Protecting assets held in own name

[StevenO]

Unfortunately when I bought my first IP I had no idea of how trusts worked and the need for asset protection, and I purchased the poperty in my own name. All future IP's have and will be bought under a hybrid trust. This still leaves my original property at risk because it is too expensive to transfer it into the trust (stamp duty, CGT etc).

So what is the best way of protecting this first property? What if I continually revalue and use the equity to buy units in the trust? That way the property is always kept at 80% LVR and most of the equity is safely placed in the trust, leaving 20% at risk if you are sued.

Does this make sense and is this what other people do?

 

[DaleGG]

HI

Yes, many people in your situation do continually draw down on their mortgage against their IP's and use those funds to buy assets in another structure.

It is not perfect (what is???) but, it is a strategy which is better than doing nothing.

Well done

Dale

Originally posted by StevenO
Unfortunately when I bought my first IP I had no idea of how trusts worked and the need for asset protection, and I purchased the poperty in my own name. All future IP's have and will be bought under a hybrid trust. This still leaves my original property at risk because it is too expensive to transfer it into the trust (stamp duty, CGT etc).

So what is the best way of protecting this first property? What if I continually revalue and use the equity to buy units in the trust? That way the property is always kept at 80% LVR and most of the equity is safely placed in the trust, leaving 20% at risk if you are sued.

Does this make sense and is this what other people do?

 

[NigelW]

Originally posted by StevenO
Unfortunately when I bought my first IP I had no idea of how trusts worked and the need for asset protection, and I purchased the poperty in my own name. All future IP's have and will be bought under a hybrid trust. This still leaves my original property at risk because it is too expensive to transfer it into the trust (stamp duty, CGT etc).

So what is the best way of protecting this first property? What if I continually revalue and use the equity to buy units in the trust? That way the property is always kept at 80% LVR and most of the equity is safely placed in the trust, leaving 20% at risk if you are sued.

Does this make sense and is this what other people do?

Yes it makes sense. Keep it geared to the hilt PROVIDED you use the money productively elsewhere!

 

[StevenO]

Thanks Nigel and Dale. I was always planning on drawing down and using the funds to buy assets in another structure - I just didn't really think of it as a way of (partly) protecting the original IP.

 

[gridcap]

how about you just put a second mortgage over the property for more than it is worth (if you have a company) - no one can get it then

 

[Patosan]

Gridcap how does one get a 2nd mortgage for MORE than the value ?
What's the role of the Co in this arrangement ?

 

[Aceyducey]

Originally posted by gridcap
how about you just put a second mortgage over the property for more than it is worth (if you have a company) - no one can get it then

And how do you do this legally?

If you borrow more than the value of the security you are crossing several banking lines.

Plus it isn't ethical

Cheers,

Aceyducey

 

[gridcap]

it has nothing to do with borrowing - it is a claim on the property.
say you have a 500k property and you borrowed from westpac 400k for it they have first mortgage on property to secure their 400k. so you have 100k of asset in the property - which is at risk if you ever get sued for anything. say heaven forbid you are driving your car 0.06 hit and hurt someone - a no pay no fee lawyer will work for the person you hit and take everything you own - in this case 100k (he can't take 500k cause westpac have 1st mortgage for 400k) - what if you had 1Mill in assets - very dangerous. you need to structure for asset protection so no one can take away what you have worked hard for.

So you just go and see your solicitor and ask him to fill out the forms to lodge a second mortgage over the property - could be 100k - but then when price increases you have to do another - so why not make it for 250k - at least it will cover a few years of capital growth for you. Who takes the 2nd mortgage? - an entity you still have control over - if you have a coy set up (say as a trustee for your trust) then this entity could take it out - if not perhaps some individual you trust - a relative (not recomended though)

so now you have that car accident above - lawyer looks into suing - you; sees youve got a property in your name - value 500K - he then sees there is 1st mortgage for 400k and a 2nd mortgage for 250K - he doesn't waste time trying to sue you - as there is nothing clear he can get!

Just a form of asset protection not illegal you could put a 2nd mortgage on for 500k or 1mill if you wanted (costs solicitor fee + mortgage stamp duty)- but best overall if you use trust structures where you are a discretionary beneficiery only

A lot of people who have trust structures for invest property but own outright their PPOR - protect their PPOR from potential litigation by using their corporate trustee coy to take a mortgage out over the PPOR for more than it is worth - so they cant be attacked.

 

[Aceyducey]

Gridcap,

Yeah seen this approach before. Have never seen the value.

It works until you want to refinance the property...which happens quite often for us investors...then you need to unravel the 2nd mortgage again.

All too much trouble when you can simply place your assets into a Trust structure to protect them.

And you cannot easily lose your PPOR when being sued.

But if you are THAT worried, rent and own everything through Trusts - or better yet do a defensive driving course.

Cheers,

Aceyducey

 

[Nominees]

Gridcap,

This is interesting. Thanks for the info.

As Acey has said what would you do if you refinance say evry two years to access the extra equity in a property?

Acey, why do you say a PPOR is harder to get at? I have never heard that before. I wish it were harder to get at but if you have to pay someone a million this may well mean you have to sell your PPOR and start renting...

Correct me if I am wrong.

Cheers,

Nom

 

[gridcap]

yes i now have sold my investment properties in my own name and rebought in a trust structure and gone to cash flow positive too - my own house though is not protected fully yet - i did not think you had to roll out of a second mortgage to refinance as the value increases (meaning in my example with 1st and 2nd mortgage - u are saying say the house goes up to 800k in value, u want to get it re-valued and leverage off it to buy more - of course. I don't think the fact that the 2nd mortgage is there hinders this process because it is no.2 behing no. 1 mortgage - as i said i will check. - i will check with my accountant who is also a big property investor, trust advocate and seminar presenter. dale may know the ans.

this info is what i have learnt/am learning from all the seminars i go too books i read etc like most people - no expert just learning.

ps no need to be sarcastic - it was just an example - we are heading down the road of the US - in litigation the truth does not always come into it - if you have something of value it can be argued that someone else deserves it - leave yourself open for attack - it is your risk

 

[gridcap]

the best case ever of asset protection through trusts was alan bond - bankrupt owing millions and millions ;went to jail etc - but had all his property tied up in trust - look at him he is laughing

read about his structure in fin review a while ago

 

[StevenO]

Great info Gridcap. I have never heard of doing this before. Look forward to hearing what you find out about the 2nd mortgage hindering the refinancing with the first lender, as the property value increases.

If you used the trustee company for your trust to take out the second mortgage on your PPOR, your equity in the property would then be at risk if someone sued the trust/trustee. The trust would sack the corporate trustee and the creditor would go after the assets in the company. Or would the first mortgage on the PPOR prevent the forced sale of the property by the 2nd mortgagee?

 

[Nominees]

This is getting interesting!

Wouldn't it be better just to set up a $2 company that did nothing else than just have 2nd mortgages on properties?

I would keep it away from the trustee etc... Is there a good reason for using the trustee?

Nom

 

[Patosan]

Yes indeed this getting interesting.
I too await feedback on the refinancing issue.

Thanks heaps Gridlock for an approach I hadn't heard of, even though I had asked for such advice here before and from my accountant and solicitor. Goes to show we have to keep coming back to hear from newer members.

My first 2 IP are privately owned, one will be developed next year and will be a great cashflow contributor, so I've decided to transfer it into our trust before develpoment. I was uncertain of the future for the other, this could pan out to be one option for protection.

 

[bundy1964]

Originally posted by Nominees
This is getting interesting!

Wouldn't it be better just to set up a $2 company that did nothing else than just have 2nd mortgages on properties?

I would keep it away from the trustee etc... Is there a good reason for using the trustee?

Nom

But wouldn't they check to see who owned the $2 company and who was a Director/shareholder with all roads leading back to Rome you would have no asset protection? Just a layer of smoke and mirrors for the casual observer?

bundy

 

[bbg2003]

What many people do is:

1.Borrow as much as you can on your PPOR or IP's held in your name to buy IP's with a trust.

2. Repay the trust loan principle first.

3. Keep borrowing on th PPOR as soon as there is equity available.

4. Next property boom, sell and repay trust loans first.

You need to make a decision based on a balance between taxation issues and asset protection issues.
Consider both very carefully before deciding which way to go.

imho
bbg2003

 

[bbg2003]

As for the $2 mortgage company, that mortgage would be an asset on the company's balance sheet and shareholders assets.

The only way to completely secure your assets is to give ownership and control to an entity that is a "third party", at "arms length" and unrelated in the eyes of the law and a trustee in bankruptcy.

imho
bbg2003

 

[XBenX]

Just a qn..

But creating a book entry for the loan isnt all that difficult ?

Nor is lodging a 2nd mortgage - pay the registration fee and stamp duty and spend 30mins on paperwork and postage and your done, the same goes for discharge. (if req'd when you do ur reval)

Sure its not the ideal situation but it wasnt perfect at the start - so u can either spend some big $$$ and start again or try something like is being suggested.

Excuse the shorthand...

 

[NigelW]

Originally posted by bbg2003
As for the $2 mortgage company, that mortgage would be an asset on the company's balance sheet and shareholders assets.

The only way to completely secure your assets is to give ownership and control to an entity that is a "third party", at "arms length" and unrelated in the eyes of the law and a trustee in bankruptcy.

imho
bbg2003

Hi BBG

your "ho" is right on the money!

cheers
N.