It means that any Trust provision which seeks to exclude or reduce a beneficiary's interest in the Trust due to bankruptcy is void.
Property Investor Trust vs. Fixed Unit Trust
- Thread starter mooki24
- Start date
It means that any Trust provision which seeks to exclude or reduce a beneficiary's interest in the Trust due to bankruptcy is void.
The PIT ruling relates to tax, not to any other legal aspect. As Aaron said above the section is trying to prevent people inserting clauses in trust deeds that prevent assets unfairly falling into the hands of creditors. So you couldn't draft a deed which says something like A holds the units in this trust unless A becomes bankrupt in which case B holds the units.
There are ways to draft the deed to make it harder for creditors, but you have to tread a fine line. It is not as simple as your accountant makes out.
Haha, I think we have different definitions of fun Terry
Even though it's painful it's actually been a good learning process and I really appreciate everyone's help and advice on this. It can sometimes be hard to get straight answers from the accountants and solicitors.
I'm still not entirely sure what I'm going to do. I've asked the accountant for their legal contact so I can speak to them about this further as I am assuming that the solicitor is the one that actually writes the deed (I could be wrong)
Hopefully this way I can crosscheck each others advice and come up with the best solution. Fingers crossed
Thanks again everyone!
Terry,
I am still not sure in part 2 above this offers any protection as the trustee of the discretionary trust will have to be an individual or a company that has directors as individuals. This essentially means the assets of these individuals come under scrutiny in the event of bankruptcy or litiguous matters.
Asset protection is often an over complicated vehicle that is rather complex and ill-advised.
Hi Leigh
In the event of bankruptcy there is a trustee in bankruptcy that takes over the affairs of the bankrupt. The trustee stands in the shoes of the bankrupt and all of their 'property' vests in the trustee (not to be confused with the trustee of the discretionary trust). So they bankruptcy trustee is the bankrupt, all their assets become his on trust for the creditors.
With a discretionary trust no one individual has anything which can be defined as property. ie they are not entitled to anything of the trust until the trustee makes a resolution to distribute to them. They hold a mere expectancy and a right to be considered. So as the bankruptcy trustee stands in their shoes they will have a right to be considered by the trustee of the discretionary trust. Usually a trustee of the trustee will use their discretion and distribute to other family members.
Often the bankrupt beneficiary is also the director or trustee of the trust in which they are a beneficiary. Once you go bankrupt you cannot be trustee or a director of a company.
If you owned shares in the company then these are property and would be controlled by the bankruptcy trustee. The bankruptcy trustee could then control the trustee company and distribute the trust's assets to the beneficiary which would be them and then they can satisfy creditors and pay themselves their high fees.
If an individual goes bankrupt and they are trustee of a discretioanry trust then the deed will prohibit them holding this position and cover who the next trustee will be. So the Bankrutpcy trustee may not control the trust.
If the bankruptcy trustee gets control of the trustee company this is no problem usually as the appointor of the trust will have appointed another trustee by this stage. The position of appointor has been deemed not to be property and cannot pass to a trustee in bankruptcy (Burton's case from memory).
Bankruptcy doesn't happen overnight. If someone tries to bankrupt you you will have at least 28 days to respond.
In the case where someone is appointor and trustee and a beneficiary it will still be impossible for the trust assets to be deemed the assets of the person, even if the trust has only ever distributed to that person. This argument was used in a NSW SC case a few years ago after the Richstar decision where ASIC successfully got an injunction over trust property of an individual. The NSWSC case involved a doctor Smith who left her trust owned house in her will by mistake. The trust assets were deemed to be separate to her estate.
However, it is a good idea to strengthen the asset protection of the trust by having more than one appointor and possibly even a controller.
Being a director is classed as an appointment so this cannot fall into the hands of a bankrutpcy trustee either.
I received a letter from Macquarie Group Services today asking me to consider converting my Hybrid Discretionary Trust to a Land Tax Unit Trust. Yes there would be significant land tax savings but I'm not sure I'd be better off using an LTUT in the long term?
The benefit of having a HDT is the ability to negative gear now but redeem the Special Income Units at some stage in the future (when the cashflow turns positive) and operate the HDT as a DT for asset protection and tax minimisation through income streaming to discretionary beneficiaries.
Should I be converting to a Land Tax Unit Trust instead?
Would depend on your circumstances.
For example have you already used up your land tax free threshold?
No, I only have one property in my own name and it is well within the tax free threshold. The other IP's are in the Hybrid Trust and are charged land tax from the 1st dollar.
Now you should work out how much it would save you in land tax each year and then the cost of converting over. Compare costs v benefits.
Any CGT or stamp duty consequences? (I think they may have rulings??).
With a unit trust the trustee has the ability of redeem units. But with a fixed unit trust that qualifies for the land tax threshold in NSW I don't think this is possible. An alternative is for the units to be sold to a discretionary trust. Virtually the same thing, but slightly less asset protection perhaps.
It would cost $2.2K for the conversion but save $2.8K p.a in land tax each year. No CGT or stamp duty consequences.
I've just read somewhere that a 'sole trustee of a unit trust may be one of its unit holders but not the only one'. Does this apply to Land Tax Unit Trusts? I'm the sole trustee of my HDT and hold 100% of the Special Income Units.
It would cost $2.2K for the conv srsion but save $2.8K p.a in land tax each year. No CGT or stamp duty consequences.
I've just read somewhere that a 'sole trustee of a unit trust may be one of its unit holders but not the only one'. Does this apply to Land Tax Unit Trusts? I'm the sole trustee of my HDT and hold 100% of the Special Income Units.
Yes, that is basic trust law. You cannot hold property on trust for yourself as there would be no trust in that were the case. You will need at least one other unit holder, or hold the units jointly.
You would also need to do your loans again.
yes should have had a corporate trustee. individual as trustee and the same individual holding the units becomes a 'merged trust'. basically someone ****ed up the setup or didn't know what they were doing.
