at arms length, the tax office can't really say anything right?

2. Scenario: I want to set up a unit trust which acquires mum's two IPs currently under her name. Then set up a self managed super fund for her and allocate units to her fund. Any income, which was previously taxed at her top bracket rate, will now be taxed at 15%. Let's leave CGT, stamp duty, lad tax, admin costs aside for now. My questions are
2.1 Are the procedures and structures set out above legal? I read that a superfund cannot buy assets from members when the members are in the structure of a person, a partnership, a company or a hybrid/discretionary trust. In this case the fund acquires from a unit trust and the unit trust will not have mum as a beneficiary. So mum's fund is not buying from a member. However indirectly the fund is doing exactly that. So is it legal?
2.2 15% tax rate on income and 10% tax rate on CG only apply when the fund is converted into an allocated pension fund. When can a fund be converted and start issuing pension? I'd like mum to have income as soon as possible. Is there a way to get the income earlier than 55? The earliest age is 55 right? Or is it 65?

3. Does the issuing/purchasing/redeeming of units raise a stamp duty or CGT event?

Thank you heaps!!!!

You'll probably hear from me soon to get structures set up

Best regards,
J

Hi JJJ

Preliminary comment - see your lawyer/accountant and get some advice. some observations:

Point 1 - the trustee of a discretionary trust cannot distribute income or capital of the trust to a person or company who is not a beneficiary - that would be a breach of trust.

The trustee of a unit trust must distribute income and capital according to the proportions of unitholdings of the unitholders (subject to anything wierd in the trust deed and terms of issue of the units).

The way most discretionary trusts are drafted, the corporate trustee of the trust would probably be a beneficiary due to the principal beneficiary/ies being directors of that company...BUT I think it is a very bad move to distribute trust income/property to the trustee. Set up another company if you want to move income to a 30% taxpayer... Of course you then have to get the \$ out of that company...which is another story perhaps involving Fringe Benefits Tax and other catastrophes...

Point 2 - pre some date in 1999 it used to be easier to do what you're proposing but it's now MUCH harder. Some hurdles for you to jump may include: 1) in=house assets rule - basically these properties are possibly disallowed for a number of reasons, including (and I'm firing from the hip here): a) non-arms length sale terms (this can be got around with independent vals etc) b) the property may constitute more than 5% of super fund's value c) it's residential property not business property leased by the members to run their business d) sole purpose test for super e) control of > 50% of the unit trust by the members of the super fund.

Note it is STILL possible to do what you're planning, but often there's a need to team up with some unrelated people so that nobody controls >50% of the unit trust...

PS. there's more that one way to skin a cat. If your Mum, with her IPs is asset rich and cash/income poor then there may be a much easier way to extract an income - namely a cashbond. Do some reading on the forum about that concept and check out Steve Navra's website www.navra.com.au for more info...

Good luck with it all and please 1) GET SOME ADVICE ON YOUR SPECIFIC CIRCUMSTANCES 2) MAKE SURE YOUR MUM GETS ADVICE - THEY'RE HER ASSETS AFTER ALL

Cheers
N.

#### NickM

J

NIgel is correct. Just to clarify further, a SMSF cannot acquire assets from a member or an associate of the member.

They have a clause in the legislation which talks about Pt8 Associates and you would be included under that section as would your unit trust.

cheers
NickM

#### triple_j

Thanks Nigel, Nick

#### kheaver

I've been reading the Chris Batten web site, he recommends that rather than the normal hybrid trust setup he says the most flexible setup is a double trust where you have a Unit Trust with a Hybrid Discretionary Trust holding all the units in the unit trust.

This isn't mentioned in his Investment structures 2002 or Dales Trust Magic.

I'm just wondering what are the merits of this setup over a regular Hybrid Trust.

Regards,
Kim Heaver

#### NickM

Hi Kim
Chris recommends this double trust structure as it will enable a property to be transferred into a SMSF at a later date.

If the property is owned by a Hybrid, Discretionary or an individual that is an associate of a member of the SMSF then the property cannot be transferred.

This applies to residential property only as business real property is exempt from these rules.

I have set up some clients in this manner if their circumstances warrant it. I believe this structure is more relevant if a client is running their own business.

notwithstanding that it is a more complete structure, however the administration may be a little too much for some.

NickM

#### kheaver

In a normal Discretionary trust deed the trustee is indemnified out of the trusts assets.
If someone is using a corporate trustee, wouldn't the assets be better protected more by not having the trustee indemnified.
So if the trustee is sued, you appoint a new trustee and leave the old trustee on its own, being a \$2 company thats all anyone can get.
Its more important to protect the trusts assets than the corporate trustee which is sacrificial.

Is there any reason why this is not done.

Regards,
Kim

#### NickM

WIthout going too far into it, i think you will find that the bankruptcy provisions may stand in you way.

Secondly, if the trustee cannot be indemnified from the trust assets then how can a banker take security over trust assets ?

Rolf maybe ?

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