IP Trusts for asset protection and neg gearing....

[RedApple]

Hi everyone,

Which trust structure is to best to use for negative gearing and asset protection purpose ?
(Protection from the family court, a spouse, in the event of a relationship/marriage breakdown, etc)

Do you have any recommendations on a good lawyer or accountant in Melb who specialise in setting up Property investment trusts ?

 

[Terryw]

No trusts provide all of that.

Negative gearing is only possible with fixed or unit trusts. You borrow to buy the units in the trusts. But this offers no asset protection as the units are property which could be available to creditors. There is no tax flexibility either.

The family law court also can get behind trusts, so they do not help in this regard - though they may help by making things less obvious to a spouse who may not make a claim.

For asset protection the best trust is a discretionary trust - but no negative gearing against your personal income and losses are trapped in the trust.

 

[Ausprop]

and funds injected into the trust will be an asset held by that person (and a liability of the trust) which will be available to creditors

 

[alexlee]

and funds injected into the trust will be an asset held by that person (and a liability of the trust) which will be available to creditors

Not if you class it as a contribution, but if the funds were borrowed by the contributing individual, the individual loses the deductibility as they're not receiving interest income on it.

 

[Terryw]

It could still be clawed back under the Bankruptcy Act.

 

[alexlee]

It could still be clawed back under the Bankruptcy Act.

Terry, is that the case only if the individual was already involvent when they contributed? e.g. if an individual sets up a family trust now, and in 2 years they set up a business that eventually goes bankrupt, can the contribution still be clawed back?

 

[Terryw]

Hi Alex

I believe transactions which occurred up to 5 years before bankruptcy can be overturned if it was done at under market value or without consideration. A gift would be at risk here.

Also I think there are other provisions which enable a clawback if it was done with the aim to defeat creditors.

 

[Terryw]

It looks like there is an exemption under s120 if the transaction was done more than 2 years ago and you were solvent at the time.

http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s120.html

 

[Ausprop]

why on earth would you hold assets personally hey? men of straw we should all be

and each deal shoudl be in a new trust/ompany struture. things i wish i knew a while back

 

[alexlee]

why on earth would you hold assets personally hey? men of straw we should all be

and each deal shoudl be in a new trust/ompany struture. things i wish i knew a while back

There are some costs in setting these structures up, and as Terry said, while a discretionary trust has better asset protection (from non-spousal creditors), it's limited in terms of negative gearing. I'm not going to rehash the debate on HDTs. So putting a neagtively geared IP into a DT, especially if you plan on refinancing regularly, will hurt your cashflow.

It would make sense to segregate non-business passive investments with positive taxable income, though.

 

[Ausprop]

reasonably true, apart from the cost issue. i think my last one cost $150?

 

[bene313]

An option could be to purchase through a unit trust, then later on when the cashflow comes good, transfer the units to a discretionary trust. Would have to pay the CGT on transfer however.

 

[alexlee]

An option could be to purchase through a unit trust, then later on when the cashflow comes good, transfer the units to a discretionary trust. Would have to pay the CGT on transfer however.

Why bother with the unit trust at all? Unit trusts don't offer asset protection as far as I know. If you were willing to pay the CGT, just buy it in your own name and transfer it to a DT when it becomes cashflow positive. But if you keep refinancing to buy more assets, as many do, then it may never really become positive until many years in the future, in which case the CG hit will be significant.

 

[bene313]

Why bother with the unit trust at all? Unit trusts don't offer asset protection as far as I know. If you were willing to pay the CGT, just buy it in your own name and transfer it to a DT when it becomes cashflow positive. But if you keep refinancing to buy more assets, as many do, then it may never really become positive until many years in the future, in which case the CG hit will be significant.

It's not for everyone but there may be some benefits. Flexibility in regards to: stamp duty on transfer of the units; transfer of units to a SMSF; utilising the refinancing principle.

 

[RedApple]

is there a stamp duty cost when transfering an IP from a unit trust into
a discretionary trust ?

An option could be to purchase through a unit trust, then later on when the cashflow comes good, transfer the units to a discretionary trust. Would have to pay the CGT on transfer however.

 

[RedApple]

Thanks everyone for the above inputs.

1.Do discretionary trusts provide the best protection from spousal creditors
and unit trusts none at all ?

2.Say, if you acquire some IPs and have them held in some trusts long before entering a marriage and if down the track the marriage fails, would these assets be considered as marriage assets and be forced to split into 50/50 by the family court ?

3.If one has an IP portfolio, doesn't own a business and has very little risk of ever going bankrupt (unless they get sued by tenants for injuries caused by the property which is also highly unlikely), would having just legal liability covered by insurance sufficient ? Is having the IPs held in trusts for extra protections from non-spousal creditors even neccesary here ?

 

[Terryw]

Family Law courts can look behind trusts, even discretionary trusts. They do provide some protection, especially if you do not control them, but not complete.

There are also many ways you could get sued, even if you are not running a business. eg. you have many properties and get sick, or a relative gets sick and you are unable to pay your loans. Bank retakes property and there is a shortfall. Assets in a separate discretionary trust will not be available to creditors - generally.

 

[Terryw]

is there a stamp duty cost when transfering an IP from a unit trust into
a discretionary trust ?

Yes, CGT too.

 

[syba]

On a slight tangent to this, I'm a director/employee in a small private company and have shares in it. I'm going to purchase some more shares off an outgoing shareholder and buy them (plus transfer my existing shares) into a family trust. My only other major asset is my PPOR . I've been advised to set up the trust with a shelf company as the trustee rather than myself for asset protection. I'm trying to figure out protection from what.

As I'm a director of a company I could be taken for my assets if the company goes down, but the shares in the company would have no value if that happens so they could have them for all I care. The only other way my assets could be taken through the company would be if I committed fraud or something illegal, which I'm not going to do anyway.

I'm happy to go down the way of a company ownership if it actually is beneficial, but not just if it's a nice thing to do. Would cost just under $1k for the first year, then $212 every year after that to keep the company. If I don't need to spend the money, I'd prefer to keep it in my pocket!

Any thoughts?

 

[Terryw]

Having a company as trustee is for protection if the trust is sued. This is unlikely to happen if all the trust does is hold shares. It is different if the trust is running a business though. The trust could be sued - it will be the trustee actually that is sued. They will usually be indemnified out of the assets of the trust, but if these are not enough their personal assets could be at risk.