Protecting PPOR from Litigation

[alongjourney]

Hi everyone. I cant find anything that has answered my question so please bear with me if this has been talked about already.

Im mainly concerned with protecting my "Principal place of residence" in the event of litigation. Im a self employed contractor working in a medium to high risk profession. I operate through a Company with both my wife and I as Directors.

I carry good public liability insurance and are still concerned that someone can litigate against myself as Director and take our family home which is currently worth $700k with only a small mortgage remaining. Transfer of Stamp Duty is around $23,500.

My questions are:

1. How safe is a family trust as protection under these circumstances

2. Am I correct in thinking that I will pay CGT on any increase in value over the $700k once it is owned by the trust even though it is still my PPOR.

3. Can the Stamp duty be avoided by some sort of Declaration that it is my PPOR?

4. Am I just missing the point and there is an easier way. My main focus is on Protection. My intentions are to build up a portfolio of properties. I already have one which is also in my name.

 

[Rolf Latham]

Hiya

Im only a mug punter in the asset protection game, Dale GG and Nick M would have a better idea, but I reckon its the tyoe of trustee that you use that makes the core difference.

As a personal trustee your butt is still haning in the breeeze, since you cant sack/wind yourself up.

A Proprietary Limited Company as Trustee seems to fit that better, since I think you can wind up the Old (targetted) P/L and replace it with a new one ?

ta

rolf

 

[see_change]

Another thing to be aware of , if you hold you PPOR in a trust , is that you may be subject to land tax. In NSW there is no land tax free threshold for houses held in trusts.

One thing to explore is getting a maximum Loan on your ppor and then lending it as an unsecured loan to your trust fund which then uses it to purchase Investment properties. This minimises the equity in your PPOR that someone can access.

Other things to look at would be you wife resigning as a director of your company , and her owning 99% of the PPOR. Again this limits the amount you have exposed.

These are a couple of things I have heard of people doing , though rolfs advice to talk to Dale or Nick will give you the best advice.

See Change

 

[wbthom]

Hi,

There are several ways to reduce the risk to your house with minimal cost. The most practical are:

1. First - Convert your company to allow one director only and have your wife resign as a director (ask your accountant to fix this). She can stay on as a shareholder but it is best if she is removed from signing authority in the company. This takes away her liability as a director in any future action.

Second - transfer most of your share of your house to your wife's name eg make the ownership 1/99 instead of 50/50. This does not trigger capital gains tax and in most states there is an option to transfer to a spouse with no or minimal stamp duty.

With this strategy any future action against you personally or as a director of the company only risks 1% of your house value. If you then organise a trust (with your wife as director of the trustee company) future assets in the new trust are well ptotected from any action against you.


2. If your home is mortgaged and you already own another investment property with a mortgage (or wish to buy one) - Ask your bank to overstamp your home mortgage (ie mortgage increases to 100% or more of the value of your home and decreases mortgage on investment property) - note that this is only possible with cross securitised properties from the same lender,

Any body attacking your assets will then not bother with your home as the bank has a first mortgage on your house which takes priority.


Sorry about the length of this post but asset protection can be a complicated area

Bill

**** Obviously see change and I had the same thought at the same time Bill

 

[alongjourney]

Several interesting points have been brought up thanks to those involved. Referring to what Bill had to say, I guess the same would apply if I removed myself as a director leaving my wife as sole director. (Both the PPOR and investment are solely in my name only)

I would be interested as to what Dale GG and Nick M may have to say. I have an appointment at my solicitor tomorrow so I will tell everyone what was the result

Thanks for your help.

 

[see_change]

If your wife is sole director, she would have potential liability as the director, and you would have potential liability as the contractor, so that doesn't solve the problem as you both have potential liability.

See Change

 

[bbg2003]

I agree with previous posts, but only to a certain extent.
It really depends on what reason your may be "attacked" for.
See HIH & One.tel cases. ie it did'nt work for them.
Also check what your biz insurance covers, read all that fine print.

 

[DaleGG]

Hi

In these cases we would recommend, as Bill & SC have suggested, that the company be converted to a single director company and the wife resign as a director.

Then, the home would be transferred completely to the non director spouse under the "love & devotion" rules free of stamp duty or CGT.

Providing this is done early enough and well before any law suit or problems, then, it is pretty much water tight.

Dale

 

[alongjourney]

Thanks Dale

This at least gives me some light at the end of the tunnel. Will talk to solicitor about it in the morning to see how watertight it is. Like the idea of no stamp duty.

 

[NigelW]

Originally posted by alongjourney
Thanks Dale

This at least gives me some light at the end of the tunnel. Will talk to solicitor about it in the morning to see how watertight it is. Like the idea of no stamp duty.

The love and devotion thing only works so far in Qld. It will not help you here. From memory, to be free of stamp duty the transfer has to end up with you and the spouse 50/50 interest in PPOR.

Which is obviously what you DON'T want here.

Picking up on something proposed earlier, I think there MAY be some scope for avoiding eventual CGT if you move house to a trust and then lease it back as PPOR on a L O N G term basis. BUT talk to your accountant.

There shouldn't be CGT to begin with as you're selling your PPOR to the trust.

Ultimately, you need to weigh up the costs of the various options vs the peace of mind it may give you.

Bear in mind also, as mentioned, that the bankruptcy act is getting more teeth regarding your personal position and the insolvency provisions in part 5.7B of the Corporations Act with regard to your company have a fairly long reach to clawback so-called voidable transactinos. But as mentioned, the passage of time, no prospect of insolvency on the horizon at the moment and fair value being given for the transfer should see you sitting pretty...

Good luck
N.

 

[alongjourney]

Thanks again to everyone who has joined in.

I went to see my solicitor this morning and mentioned the "love and devotion" part and this is what I found out.

1. The safest way for me is to transfer the property into my wifes name and have her resign as Director of our company. This apparently is watertight against litigation via the companies trading.

2. The "love and devotion" clause actually works like this. A husband can transfer to a spouse or relative the property involved and on the transfer docummentation the words love and devotion are recorded instead of the value of the property(it was actually something like love and affection). This I was told is done mainly to remove the dollar amount of the property documents much as you would do if you were buying someone a present and tearing the tags off. I was then shown a legal document that related to the clause and it clearly stated the stamp duty is to be paid on a registered valuation.

3. By having the house purely in my wifes name we still dont attract CGT in the future (Still PPOR) when we sell it and It gives me good protection. The downside is the $24000 Stamp Duty.

Please note, No Liabilty accepted for these comments, Please seek your own legal advice as your circumstances may be different . This is just what I was told...


Anyones Thoughts appreciated

 

[kierank]

Originally posted by alongjourney
3. By having the house purely in my wifes name we still dont attract CGT in the future (Still PPOR) when we sell it and It gives me good protection. The downside is the $24000 Stamp Duty.

AJ,

You stated earlier that your PPOR was valued around $700K. I assume that it is joint tenants. Hence, half the house is already in your wife's name; so you only need to transfer your half to her name. Also, in Qld, Stamp Duty is reduced on PPORs.

According to my calculations, to transfer your half ($350,000) to your wife as a PPOR, the Stamp Duty would be $6,000 (a lot than than $24,000 you quoted).

Can I suggest you go the the Office of State Revenue Office of State Revenue where you will Stamp Duty calculators.

 

[alongjourney]

Unfortunately its all in my name (Murphys law again), and the calculator says that on $700k it comes to $18750. (Better than $23475 that I got quoted to move it into a trust.

 

[kierank]

Originally posted by alongjourney
Unfortunately its all in my name (Murphys law again), and the calculator says that on $700k it comes to $18750. (Better than $23475 that I got quoted to move it into a trust.

AJ,

Bugger!!!

Then one way to lower your S/D is to find a valuer who is really conservative - if they only valued it at say $600K, then S/D would be $15,000 (a $3,750 reduction). Valuers tend to be conservative by trade and nature and a low valuation wouldn't worry you.

Another approach would be to wait and hope that the market crashes. In this way, your valuation will be lower. Of course, you run the risk of the market continuing to rise - as you are in Qld, this is a strong possibility IMHO.

 

[Terry_w]

Unfortunately its all in my name (Murphys law again), and the calculator says that on $700k it comes to $18750. (Better than $23475 that I got quoted to move it into a trust.

in this case you may want to consider transferring 50% to her now which may result in no stamp duty and then the other 50% the day after which would attract stamp duty.

(I realise this is 10+ years old - but worth noting for others)

 

[Terry_w]

1. The safest way for me is to transfer the property into my wifes name and have her resign as Director of our company. This apparently is watertight against litigation via the companies trading.

This wrong, it could be attacked in 2 ways
s37A covneyancing act (NSW - simialr provisions in other states.) and
s120 bankruptcy Act