NSW Trust borrow money in their own right?

[Marty McDonald]

Hi,

Got a lender wanting a guarantee from a trust which has raised the following question....

"In NSW can a discretionary trust borrow money itself ie not the trustee "ATF" but the actual trust itself?" Normally the trustee would be the borrower on behalf of the trust but curious can a trust borrow directly?

Anyone care to enlighten me.

 

[Terryw]

Hi,

Got a lender wanting a guarantee from a trust which has raised the following question....

"In NSW can a discretionary trust borrow money itself ie not the trustee "ATF" but the actual trust itself?" Normally the trustee would be the borrower on behalf of the trust but curious can a trust borrow directly?

Anyone care to enlighten me.

Hi Marty,

Legally it is the trustee that owns the trust assets. A trust is not a legal entity - if a trust is sued it would be the trustee that is named on court documents for example. So it would be the same with loans - A lender would lend to the trustee as trustee for xx trust and want security over the trust assets as well as personal guarantees.

Incidently, there is a new Personal Property Security Act which just come in force this year. This act covers lending/security against everythign except land. So this will bring about some changes in the way companies and trustees borrow money. In the old days a lender would want a fixed and floating charge over the assets of the company. This used to come under the Corporations Act but would now come under the PPS Act.

I am not sure what changes this would bring, but they would want to register their security interest over the whole of the trust assets like a fixed and floating charge.

 

[Aaron_C]

Maybe a case of the sausage maker in credit not understanding what a trust is

 

[Marty McDonald]

No he is a senior business banker with $5Mil delegation

 

[Terryw]

The loan documents may say "the trust" but it is probably the trustee that is the real borrower.

 

[Aaron_C]

A 'trust' can't be a party to a contract because it is not a legal entity....that is Trusts 101 in law school.

 

[Marty McDonald]

Hi Marty,

Legally it is the trustee that owns the trust assets. A trust is not a legal entity - if a trust is sued it would be the trustee that is named on court documents for example. So it would be the same with loans - A lender would lend to the trustee as trustee for xx trust and want security over the trust assets as well as personal guarantees.

Hi Terry,

Thanks for that, that's what I thought (was hoping you would chime in). I said to him that the trustee should be providing the guarantee if any and as the trustee's directors are the same as the applicants themselves then no guarantee is required. That threw him and thats when he started talking about trusts borrowing money themselves. Hmmm this could get ugly.

 

[alexlee]

,

Thanks for that, that's what I thought (was hoping you would chime in). I said to him that the trustee should be providing the guarantee if any and as the trustee's directors are the same as the applicants themselves then no guarantee is required. That threw him and thats when he started talking about trusts borrowing money themselves. Hmmm this could get ugly.

Why would the applicants be the same as the directors of the trustee if it's the trustee ATF the trust borrowing the money?

 

[Sim]

I'm a bit confused.

Who is actually applying for the loan?
Who has the bank asked for a guarantee from?

If you are borrowing money to purchase assets in the trust, it would be the trustee of the trust who is named on the loan documents - as already mentioned by other people.

It is not unusual for a bank to demand a personal guarantee from the directors of the trustee for the trust to cover the borrowings of the trust.

However, you seemed to be suggesting that this is the other way around? The bank somehow wants access to the assets of the trust should you fail to pay back a loan in personal names? If so, I would run a mile - largely defeats the purpose of using a trust in the first place, and I'm not sure if a trustee has the right to give a guarantee of the assets of the trust over a personal debt?

 

[Rolf Latham]

However, you seemed to be suggesting that this is the other way around? The bank somehow wants access to the assets of the trust should you fail to pay back a loan in personal names? If so, I would run a mile - largely defeats the purpose of using a trust in the first place, and I'm not sure if a trustee has the right to give a guarantee of the assets of the trust over a personal debt?

typical HDT structure

Personal Borrowing to buy Income Units, Guarantee from trustee to allow the trust asset to be used as security .

Commercial benefit needs to be shown

ta

rolf

 

[Sim]

typical HDT structure

Ahh ... that makes a bit more sense then.

 

[Marty McDonald]

Why would the applicants be the same as the directors of the trustee if it's the trustee ATF the trust borrowing the money?

Its not the trustee borrowing the money they are borrowing in personal names. The trust is a business entity. The bank wants guarantees from the trust as this is where the income to service the debt flows from.

Sorry for the confussion.

 

[Aaron_C]

That's strange Marty - usually they don't ask for that guarantee unless of course the trustee was the registered proprietor.

 

[Marty McDonald]

That's strange Marty - usually they don't ask for that guarantee unless of course the trustee was the registered proprietor.

Your not wrong seems all back to front to me. Normally they are trying to drill down but now they are drilling up!

 

[Rolf Latham]

Its not the trustee borrowing the money they are borrowing in personal names. The trust is a business entity. The bank wants guarantees from the trust as this is where the income to service the debt flows from.

Sorry for the confussion.

Normal...... the lender wants to secure the income, since the trustee can distribute to anyone.

Just wait till they try on the rmd or ffc

Ta
Rolf

 

[Marty McDonald]

Normal...... the lender wants to secure the income, since the trustee can distribute to anyone.

Just wait till they try on the rmd or ffc

Ta
Rolf

Yeah perhaps they should get guarantees off the businesses main clients as well. Whatcha gunna do

 

[Terryw]

I see. The reason would be the discretionary nature of the trust so there is no guarantee that the beneficiary client will ever get a future distribution. I am surprised that I haven't seen something like this before. Have you guys?

Can the trustee give a guarantee though? You would have to have a good look at the deed and see if they have the power to give a guarantee and that it is not going to breach their duties. Probably need to consider the Trustee Act in the relevant state too.

 

[Aaron_C]

Can the trustee give a guarantee though? You would have to have a good look at the deed and see if they have the power to give a guarantee and that it is not going to breach their duties. Probably need to consider the Trustee Act in the relevant state too.

It'd probably be hard to prove a 'benefit' to the trustee in that case of providing the guarantee, especially if there is more than one beneficiary in the deed. Wouldn't be much of a fiduciary duty is a trustee was simply giving guarantees for a beneficiary's home loan that was unrelated to the trust assets.

 

[Rolf Latham]

It'd probably be hard to prove a 'benefit' to the trustee in that case of providing the guarantee, especially if there is more than one beneficiary in the deed. Wouldn't be much of a fiduciary duty is a trustee was simply giving guarantees for a beneficiary's home loan that was unrelated to the trust assets.

typically though the guarantees we are talking about here are related to SPECIFIC trust assets, or specific trust income

As we know, lender legal people can be bozos complete with the big shoes, the red nose and the fluffy wig when it comes to Trust 101.

Like chasing the beneficiary guarantees from 88-year-old grandma's, when really what They want is an indemnity.

I am always amazed that the lenders are quite happy to ask a beneficiary to give a "third party guarantee" (otherwise known as a guarantee with no defined commercial benefit to the guarantor) in a trust situation where they asking for adult beneficiary guarantees. yet the same lender, won't allow the same grandma, to provide a guarantee, for her grandson, to go and buy his own occupied property because there was no deemed benefit for the grandma.

Many lenders don't understand that a discretionary trust, has discretionary powers by the trustee, to distribute income or capital as it sees fit. So if we are asking an adult beneficiary to provide a guarantee within a discretionary trust, we asking for a guarantee of a loan, whereby definition the beneficiary providing the guarantee may never receive a benefit for the guarantee...............

Thanks

Rolf