hybrid discretionary trust

[alpina]

wow!!! this is complicated stuff!

i just hope im not trying to understand something that may never benefit me in the practical sense.

I understand that its important that we put in place measures that will protect us in the future, but i just wonder how big you need to get before the true benefits of such a structure are realised? in other words, do people set up these structure being overly cautious?

julie

 

[Kevmeister]

julie:

The same question niggles away at me. Particularly when you take the advice (or your own logic) further. Michael Croft says he maintains property in individual cells of 4-7 properties, which effectively means 4-7 properties per trust before commencing another.

Trustees are indemnified out of the assets of the trust, so I'm not sure how sacking one trustee and replacing them with another helps, especially with Nick's comment relating to that very issue.

Nick, if a former trustee is still entitled to be indemnified out of the assets of the trust then what actually is the point of sacking the trustee? And what actually is the point of having a corporate trustee?

Here's the scenarios:

a. Corporate Trustee, one Trust owning five properties. The controllers of the trust hold all their property in the trust (no personal ownership). Tenant sues for big damages. Tenant gets awarded $millions. All assets of the trust disappear/get liquidated to indemnify the trustee.

b. Individual Trustee, one Trust owning five properties. Same litigation occurs. Individual Trustee is indemnified out of the assets of the trust. If the individual is lucky the trust covers the costs, if not the individual trustee might lose their own assets as well. But since the Trustee is likely to be the Appointor isn't the nett result somewhat the same - the Appointor has ultimately lost everything?

It would seem that this is where Darren's suggestion of 1 trust/trustee per property actually starts to make sense because then they are totally independent of each other (except the Appointors) and I presume the most you can lose is one property? And then it also makes sense to have a corporate trustee since the buck stops there (so long as they can't somehow attack the trustee's directors, who are usually the Appointors of the trust).

I'm all for "beginning with the end in mind" (I've ordered Dale's book - yay) but it's a helluva learning curve, and it's hard pinning someone down to the concrete facts and the concrete do's and don'ts.

 

[saibaba]

Hybrid Trusts

I am holding few investment props(ranging from 180 to 300). How much would it cost to transfer these to a Hydbrid trust.

-Do i need to borrow money against the Hybrid trust. How can banks lend me money. who is going to be the surity.

-how do i service the loans for the additional expenditure

-Can an individual negatively gear the properties held by the trust

Please advice.

 

[Jean]

Aw c'mon Saibaba, you need both a CPA and a lawyer. Buy them, or at least buy part of their time.

 

[Jean]

Oops sorry, saibaba, did you mean you own a few IPs valued at $180k to $300k (ie not a total of 180 to 300 properties in number)?

 

[D.T.]

Hi,

Jean, I'd say the former and not the latter, its the way i interpreted it anyway. If someone had that many properties im pretty sure they'd have everything down pat already anyway.

Kev, My interpretation of my (limited) research says that your scenarios are correct, and this answers your own question "whats the point of having a corporate trustee?".

Dale, Nick, etc:
The point that im not too sure of is tax. Is corporate trustee any better for tax reasons, or is it only for the protection?

- Regards

Dave

 

[NickM]

Dave
Corporate Trustee is predominantly for asset protection. Tax implications are the same.


Saibaba
1. cost to move properties to a trust depends on a number of factors; stamp duty + CGT will be the main deterrant

2. banks take a guarantee from the trustee

3. You will have to service the loan if it is negatively geared

4. Yes an individual can negative gear through a hybrid trust

CHeers
NickM

 

[MF35]

So are we saying here that a Hybrid Discretionary Trust does NOT offer any significant asset protection? It was suggested at one of NickM's recent talks that even if you have your property in Trusts if there is a trail to the assets, and your interest in them, then the assets are not necessarily safe.

Does anyone know of any examples where people have had their assets in such trusts and these assets have been subject to damages in civil matters? Or have been deemed not to be open to civil damages claims?

Also there is the flip side of the civil liability issue. If the individual behind the Trust is open to damages through claims against the trust, then it would stand to reason that the Trust is also open to damages through claims made against the individual.

Surely this has been tested at court by now? If so there should be some case law to refer to? This seems to me to be the best way to find some authority either way on the issue.

It's just a matter of knowing either way. I think Trusts have plenty of other potential advantages especially in the long term, and may well be a good option regardless of the asset protection issues. It's not like you'd be better off with them in your own name in this regard.

However, unless someone can come up with, or point me to, some credible authority (like case law) that shows for sure how assets in Trusts have been deemed by the courts as not exposed to civil claims against Trustees (even if the Trustee is removed when you become aware of possible or pending civil action), and on the flip side that Trustees personal assets are not exposed to civil action resulting from the Trust's business/assets, then I wont be factoring in Asset Protection as a reason to use a Trust and would base my decision purely on the tax benefits.

Is there significance in the timing of the removal of the Trustee when determining civil liability?

MF

 

[NormH]

I am not on the inner circle and don't profess to know the particular people concerned but several high profile cases come to mind where I would bet my bottom dollar the defendants had family trusts.

err HIH err OneTel err that other person in Spain - Schase?? not sure about Bondy but he don't look too broken in all photos taken of him

dunno, I just get the impression that their 'money' is somewhere other than their own name somehow.

Norman

 

[MichaelM]

Originally posted by Kevmeister


Nick, if a former trustee is still entitled to be indemnified out of the assets of the trust then what actually is the point of sacking the trustee? And what actually is the point of having a corporate trustee?

Here's the scenarios:

a. Corporate Trustee, one Trust owning five properties. The controllers of the trust hold all their property in the trust (no personal ownership). Tenant sues for big damages. Tenant gets awarded $millions. All assets of the trust disappear/get liquidated to indemnify the trustee.

b. Individual Trustee, one Trust owning five properties. Same litigation occurs. Individual Trustee is indemnified out of the assets of the trust. If the individual is lucky the trust covers the costs, if not the individual trustee might lose their own assets as well. But since the Trustee is likely to be the Appointor isn't the nett result somewhat the same - the Appointor has ultimately lost everything?

It would seem that this is where Darren's suggestion of 1 trust/trustee per property actually starts to make sense because then they are totally independent of each other (except the Appointors) and I presume the most you can lose is one property? And then it also makes sense to have a corporate trustee since the buck stops there (so long as they can't somehow attack the trustee's directors, who are usually the Appointors of the trust).

Can anyone comment on what Kevmeister has said above about only holding one property per trust to ensure you don't lose any more properties than necessary?

Dale or Nick, I am a bit concerned that if a former trustee is still entitled to be indemnified out of the assets of the trust then surely this goes against the argument you would use for the ATO about asset protection being the number one reason for using a trust?

 

[NickM]

Michael
In discussing general issues about trustees liabilities, you must appreciate that each circumstance is different.

You should also appreciate that Dale and I are not lawyers nor do we profess to be.

We simply do our best in commmunicating our knowledge of these subjects to the forum. I consult regularly with specialists in this area and they would be reluctant to make any comment that is general in nature.

In many instances, negligence would need to be considered. If a trustee or a director of a trustee company is found to be negligent then they may be found personally liable.

I dont believe that there are many cases of negligence against trustees of "family trusts" that own investment assets. ( I am willing to be proven wrong )

You must individually assess you own position and assess your own risk and exposure to potential litigation.

NIckM

 

[MF35]

In the absence of examples of actual cases or specifically releveant case law that shows how Trusts Do Not protect your assets am I to assume that Trusts Do protect your assets???

MF

 

[Kevmeister]

NickM:

This is very interesting.

When I read your comments about negligence, my first thought was that in a typical residential investment property arrangement (using trusts), the situations under which you would be litigated would be either:

a. Financial, like not paying your bills etc.

or

b. On the basis of negligence (err, sorry, alleged negligence), like tenant falling down stairs.

I can't even think of any litigation examples that would not fall under one of the above two scenarios. Anyone got alternative ideas?

Acts of god are the only other thing that come to mind, so I'm wondering if a tenant can sue the landlord over an act of god (like flooding or lightning strike or earthquake or mudslide etc)?

Assuming the trust is liquid and payings its bills, financial litigation should not be an issue. Even if it is, the potential for substantial losses seems somewhat miniscule to me, since litigation in this case generally works on a cost-recovery basis. I don't regularly hear judges awarding $500K to an electrician because you didn't pay his $1200 bill on time.

OK, so tenant slips in shower - you're allegedly negligent for not providing a non-slip surface in the shower. Tenant falls down stairs - you're allegedly negligent if handrail is loose, or wrong height, or stairwell isn't properly lit, or stairs are slippery etc. All of these scenarious will be argued as "negligence" by the plaintiff's lawyer, won't they?

I have first-hand knowledge at how coy legal people get when asked to state something of substance, so I see your dilemma. So, I'll ask this question: let's think of a scenario where a tenant can sue a landlord without there needing to be an accusation of negligence.

So if a successful lawsuit is brought against a trustee on the grounds of negligence, doesn't that implicitly make the directors negligent?

I realise neither you or Dale are lawyers, I'm just trying to wrap my brain around the protection afforded by trusts.

It seems to my uneducated self that trusts seem to work better to protect assets when it is the person being sued, and less well when it is the trustee being sued.

So, when Skase or Bond made off with millions of $ (allegedly), all nicely tucked away in a family trust, the trust money couldn't be touched, because a beneficiary of a discretionary trust has no control over the trust's assets (miraculously, the trust suddenly starts making all distributions to Skase's/Bond's wife). Yes?

 

[Kris Sheather]

How about your dog bites a lawyer who happens to be walking past your house being an idiot, who then tries to sue you for everything that you are worth?

 

[MichaelM]

Well put Kevin, it will be interesting to see if anyone can clear this up.

Kris, are you talking from personal experience?

 

[Kris Sheather]

Definitely just a hypothetical.

 

[NickM]

Kevin
You have raised some valid points but i would argue that negligence would be very difficult to prove if the landlord has acted honestly and in good faith.

If the handrail was loose and i paid a tradesman to repair it yet the tenant still broke it - where does the blame lie ? the tenant will blame the landlord - the LL blames the tradesman - the tradesman blames the tenant.

Insurance is a must with all IPs and should work to cover these instances.

Where a corporate trustee commits a breach of trust, the traditional view has been that the directors of that company would not be held personally liable, except in a case where trust property could be followed into the hands of a director. The rationale was that directors were agents of the company, and were accountable to the company rather than to the beneficiaries of the trust.

Discretionary trusts afford beneficiaries a degree of asset protection, as it’s the trustees who are personally liable for the debts of the trust, subject to a general right to be indemnified out of the trust property for all liabilities incurred in the course of conducting the trust business. In most trust deeds, this right of indemnity is limited. Using a corporate trustee with limited assets will protect the personal assets of the individuals involved with the trust.

Where the trustee of a discretionary trust is a corporate entity, and those involved do not provide any personal guarantees nor infringe any personal liability provisions of the Corporations Act (eg. Part 5.8 dealing with insolvent trading and section 233 dealing with the liability of directors for debts incurred by a body corporate acting as trustee), then this commercial aspect remains an advantage of a discretionary trust.

NickM