One Corp Trustee with Multiple Trusts?

[austini]

Hi gang,

If an individual already has a standard discretionary trust with a corporate trustee and wanted to establlish a hybrid discretionary trust would it be wise to use the existing Coy trustee for both.

Using a single corporate trustee for both the DT & HDT would certainly save on setup and ongoing admin fees. But I was interested in finding out if there are any disadvantages with this approach?

Thanks in Advance - Gordon

 

[Rolf Latham]

Hiya

My first thought would be that asset protection would be a little "diluted" in that you would be giving one lender access to the other trust via the same P/L trustee.

If you wanted to separate finances and bunker proof it from Mortgagee Action, the only way that I am aware of is to use a separate trustee.

Dale, Nick ??

Ta
rolf

 

[austini]

Coy Trustee and Multiple Trusts

Thanks Rolf.

The issues you mentioned in our case is not a concern. Essentially we would have been intending to purchase future properties in the original trust anyhow. However the Hybrid Trust could allow us to access negative gearing benefits and enable transfer to a super fund at a later date.

Hence the objective is to tap into the advantages of a Hybrid trust whilst keeping setup and admin costs of running two trusts to a minimum.

-- Gordon

 

[NigelW]

Originally posted by austini
Hi gang,

If an individual already has a standard discretionary trust with a corporate trustee and wanted to establlish a hybrid discretionary trust would it be wise to use the existing Coy trustee for both.

Using a single corporate trustee for both the DT & HDT would certainly save on setup and ongoing admin fees. But I was interested in finding out if there are any disadvantages with this approach?

Thanks in Advance - Gordon

Hi Gordon

Short answer - unwise. Use separate companies.

There are a number of reasons why this is better.

The 1st reason is more practical than legal. The trustee has an obligation not to intermingle the assets of the trust with its own and equally not to intermingle the assets of multiple trusts. Whilst big trustee companies have the admin and accounting staff to do this easily I think for individuals running their own co's and trusts it can get a bit messy sometimes.

Secondly, if somebody decides to sue the trustee, say they have a slip and fall in a rental property, it is much safer to only have the assets of one trust potentially at risk. Technically even if successful the injured tenant should only be able to recover against the trustee to the extent of the trustee's right of indemnity out of the assets of the trust in which the rental property was owned. BUT in the interim you may have to go to great lengths to prove what assets belong in which trust. Perhaps whilst that is being worked out the injured tenant's nasty lawyers will slap caveats on ALL the properties legally owned by the trust - preventing you from selling the properties in the "innocent" trust or refinancing them etc. No real skin off the tenant's nose, they just tie things up whilst the court works it out and you probably get slugged for even more of their costs...

Also things can get a bit tricky with the interaction between the trustee's right of indemnity out of the trust fund and granting security to the banks. If a charge is required by your lender then you will probably need to have your lawyer tinker with the wording of the standard "mortgage debenture" they request from the company to make it clear that the charge is given only by xyz co in its capacity as trustee of the abc trust and not of the def trust...

it may also be more involved to establish the company's correct land tax bill with the relevant state revenue office.

Another problem which may arise more quickly is that the trustee may become "land rich" so that dealings in its shares may attract full stamp duty based on the underlying value of the trust assets rather than .6% off market securities duty.

None of the above is necessarily an insurmountable problem, and they are risks/problems which you may be comfortable accepting.

Perhaps something to think about and talk to your lawyer about is whether your existing discr trust can be amended to permit the issue of units? This will need to be carefully done to avoid the dreaded *cue evil organ music* resettlement of the trust.

On a related point, if you want to move the property to your SMSF eventually then you may be better served with a two tier structure. Namely a company which owns a UNIT trust buys the property and then your discretionary or hybrid trust buys the units in that unit trust. (and in the case of a hybrid trust you buy the relevant units in the hybrid trust to entitle you to income from the units in the unit trust...gee this gets messy doesn't it!). But of course then you'll have potentially 3 companies and trusts!

and remember there are lots of restrictions on what assets can be moved to SMSFs and in addition this will have capital gains tax implications.

So in a nutshell go separate. If asset protection is a high priority you should pick an equity limit for each trust and start a new one when that limit is reached (bearing in mind the equity should increase over time as well). Just to add more complexity I also think that truly passive assets such as shares and interests in managed funds should be kept in separate trusts from real estate assets...

Hope this has given you some food for thought.

Cheers
N.

 

[austini]

One Coy with Multiple Trusts

Hi Nigel,

Thanks for your excellent response.

I suppose most are attracted to the Hybrid trust because in addition to asset protection it is possible to access negative gearing benefits.

However we are reassessing our investment strategy whereby negative gearing is likely to be of minimal importance. That is, the deal must be cash flow positive after contributing an absolute maximum of 20% of our own funds. Obviously the less personal funds that need to be committed the better. This is difficult in the current environment (especially without heading for the bush) but at least it will force us to be patient and buy well.

So by using our standard discretionary trust it seems that the main benefit lost relates to super. The so called "poison property" principle according to Chris Batten. But as you pointed out the more complex the stucture and greater the pain in managing it all "especially" in retirement years. So perhaps there is something to be said for the relative simplicity of a standard discretionary trust.

Finally the other main benefit of Hybrid trusts which is emphasised is the refinancing principle. However we use an offset facility in our trust linked to a heavily geared property loan which I would think offers at least "some" degree of similar benefits to refinancing especially in the medium term. That is, pay minimum mortgage repayments but park surplus funds in the offset account. That way, we can later access these surplus funds for personal use thereby increasing tax deductable debt on the trust property loan. Perhaps my thinking is flawed but in my mind the end result (albeit not to the same extent) is similar to the refinancing principle. Please correct me if I am talking rubbish.

Cheers - Gordon

 

[austini]

Oops missed a few points:

"Perhaps something to think about and talk to your lawyer about is whether your existing discr trust can be amended to permit the issue of units? This will need to be carefully done to avoid the dreaded *cue evil organ music* resettlement of the trust."

Well over a year ago I did speak to Kevin Munroe about this and from memory I think he did suggest this is possible to do without causing a resettlement. But I have checked out the ATO's deliberately vague rules and would need a lot of assurances before heading down this path.


Nigel could you please expand a little more on the following point you made thanks:

"Just to add more complexity I also think that truly passive assets such as shares and interests in managed funds should be kept in separate trusts from real estate assets..."

Thanks - Gordon

 

[NigelW]

Nigel could you please expand a little more on the following point you made thanks:

"Just to add more complexity I also think that truly passive assets such as shares and interests in managed funds should be kept in separate trusts from real estate assets..."

Gordon my point is that some investments have a higher risk profile than others due to their very nature.

If you buy fully paid up shares in a company, listed or unlisted, your maximum liability as a shareholder is that you'll lose the value of your shares on a winding up of the company. Nobody can trip over your shares and injure themselves.
(altho if a printout of Telstra's share register fell on you you'd be history!). You, as a shareholder have LIMITED LIABILITY. (you are slightly less safe with an interest in a managed fund but practically speaking the risk is probably near zero).

In your rental properties though, there are lots of risks and the quantum of the risk is potentially very large. In a recent Qld case the award of damages was about $1.2m for tripping on a big hole in the carpet. I don't want to scare monger or blow things out of proportion, but you have to accept that in some ways property is in fact MORE risky than an investment in an intangible asset like shares or units in a manged fund. The old adage "safe as houses" doesn't apply in all cases.

What you don't want to happen, in a worst case scenario, is have a tenant successfully sue your trustee company and be able to enforce a judgment against that trustee by taking the house AND your share portfolio.

If your shares/managed fund investments are held in a trust with a corporate trustee that ONLY trades or buys and holds shares and does NOTHING else then this really has got to be the safest holding structure around. Remember it is in a person's or entity's interaction with the outside world that risk arises (ignoring investment risk). If all that trustee does is interact with your broker then there is minimal risk of any third party being aggrieved by anything the trustee does.

So that's why I advocate having one or more "real estate" trusts and a separate "equities" trust.

For some it will be over the top, but you have to accept that you expose your intangible assets to risk if you mix real estate with them in the one trust.

Cheers
N.

 

[austini]

Thanks again Nigel,

I understand what your saying. However according to all my previous research and the advice obtained by a number of professionals who specialise in this area I was told by all that should the type of scenario you mentioned arise it is just a simple matter of sacking the existing corp trustee and appointing a new one. Hence the existing trustee owns nothing. If what you're suggesting is true it seems to be in conflict with all my existing professional advice. From memory I think this is even mentioned in Dale's "Trust Magic" publication. However note that I didn't just rely on Dale's advice but also sought advise from legal advisors.

Also, although not bulletproof, we have both landlords and public liability insurance on all our properties which at least substantially reduces the risk.

Cheers - Gordon

 

[Aceyducey]

Originally posted by austini
However according to all my previous research and the advice obtained by a number of professionals who specialise in this area I was told by all that should the type of scenario you mentioned arise it is just a simple matter of sacking the existing corp trustee and appointing a new one. Hence the existing trustee owns nothing.

Austini,

I think Nigel's point wasn't about the corporate trustee level but the Trust level.

If you put all your assets in a single Trust they are more vulnerable to legal action than if you split them by asset type into separate trusts - with the same corporate trustee.

I could be wrong on Nigel's intent however

Cheers,

Aceyducey

 

[austini]

Hi Acey,

I must admit that I had never experienced headaches until I setup the trust. Just when I think I'm getting a handle on things some information comes along to confuse me again.

In relation to your comment: "I think Nigel's point wasn't about the corporate trustee level but the Trust level."

Unless I have misunderstood what I was originally told by my advisors the trust itself cannot be sued. It is the trustee (not the trust) that is sued. So the appointer simply sackes the trustee (in our case a coy) and appoints a new one. It shouldn't matter whether I have one property or 3 properties and shares as well in the trust. Essentially once the sued trustee has been replaced all these assets should be out of harms way.

When you purchase property or shares it is under the Trustees name acting on behalf of the trust. For example, Trustee Company Pty Ltd ATF The Person’s Family Trust”. The ATF stands for “As Trustee For”.

I hope perhaps Dale or Nick can weigh in here to spice things up a bit. I am by no means an expert and encourage all opionions for or against.

Cheers - Gordon

 

[NigelW]

Originally posted by austini
Hi Acey,

I must admit that I had never experienced headaches until I setup the trust. Just when I think I'm getting a handle on things some information comes along to confuse me again.

In relation to your comment: "I think Nigel's point wasn't about the corporate trustee level but the Trust level."

Unless I have misunderstood what I was originally told by my advisors the trust itself cannot be sued. It is the trustee (not the trust) that is sued. So the appointer simply sackes the trustee (in our case a coy) and appoints a new one. It shouldn't matter whether I have one property or 3 properties and shares as well in the trust. Essentially once the sued trustee has been replaced all these assets should be out of harms way.

When you purchase property or shares it is under the Trustees name acting on behalf of the trust. For example, Trustee Company Pty Ltd ATF The Person’s Family Trust”. The ATF stands for “As Trustee For”.

I hope perhaps Dale or Nick can weigh in here to spice things up a bit. I am by no means an expert and encourage all opionions for or against.

Cheers - Gordon

What you've been advised is correct, but it's not the full picture.

Yes you can sack the trustee and appoint a new one. BUT the former trustee will probably retain its right of indemnity out of the trust fund and it is to this right that creditors can be *jargon alert* subrogated, ie steps into the shoes of the former trustee and snaffle the trust assets to meet their loss arising out of transactions properly entered into as trustee of the trust.

You cannot take your trust assets out of the line of fire just by changing trustees when faced with a a claim of say negligence for a slip and fall in a property owned subject to that trust. Sure it probably adds an additional hurdle to the prospective creditor but its not bulletproof. Most trust deeds purport to exclude or limit the trustee's right of indemnity out of trust assets for acts of fraud or gross negligence, however, I'm unconvinced that these will necessarily hold up under attack.

Sorry to add to the headaches...

Cheers
N.

 

[austini]

Thanks again Nigel, your very thorough comments are greatly appreciated. From reading your previous posts in other threads you certainly appear to have a great deal of knowledge in this area.

Despite its complexity the subject of trusts interests me greatly because I feel that having a very good understanding of this area can potentially increase one's wealth. And my experience and that of others I know has highlighted the fact that surprisingly many professionals including lawyers don't seem to really understand this area well particuarly when it comes to "Hybrid Discretionary Trusts".

I have been away from the Somersoft forum for awhile but have been reading back through much of the trust related posts and saw some of your previous comments about indemnity etc. It was very interesting reading and after reading this and various other publications by Kevin Munroe and others this does seem to be a grey area and success of legal action is very much dependent on a case by case basis.

Well I will also pay more attention to my property insurance policies (again not bulletproof) to ensure they contain the necessary conditions to minimise some of the risks associated with owning properties in the trust.

It seems like it is definately wise to use multiple trusts over time so that not all one's wealth is not held by a single trust. However I would not go to the extreme of 1 property per trust due to setup and admin costs. I think Dale's suggestion of a maximum of 1 - 2 million per trust seems like a sensible limit.

Once again thanks very much for taking the time to respond to my questions. I'm sure I will have many more questions.

Cheers - Gordon

 

[NigelW]

Originally posted by austini

Despite its complexity the subject of trusts interests me greatly because I feel that having a very good understanding of this area can potentially increase one's wealth. And my experience and that of others I know has highlighted the fact that surprisingly many professionals including lawyers don't seem to really understand this area well particuarly when it comes to "Hybrid Discretionary Trusts".

In my opinion and experience you're right on both counts Gordon.

It seems like it is definately wise to use multiple trusts over time so that not all one's wealth is not held by a single trust. However I would not go to the extreme of 1 property per trust due to setup and admin costs. I think Dale's suggestion of a maximum of 1 - 2 million per trust seems like a sensible limit.

I find most of the things Dale has to say very sensible - but then maybe I haven't spoken to him enough!

Cheers
N.