Should I be afraid?

[krystal]

Interested to hear peoples thoughts on the subject of asset protection.

Is insurance (public liability) enough?

Are trusts a more effective means of protecting an indiviual from litigation or is their main purpose for easing tax pressures?

I have asked my accountant and my solicitor about this and they tell me that I'm fine as I am but when I talk to other investors who hold less property than me they seem more concerned about this issue.

So what's the reality?

What is everyone so afraid of?

Krystal

 

[Mr Ed]

Krystal

I’d be interested on the answer to this also as I’m just starting out reading on trust structures last night (heavy reading), but just to side track a bit is I was always taught only insure what you can’t afford to loose.

I.E

Building…… Building contents insurance
Salary……… Income protection insurance
Life…..........Term Life
Rent……......Loss of tenant insurance
Car……….....Comprehensive insurance
Assets…….. Possibly a trust structure?


And the list on & on & on & on, Maybe one would be better being an insurance company?

By the way I don’t sell insurance but I believe it does have a role to play in business.

Ed.

 

[Sim]

Originally posted by krystal
Are trusts a more effective means of protecting an indiviual from litigation or is their main purpose for easing tax pressures?

You haven't been listening much have you ?

TRUSTS ARE NOT FOR TAX MINIMISATION !!!!!!

They are first and foremost for asset protection.

There may (or may not) be some tax benefits with trusts - don't forget that there are many things you lose with trusts such as the ability to negatively gear ! There are benefits too though.

Trusts do not actually protect you from litigation - the trustee can still be sued, but trusts do provide some protection from people taking away your assets - it's rather complicated, you should do a search, there are plenty of discussions on this already in the forum.

Insurance is still necessary - some people take the approach that trusts are unneccessary if you have enough insurance. But the counter argument to that is to remind yourself that insurance companies are generally for-profit organisations who need to maximise their returns, and so the first thing they will try and do is work out if they can legally avoid paying you the insurance you claim ! The slightest thing such as underinsuring, not paying your premiums on time, not complying fully with all legistlation etc, may be grounds for them to limit or refuse payout.

That being said, I think people have a moral obligation to insure - within reason.

My approach is to insure, but also use trusts as insurance for my insurance !

 

[Sim]

Originally posted by krystal
What is everyone so afraid of?

If you only have a couple of IPs, are NOT the director of a business and are not in the habit of driving over the speedlimit, drink driving or doing other things which may be deemed negligent, then with the right insurance, you will mostly be fine.

When you have many assets to lose - and especially if you are the director of a company where you will personally be held liable for any problems with the companies operation - insurance is never enough. Trusts are almost essential.

The question is, how paranoid are you about losing everything that you have worked so hard for. One or two properties is not going to take you long to get back - trusts are possibly not worth the cost and hassle (loss of negative gearing benefits is a major turn off with trusts for many people). Ten or more properties will be a major problem if you lose them all and have to start again !

Trusts are not about shirking your responsibilities - they are about not making yourself an easy target, and protecting your (and your family's !) future.

Someone well known to the forum once told me "start with the end in mind" - if you intend to own many assets one day, then start now with a structure to match that. On the other hand, if you will be happy with just a couple of IPs, then don't worry about it - just make sure you've got the insurance right !

Please note that this is not professional advice - you should really spend some time with a professional advisor specialising in asset protection !

 

[krystal]

Hi Sim

You say that "I'm not listening" - the thing is that I read and listen to much more than just this forum.

You say -
TRUSTS ARE NOT FOR TAX MINIMISATION !!!!!!

They are first and foremost for asset protection.

I read an article in the Financial Review some weeks ago that pretty much said the opposite - so who do I believe.

I am not concerned with tax minimisation but interested to assess the risk to a private investor of loss of assets through litigation.

PS I have adequate insurance - but as you say the insurance company will cover themselves first me second.

 

[NigelW]

Hi Krystal

It's a confusing topic, so don't feel stressed that you're unsure what the pros and cons of different structures are.

With a discretionary trust there is an ability for the trust to distribute the income to different beneficiaries each year. This flexibility is the key to the tax advantages.

A quick example may help:

Year 1 - hubbie and wife both in top tax bracket
Year 2 - hubbie gives up work to look after the new baby, wife keeps working (*if only*)

In Year 2 the trustee would exercise its discretion and make a distribution of most, if not all, of the trust's income that year to the husband as less tax will be paid due to the tiered tax rates we have. (sorry I didn't put numbers in here to demonstrate)

That is the major tax benefit with discretionary trusts - income streaming. You can also distribute to a company, which will then only pay 30% tax (but this may change in the near future).

The other major advantage of trusts is asset protection as Sim' mentioned.

But, as Sim' also mentioned, there are some disadvantages - cost is one, but the biggest is the inability to personally access the deduction for interest on borrowings by the trustee. A hybrid trust is one method to get around this to some extent but I'm still to be convinced that the hybrid nature doesn't comprise the asset protection advantages to a degree.

hope this helps. I'm working on a more detailed explanation of structuring alternatives which I'm planning to be ready by mid year.

Cheers
N.

 

[Sim]

Originally posted by krystal
You say that "I'm not listening" - the thing is that I read and listen to much more than just this forum.

I hope you didn't take that as offence krystal - was said with toungue in cheek ! My point was more that this topic has been covered by some of our resident "experts" before - and I hoped it was a moot point for everyone.

Originally posted by krystal
I read an article in the Financial Review some weeks ago that pretty much said the opposite - so who do I believe.

Well... I would put the media at the bottom of the list of people to believe - mmm... on second thought, maybe just above Uncle Freddy who always seems to be on a different planet !

The media tend to get over-zealous in their stories... it is a common misconception amongst the un-informed that the rich use trusts purely as a tax dodge - hence a lot of the reporting lately, and pushes for the government to reform the tax laws to stop this "unethical behaviour". I'm never sure whether the media just simply don't understand, choose not to understand, or really do understand but are simply looking for good copy.

If you are not confident in your understanding of trusts, I suggest that you pick up a copy of N.E. Renton's book "Family Trusts". It's a little bit old now, but the concepts are still valid and sound.

He spends a lot of time going through the history of trusts, how they are used, and why. There is a long list of reasons in there for why people use trusts - and only one of them is for tax effectiveness. There are several chapters on taxation of trusts - but they are still only a small part of the book.

 

[krystal]

Sim and Nigel

Thanks for your responses.

I will continue researching to gain more understanding.

Any more reading tips or other points of interest on asset protection would be greatly appreciated.

Krystal

 

[bundy1964]

Originally posted by Sim
The media tend to get over-zealous in their stories... it is a common misconception amongst the un-informed that the rich use trusts purely as a tax dodge - hence a lot of the reporting lately, and pushes for the government to reform the tax laws to stop this "unethical behaviour". I'm never sure whether the media just simply don't understand, choose not to understand, or really do understand but are simply looking for good copy.

Isn't there a quote about not letting truth get in the way of a good story?

bundy

 

[Mr. Fabulous]

Other than Renton's book, you could also pick up Dale's excellent Tax Battles manual. Go to his website at: www.gatherumgoss.com for details.

Mark
'no hat, some cattle'

 

[Patosan]

What are the insurance options against being sued, etc ?
I'm somewhat ignorant on this topic.

If I don't transfer all my present IP into our recently set up trust, due to the excessive stamp duty, what can I do to protect the other privately owned IP ?

 

[just do it]

I heard a rumour there is legislation planned to weaken the protective benefits of trusts. Has anyone heard of this?

 

[DaleGG]

Hi

Yes, I have heard that rumour. In particular, the rumour talks about people going bankrupt and retaining wealth within the trust.

At this stage, it is just a rumour, but, I am keeping a close eye on it just in case something come sout of it.

Steady as she goes.

Dale

 

[Patosan]

Would it be better to have the trust registered in another country ?
Thus avoiding any local petty politcians' decisions.
Of this would then become far more cpmplex siuation; IP income being recorded as going to os trust, then being paid back to Oz taxpayer, or to an os acc.

I haven't heard any of these rumours, perhaps since being in Japan, i only get the headlines and whatever I read here. This is a MAJOR concern though, since it is THE reason for entering into trusts. So can someone please tell me of the extent of these "rumours" ?

Sorry but "steady as she goes" without any background or recent info is not calming.

 

[Kevmeister]

One or two properties is not going to take you long to get back - Sim'

When I consider the effort we went through to get our PPOR, somehow this does not ring very true with me... But there's "get back" with a 95% mortgage and there's "get back" with 100% ownership. Big difference.

Several hundred thousand dollars of property does take a while to "get back"in my opinion.