Positive experiences with trusts

[dr.jauncey]

Its not good to own in a company as you won't get the 50% CGT reduction.

Hi, for long term residential property, I would agree.

For commercial property and short term developments and intergenerational investments, a company should be explored as a potential structure.

it would be better to use a trust, and maybe one trust for each property with one company as trustee - ie same trustee for each trust. This would be cheaper, and depending on which state you are in it may not cost much to set up separate trusts.

Using the same trustee for multiple trusts may defeat the purpose and one property per trust still sounds like overkill per above. Perhaps Gary might like to offer some thoughts on the reasoning behind his structure beyond the worst case scenario already presented as it seems Terry and I could both talk for months about potential structures without knowing the intent.

 

[garygoodbloke]

Thanks for the feedback it is truly appreciated. I wasn't aware of the CGT 50% reduction, does that apply to cases where the property is owned by an individual?

The reasoning behind the structure is for the worst case scenario. By that I mean, if someone slips on the stairs in an IP that I own (currently I don't own any - yet) and that IP is in my name, then she could sue me and end up owning all my IPs. But if that IP that she slipped in is owned by a company and that company owns only that one IP, then my liability is that single IP and she can't touch the rest of them.

Another reason is that I lik to have an elegant and scalable architecture behind everything that I do. Through what I've read, studied and experienced in my life thus far 99% of problems are avoidable and a teaspoon of prevention truly is better than a pound of the cure. Having said that, sometimes it's a question of cutting corners to get things going and fixing things up once you've got the momentum and you're in a position to do so.

As for the question of how many IPs I plan to own, I try no to put limits on myself. I enjoy reading about and thinking about property investment. But as I currently don't own any, I won't pretend to have a lot of first hand experience where I have none and I humbly ask for your insight and advice.

So it's possible to own multiple trusts, is there a limit on how many?

And if the profits flow through to a "trust company" does that mean I still get the 50% CGT reduction? And is a "trust company" the same as other pty. ltd. companies?

 

[Piston Broke]

FTR you don't "own" trusts, you control appointing a trustee who's duty is towards the beneficiaries based on the what is specified in the trust deed.

The worse case scenario is you lose them all, so betta no buy anything...
If the the person who slips is awarded damages for negligence, then most likely you'll be personally liable as a director who failed his duty to provide a safe staircase and you may lose all your companies, thus IPs.
Generally unless your made aware of an issue and have not taken steps to rectify it, it'll be rare that damages will be awarded or insurance won't cover it.
What your proposing will pretty much kill most of the profits, create a nightmare of admin, and defeat the purpose of investing in the first place which is to do less work not more.

 

[dr.jauncey]

I wasn't aware of the CGT 50% reduction, does that apply to cases where the property is owned by an individual?

Hi, this is correct. Individuals may be eligible for a 50% capital gains tax discount on the sale long-term assets but companies are not eligible for the same discount.

A trust that makes a capital gain will distribute that to either an individual or a company or another trust to do the same. The end recipient of the profit will pay tax based on the tax rules and circumstances for that particular entity.

The reasoning behind the structure is for the worst case scenario. By that I mean, if someone slips on the stairs in an IP that I own (currently I don't own any - yet) and that IP is in my name, then she could sue me and end up owning all my IPs. But if that IP that she slipped in is owned by a company and that company owns only that one IP, then my liability is that single IP and she can't touch the rest of them.

Another reason is that I lik to have an elegant and scalable architecture behind everything that I do. Through what I've read, studied and experienced in my life thus far 99% of problems are avoidable and a teaspoon of prevention truly is better than a pound of the cure. Having said that, sometimes it's a question of cutting corners to get things going and fixing things up once you've got the momentum and you're in a position to do so.

You should probably seek legal advice. The structure that you have proposed may not meet the ends that you are intending. You should also ensure that you are well covered by your insurance as this will also go some way to achieving your objectives.

Cutting corners is often counter-productive and particularly when you have a specific legal purpose in mind here. Per above, seek legal advice.

So it's possible to own multiple trusts, is there a limit on how many?

Correct, no limit.

As per PistonBroke's post above, you don't own the trust but will control both the trust and trustee to the same intent.

 

[garygoodbloke]

Thanks again.

Cheers for the correction on ownership versus control. I take on board what Pistonbroke said about killing profits, creating a nightmare from an admin perspective and defeating the purpose of investing. I also understand what you mean about being liable as a director.

Although, I believe there may be something worth clarifying.

As you pointed out I would control a trust - not own one. Let's say I have a property owned by a trust called "The Goodbloke Trust" and I'm the sole director who controls it. Let's say there's an accident in this property this trust owns and the tenant sues the trust. Now let's also assume that to get financing for the trust I've given a personal gaurantee against the loans (hard to get financing without this, or so I've read, is this accurate?).

Now, I can certainly see the possibility of losing the property. But that's it as far as I can tell. Sure, if I installed a bear trap at the bottom of the stairs in the middle of the night while the tenant is sleeping then I can be held to be criminally responsibile but I think that I would have to do something truly worthy of a criminal charge for this to happen but this is equally as true when I'm driving my car and there are pedestrians around. I still drive my car and safely - for me the chance ofa freak accident occuring where I could me misconstrued as criminally responsible and get screwed by the courts is small enough to be acceptable.

So, for my worst case scenario that I'm interested in planning for, let's say the person suing the trust ends up with the sole house that the trust owns, I'd say that's where liability ends. They couldn't get other houses in other trusts because I don't "own" those houses as you pointed out. Trusts are legal entities that stand alone and apart from their directors or beneficiaries. No court would compell me as a director or a separate trust to the one the tenant had the accident in to release a property in the ownership of that trust for the purposes of satisfying the liabilities of a seperate legal entity. Otherwise there'd be no end to the liability and no point in have companies or trusts to begin with.

So then, why would a person continue to sue me when there's no more money to go after once they've got the house they fell over in? Which lawyer in their right mind would do something that wouldn't make them money? I suppose in theory they could do it for the joy of paperwork or for the priciple or because they have a ridiculous amount of money and they're short of ideas on how to spend it (not the kinds of tenants that are easy to find, likewise for lawyers). I'm again willing to accept the risk of this occurence. I'd say the likelyhood of this outcome could be easily described as absurd.

Whereas if I actually "owned" all these properties in my name then they would all be at risk. The probability of something like this occuring down the road if/when I own a lot of properties is such that this risk is not really acceptable and I'd prefer to choose prevention over the cure. Not to mention if/when I get married and being sued for almost any other reason.

As per the comments on an admin nightmare - my job as an investor is (among many other skills and qualities) to use my knowledge, experience, people management skills and an eye for market opportunities as the qualities that will determine the extent to which I reach my goals. From that perspective, my challenge is to find a profitable enough strategy to cover the costs of hiring an accountant to keep the paperwork in order. Just as I use these qualities to find good tradesmen to do repairs, what I don't bring to the project is the ability to swing a hammer.

This also addresses the concern for profit margins. As for the goal of investing to be to do less work not more, I find this area of knowledge and pursuit to be a way of recharging my batteries - not draining them. I find it energising and fascinating and if I ever come to think of it all as work, then I'll find another asset class that gives me the joy I feel getting into this. Sure, I love the notion of passive income, but that's what the internet is for. But there's a world of difference for me between passive income and inactive investing.

But I take it on board, it always comes back to the question of finding the right strategy and determining what is realistic and what's unrealistic. I recognise that wanting these structures could mean that I'm searching for an annual 500% CoCR which means I'd wait too long and never get started - so I appreciate what you're saying, I'm just not willing to throw in the towel on the idea until I've exhausted all the ideas for making it work.

As for seeking legal advice, if and when the time comes I'll certainly do that. But at this point it'd feel like hiring Federer for private tennis lessons when I'm still learning what a tennis ball looks like - besides, I'm not going to operate under assumptions I've made from what I read on a forum until I've checked it out first.

Does anyone out there know anyone who's tried or looked into what I've suggested structurally? Or has anyone reading this? Or any notes on what I've written would also be appreciated, especially if/where I'm wrong?

 

[Terryw]

Hi

I think what you have written is essentially correct.

Except trusts are not really separate legal entities, though they are treated as such for taxation. It is the trustee of the trust that is the legal entity and therefore the trustee that is sued. Usually they are indemnified by the trust, but if the trust assets are not enough to satisfy the judgment they can come after the trustee's personal assets.

That is why having a company as trustee is a good idea.

Accidents do happen in rental properties, though they are rare. I recall one a few years ago where a brick wall fell down and killed a child.

Insurance can cover most accidents but probably not all.

But it would be still extremely unlucky to get sued and not have it covered by insurance.

Having one trust/trustee per property may be overkill if you are going to buy 150 x $100,000 properities, but it may be wise if you are looking at expensive properties which are few are far between.

It may also be a good estate planning technique. Easier to hand over control to different people when you die.

It may even be advantageous if the land tax rules were to change in the future etc.

 

[Piston Broke]

Does anyone out there know anyone who's tried or looked into what I've suggested structurally? Or has anyone reading this? Or any notes on what I've written would also be appreciated, especially if/where I'm wrong?

If you read up on the forum you'll find many discussion on ownership using trusts.

What your proposing is a form of very expensive insurance, but what exactly are you trying to insure yourself from? what are the probabilities of that happening?
There is likely a higher probability that you get seriously injured in a car accident than you losing all your IPs. So what are you doing about that?
You are much more likely to lose your assets thru divorce as well.

But the real question is can I own types investments that mitigate that scenario, If I'm so darn worried about it?
To which the answer is a resound YES.

As for your eg, trust owns IP1,
trustee pty ltd (whose name the IP1 is in) gets sued for negligence and has to pay damages as director found negligent in his duties.
Director has to pay damages, so sells IP1.
If sale price covers loan balance and damages, director loses IP1 and that's it.
If damages = loan bal + equity + 100K, then director must now find 100K to pay damages or declare bankrupt.
If director goes bust, he loses all assets (including company shares) and will have a tough time getting credit.
So there goes another IP (if he's lucky to have another one), or has to borrow the $$, or come up with a payment plan.
Bottom line your assets are still exposed, though indirectly, in case of personal liability.
Same applies if your slapped with 1mil damages for giving an accidental lift home to a hapless drunk fellow, who was staggering along the road, on the bonnet of your car. You either pay up or declare bankrupt.
All those admin fees may be better spent on a good good insurance plocies, and of course a good laywer if u ever need one.
*** Of course there are a million variables & scenarios that may occur, this is not advice of any kind but blue label fantasy ***

 

[garygoodbloke]

Cheers, what both TerryW and Pistobroke wrote makes a lot of sense, so thanks guys.

I see your point about where you draw the line Pistonbroke. I mean, it's pretty hard to turn some of these concepts into quanitifiable probabilities, and even then, trying to get a real world sense for what that number is saying is tricky.

And as you point out, it's silly to have such accept a low level position of risk in one situation if you accept a much larger/highet risk situation in another situation - there's a need for consistency.

I also like how you call it a type of insurance. When I think of the reality of the situation, I guess that's what I'm really talking about, so then it becomes a question of the differences and merits of insurance packages and the premiums I am looking at. Essentially a numbers game. The way you set out the scenario was also pretty informative, directly or indirectly, if the I lose all my properties because one falls over then it doesn't matter if it goes to satisfying the mortgage or to the tenant who sued, the point is that I lose it. So thanks for removing that whole variable from the equation for me.

I guess the root is what I'm willing to accept and what complies with my SANF and the rest is derived from that.

And cheers Terry for pointing out something I hadn't properly understood before - that ownership and liability issues are very different between Trusts and LLCs, where there's more liabilty for the Trust director than for an LLC. I guess those benefits are mitigated or even outweighed by the difficulties financing can be for an LLC.

Less liability means less of you on the line which means the bank would be more reluctant. You never get something for nothing when all is said and done.

Thanks, I'll try to search and read more about trusts but I'm always worried that 4 year old posts may be redundant or the laws may have changed.

Does anyone know how big investors structure their portfolios?

 

[The Y-man]

Garygoodbloke, you might also want to research into the function of the appointor.... it can be a potential point of weakness.

Cheers,

The Y-man

 

[Fudge]

Does anyone know how big investors structure their portfolios?

By spending big money on a consultation and seeking advice from a top dog accountant / lawyer.......... which will seem initially like:

hiring Federer for private tennis lessons when I'm still learning what a tennis ball looks like

This could be the holy grail (or maybe holy trail) to $$$$$

But if you find out......let us all know

This is an interesting read......

Cheers,

F

 

[The Y-man]

Does anyone know how big investors structure their portfolios?

I like the explanation given by a seminar presenter once upon a time....

At the risk of sounding incredibly politically incorrect, I understand it is commonly done through trusts and a "trophy spouse".

So garygoodbloke, you need to marry someone:

1. with whom you sign a bulletproof prenup.
2. that will agree to do absolutely NOTHING that may be the cause of litigation. This means your spouse should have no career, shouldn't drive a car etc.

This trophy spouse will be the director of your trustee companies. This person is known as the "no risk" person.

In return for having to live the existence of the trophy spouse, you will in return provide all the spouse's material wants and desires (so long as it does not cause risk) - and that will most likely include a chauffer driven limo (since the spouse is not allowed to drive)

(At the risk of inflaming more political incorrectness, the trophy spouse is also expected to provide and raise heirs.)

Cheers,

The Y-man

 

[Terryw]

Y-man

Why a trophy wife? The more trophy like they are the greater chance they will leave.

Didn't you read the "Wolf of Wallstreet"?

 

[The Y-man]

Didn't you read the "Wolf of Wallstreet"?

I don't read much...

Sounds like a good read!
http://www.bookoffers.com.au/the-wolf-of-wall-street-jordan-belfort/



Cheers,

The Y-man

 

[Terryw]

Just wait for the movie version.

It is a very interesting and funny book. I am reading part 2 now on how he got caught.

 

[Piston Broke]

Does anyone know how big investors structure their portfolios?

The only legal holding entities are person, company & trust.
There are no extra secret ones.
But with more money they can be moved around (including offshore) and pay many people for many services, and of course made more intricate and create smokes & mirrors.
The insurance premium becomes much smaller if the assets in question are $100 mil.

A lot of info is avaialable if you do research and read some bios.
Ad of course there is the famous Packer vs ATO case, and the Michael Hutchence case which nobody seemed to pay attention to.
It's all documented history.

 

[Terryw]

I've heard that Michael Hutchinson's structure was so complex and secret that his family was unable to get to most of his assets after his death. Probably because it was hidden, without leaving a paper trail with only a few knowing who was what and where.