Trust Types/advantages

[TMNT]

so please excuse me on my complete lack of knowledge in this area

when buying IPs, other then putting it in your personal name

I hear everyone talks about trusts/unit/hybrid/discretionary

any chance someone could tell me what the pros/cons are

Im essentailly looking for one that will protect my other ips from eachtoher in the worst case scenario....if possilbe

 

[ozmale42]

I'd also be interested to know in lay terms pros and cons of each and when one kind would prevail over another.

I'm an accountant, but not involved in trust issues or the setting up of different structures (I took the less stressful career path of becoming a CFO in a law firm) but you'd think I'd be able to grasp it, wouldn't you?..Even got an HD in company law..No way !..... so I can totally understand how someone not from that background would find it all so confusing.

I see a post from TerryW coming.

Regards

 

[Terry_w]

Discretionary trusts will vary in type - hundreds of different ways to set them up. But basically no one beneficiary will have any vested interest in the assets of the trust. The trustee owns the property for the benefit of a wide class of beneficiaries with no one beneficiary having any ownership of anything. So if a beneficiary goes bankrupt there is nothing to lose.

Unit trusts - also many different types. Fixed and non fixed etc. These are trusts which are set up so the unit holders are entitled to fixed shares of the income and/or capital. Fixed unit trusts are where the entitlement is fixed and cannot be varied and the unit holder can demand transfer of the property to their name.

Bare trust - where A owns X for B. There is no discretion. B owns the property but it is in A's name. Like a SMSF with a custodian trust owning the property, legally, until the loan is paid off.

Testamentary - a trust formed via a will. Could be unit or discretionary or hybrid.

Hybrid is just a combination of a unit and a discretionary. You could have the income discretionary with the capital to go to fixed unit holders for example.

 

[TMNT]

Discretionary trusts will vary in type - hundreds of different ways to set them up. But basically no one beneficiary will have any vested interest in the assets of the trust. The trustee owns the property for the benefit of a wide class of beneficiaries with no one beneficiary having any ownership of anything. So if a beneficiary goes bankrupt there is nothing to lose.

sorry for the dumb question, but most of the people who use trusts seem to have one of these,

so in laymans terms does this mean that if I was a trustee, I am protected from bankruptcy of the beneficiaries? but what about trying to presrve my own assets if I was the only beneficiary and trustee?

I guess im trying to protect the rest of my assets if one goes sour,

or alternatively what options to I have?

 

[Terry_w]

so in laymans terms does this mean that if I was a trustee, I am protected from bankruptcy of the beneficiaries? but what about trying to presrve my own assets if I was the only beneficiary and trustee?

Generally if a beneficiary were to go bankrupt it would have no connection or effect on the trustee in their capacity as trustee or in their personal capacity. The trustee could still distribute income to the beneficiary but if they did the money would go to the creditors.

You cannot be the only beneficiary and trustee as there would be no trust. You cannot hold property on trust for yourself.

If you were one of a few beneficiaries and the trustee and you went bankrupt then the appointor of the trust, which could be you, would appoint a new trustee (a bankrupt cannot be trustee). The assets you own on trust for others do not form part of your estate in bankruptcy so generally the assets of the trust would be protected.

But this will all depend on the deed, the structure and the conduct of the trust.

But if you went bankrupt all of your own assets would fall into the hands of the bankruptcy trustee who steps in your shoes and sells everything to pay back what you owe to creditors.Trust assets are different - they are not yours.

 

[RPI]

Discretionary trust v company can be a good example to look at asset protection in the opposite direction to how most people think of it.

Company you own the shares, they are an asset, Company owns stuff, you go bankrupt nothing to do with the Company, bankruptcy trustee takes your shares, you lose control of Company and either shares or assets of company sold for money to go to your creditors

Disc Trust you are a beneficiary, you being a beneficiary is not an asset, you have no rights to make trust give you anything, trust owns stuff, you go bankrupt nothing to do with trust, bankruptcy trustee can not take over as you being a beneficiary (though if trust distributes to beneficiary, bankruptcy trustee gets that,but trust would not do that while you are bankrupt)

Can protect company shares by having them held by a DT rather than you but that is a different storey

 

[redwing]

Check out http://www.trustmagic.com.au/ and http://www.investorone.com.au/ for additional info

 

[Peter_Tersteeg]

TMNT from the questions I'll assume you're interested in using a trust primarily for asset protection.

Asset protection sounds nice, in essence it protects your assets in the event that you are sued.

Is there any realistic risk that you might be sued at some point? In certain professions there is a real risk and sometimes when people own their own business they may have a higher likely hood of being sued.

For most people in a PAYG job the risk is negligible and people need to ask themselves if the risk is worth the disadvantages of a trust:
* Costs money to set up and maintain ($2000-$3000 setup, about $1000 per year to maintain).
* Higher land tax costs in many states.
* Essentially no negative gearing benefits.

 

[TMNT]

TMNT from the questions I'll assume you're interested in using a trust primarily for asset protection.

Asset protection sounds nice, in essence it protects your assets in the event that you are sued.

Is there any realistic risk that you might be sued at some point? In certain professions there is a real risk and sometimes when people own their own business they may have a higher likely hood of being sued.

For most people in a PAYG job the risk is negligible and people need to ask themselves if the risk is worth the disadvantages of a trust:
* Costs money to set up and maintain ($2000-$3000 setup, about $1000 per year to maintain).
* Higher land tax costs in many states.
* Essentially no negative gearing benefits.

thatnks PT bear

I know im asking a how long is a piece of string type question, and I should be getting pro advice, but just trying to learn the options i have because im sure an accountant will confuse me within 10 seconds

basic story is,I have quite a few IPS, all under personal name,
no real issues, however, 4 are vacant at the moment, one for 2 months, got me thinking that if all hell breaks loose, then can I protect all the other ones from each other if worst comes to worst,

eg fall behind/default on one property, they reposess it sell it, end of story

currently only work part time for personal reasons, no business, nothign complicated YET

also, if I were to say go into a large JV for development, if the market turns sour and all hell breaks loose, how can I protect myself as well

thanks for listening guys!

 

[Terry_w]

Generally asset protection is and won't be an issue for most people. I have never been sued for example. No threats to sue me either. But I have sued someone and this entailed risk - what if I lost?

If you own properties in one structure, your own name for example, and things start to go bad the whole lot will be exposed. For example, many may be vacant. This could lead to stress, to marriage break downs to heart attack and you may not be able to get back on track in the short term. This could lead to the lender taking possession of one then two etc. Domino effect.

Or you could build up a large portfolio and then decide to invest in a business. At this stage you decide to set up a company as trustee for asset protection. But you are required to give a personal guarantee for the rent. I know one person who guaranteed to pay $150,000 pa in rent for 5 years. The company collapsed within a few months....

Or, you need to sue someone. You slip and crack your back and sue the owner of the food court. You lose on a technicality. You are up for the otherside's court costs and legals. hundreds of thousands by this stage.

 

[RPI]

Agree Terry

it is like insurance, not everyones has a car crash either.

 

[Terry_w]

You never know where things will lead. 15 years ago I had not the slightest thought that I might one day become a lawyer for example.

 

[TMNT]

ok, thanks terry and RPI

I guess I might be doing different things in the near future as well!

so if this were the case how would you protect yourself,

do you put 1 property per trust?
I see people start up businesses, do really well for 10 years and then the business collapses, and they seem to get off scot free, while contiuning to drive their expensive cars, and live a good lifestyle and are back opening another business within a year,

surely these guys have set themselves up to protect themselves

 

[Terry_w]

ok, thanks terry and RPI

I guess I might be doing different things in the near future as well!

so if this were the case how would you protect yourself,

do you put 1 property per trust?
I see people start up businesses, do really well for 10 years and then the business collapses, and they seem to get off scot free, while contiuning to drive their expensive cars, and live a good lifestyle and are back opening another business within a year,

surely these guys have set themselves up to protect themselves

You would need to develop a detailed plan involving multiple strategies and structures.

It is not as simple as just buying a property in a 'discretionary trust'. You will have to look at the whole transaction and how the trust is conducted post set up too.

 

[AXXO]

ok, thanks terry and RPI

I guess I might be doing different things in the near future as well!

so if this were the case how would you protect yourself,

do you put 1 property per trust?
I see people start up businesses, do really well for 10 years and then the business collapses, and they seem to get off scot free, while contiuning to drive their expensive cars, and live a good lifestyle and are back opening another business within a year,

surely these guys have set themselves up to protect themselves

You will find most of these guys use other peoples money and the banks money to run their businesses.

In other words they have zero of negative equity. So what they lose they never paid for anyway. At the end of the day they only lose what they guaranteed, being assets in hock.

So run the business in a company and don't guarantee assets not in hock.

And also, when the company goes bust make yourself scarce. Maybe move interstate.

As Terry said, to protect your assets you have to develop a plan. Maybe one structure for hocked up assets and keep them hocked up and another structure for non hocked assets. You can keep adding structures as you go then, if the previous structure comes out of hock.

 

[RPI]

Some guys I have helped through liquidation of some entities and personal bankruptcy have still been beneficiaries of trusts with significant assets and income. However, they would not be able to receive siginificant distributions until they come out of bankruptcy.

Global structure and separate. Land Tax issues often make it worthwhile having 1 trust per property anyway, (not NSW)

D

 

[Plan_Trader]

There is an issue that hasn't been discussed and that is taxation of trusts where you have a corporate beneficiary. The ATO has really made this hard and I am beginning to wonder if having two discretionary trusts with a corporate beneficiary is really now too complicated. The ATO have scrapped using unpaid present entitlements and you have to use registered loans and actually make payments. It is an absolute nightmare. The ruling is being reviewed by the Board of Taxation by July but I don't hold out much hope. I suspect there must some politics in play.
I want to unwind it all but how hard is that going to be?

 

[Terry_w]

There is an issue that hasn't been discussed and that is taxation of trusts where you have a corporate beneficiary. The ATO has really made this hard and I am beginning to wonder if having two discretionary trusts with a corporate beneficiary is really now too complicated. The ATO have scrapped using unpaid present entitlements and you have to use registered loans and actually make payments. It is an absolute nightmare. The ruling is being reviewed by the Board of Taxation by July but I don't hold out much hope. I suspect there must some politics in play.
I want to unwind it all but how hard is that going to be?

It is not the company being a beneficiary that is the problem but the borrowing by the individual from the company. An individual can only borrow if it is a legitimate loan and commercial interest rates must be charged depending on whether it is a secured or unsecured loan. If this interest isn't charged then it will be deemed a dividend to the individual who would then pay tax on it at their marginal rates.

But you are right that it is extremely complex. I haven't got the time or energy to spend trying to understand it either (if you did end up understanding it would just change anyway!).

However, to get to the stage where it would be more beneficial to borrow from your company rather than paying tax on the income would mean you would be earning some serious money, especially if there was a spouse involved and you were able to claim some of your expenses as a deduction. You probably wouldn't need that money and could just wait for it at some stage in the future when things change or your income drops.

 

[coastymike]

I don't think it is that big an issue to be honest.

So you can't pay an unpaid present entitlement. Well you first of all max out the individuals (which equals about $150k to get to a rate equal to the company tax rate of 30%). So for husband and wife that is $300k.

Then you distribute to a corporate beneficiary any excess including the cash and hold in investments paying 30% tax rate.

As long as the shares are held by a trust the company then distributes those funds along with the franking credit during times when the individuals have a lower marginal rate.

It's tax planning. Sure it has become more complex but so have smartphones. Doesn't mean you go back to your old Nokia.

Sounds like the "back in my day we had to walk 500 miles in barefeet with 10 metres high snow just to get back to school". Times change. Keep up to date and make sure accountant is as well. Change tack accordingly. It's like a Sydney to Hobart race. Always got to change tack.

 

[RPI]

I agree with Terry and Coasty

i think that UPE is the ATO's biggest bugbear at present and that ties in with Div7A.

Still a very valid strategy