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Trust set-up: Building wealth and asset protection

Discussion in 'Investing Strategies' started by SSInvest, 15th Apr, 2020.

  1. SSInvest

    SSInvest New Member

    Joined:
    14th Apr, 2020
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    Location:
    Australia
    Hello there,

    I've recently joined InvestChat and am looking for some advice regarding an investment strategy that involves setting up a family trust (for myself and two brothers) and possibly a 'Bucket Company' as a fourth beneficiary (for distribution and further investment purposes - all three of us as individuals are currently above the 30% company tax bracket and will be for the foreseeable future). There's a few different parts to this and I'll have a few different questions around it so any help would be greatly appreciated! Also important to note the family trust is for asset protection purposes (two of us are directors of companies).

    Basically we are looking for the most tax effective way to invest a large initial investment (cash to buy shares) and also hold 1 x residential property (own debt free) and 1 x commercial property (own debt free). With regard to the shares we are particularly interested in income producing companies (ie Thornhill approach - dividends from LIC's, ETF's) however being quite a while off retirement we would want to reinvest all dividends for now. From what I have already read on here that can be achieved through a family trust (asset protection purposes) and the bucket company (distribution purposes and reinvesting dividends). We will probably look to make wives/children (18+) beneficiaries in the future for tax purposes.

    The strategy would go something like this:
    (for the purpose of this example I'll use approximate values)

    TRUST (initial investment)
    - Residential property (1mil) debt free ($40k rent p.a gross)
    - Commercial property (500k) debt free (30k rent p.a net)
    - LICs, ETFs, Individual stocks (1mil)

    BUCKET COMPANY
    - Receives trust distributions (dividends from shares, rent from property)
    - Uses income to invest in income producing assets (eg LICs, ETFs)

    As stated, the purpose is for asset protection and to build a portfolio over time with an income stream (or three) in retirement.

    The main questions are:

    1. Would this structure suit our asset protection needs? Would a corporate instead of individual trustee extend this protection?

    2. Would there be any benefit in creating three separate trusts (one for each of us)?

    3. Should the inital transfer ($1 million cash, 2 x properties) into the trust be in the form of a gift or a loan?

    4. Is the bucket company structure (assuming LLC?) sufficient for asset protection? This will obviously grow in value every year, even with the 30% tax payable.

    5. Suggestions around the beneficiaries set up would be appreciated - what is the risk of adding extra beneficiaries?

    6. While we are all working would a DSSP ( ie AFIC & WHF) be beneficial to build the portfolio over a DRP? (reduces trust distribution while still increasing holdings)

    Thanks for your time and consideration, apologies for the long-winded and multi-faceted post!
     
    twisted strategies likes this.
  2. Terryw

    Terryw Well-Known Member

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    1. what are you wanting to protect against?
    2. Yes - think death
    3. That is something you should get legal advice on.
    4. Depends on how the bucket is structured and what you are wanting protection against. If you own the shares and go bankrupt the company and its assets fall into the hands of creditors for example.
    5. Have the deed drafted with a wide class of beneficiaries so that you will not need to add beneficiaries in most circumstances. Also the trustee should have the power to add beneficiaries.
    6. It could but this is something a financial planner would need to advise you on.

    Generally you wouldn't want to have shares in the same trust as a property either see
    Legal Tip 269: 4 Reasons not to hold shares in the same Trust as Property Legal Tip 269: 4 Reasons not to hold shares in the same Trust as Property
     
    twisted strategies likes this.
  3. SSInvest

    SSInvest New Member

    Joined:
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    Location:
    Australia
    Hi Terryw,

    Thanks for getting back to us so quickly.

    1. Basically we’re wanting to protect all assets and shares against litigation - to do with two brothers in their director roles and also all 3 of us personally.

    2. We were hoping to keep it as one trust and get something written in that could distribute portions upon a death. Can this be done?

    3. Cheers we will look for some professional advice around this.

    4. What would be a good way to structure the bucket company or bucket ‘companies’ if need be, in order to protect against both personal litigation and litigation against the company directors? Can this be done by creating another bucket company to add another barrier so to speak? Ie. the first company can be sued but they can’t touch the second company taking the trust distributions.

    5. We would likely be looking at setting up the 3 of us as the trustees and most likely wives and children as beneficiaries. Are their any specific risks to having more beneficeries? Do ALL beneficeries have a claim to the trust at any time?

    6. Cheers. We will look into this with a financial planner. That’s a good point to do with property and shares in the same
    trust. The commercial tenant is our own company so no worries there, the unknown residential tenant could pose a risk.
    If more then one trust is required, can money easily be moved around amongst them? Ie. the rent from the commercial and residential property being used to accumulate shares in the other.

    Thanks for your help.
     
  4. Terryw

    Terryw Well-Known Member

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    1. You need to consider the bankruptcy laws in that case, especially the claw back provisions in the bankruptcy act and even state legislation such as s37A conveyancing act nsw. Also trust law, especially resulting trusts

    2. You could word the deed so that on the death of a particular person the trust would vest, or 1/3 of the corpus vests. But you need to consider how this weakens asset protection.

    3. Seek a lawyer

    4. You should get specific legal advice. Grandpa could be the best person to hold the shares, or it could be the trustee of another trust. Adding another company to own the shares in the bucket company is possible but who would own the shares in this company? A bucket company would never be sued if it does nothing but hold distributed income, but shareholders can be sued.

    5. 3 people as trustees may or may not be a good idea. It is cumbersome and trustees are personally liable for trust debts. No beneficiary would have any entitlement to trust assets, only an expectation to be considered by the trustee when they distribute income and capital

    6. There are many tax and legal reasons why you wouldn’t want the same trust to hold shares as the one that holds property, even where related parties are involved. Trusts are separate tax entities so money can’t be easily moved around. But if one trust is a beneficiary of the other income can be distributed from one to the other, but again many legal and tax issues to consider.
     
  5. SSInvest

    SSInvest New Member

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    1. Perfect thanks for that, we’ll look into it.

    2. I see, so the entire trust would vest opening up the possibility of litigation. If it were seperate trusts for shares and properties, I assume the share trust could distribute his portion of the shares in cash (possibly over a few different years for tax purposes) easily enough but the issue would lie with the properties trust. This would need to vest.

    3. Will do - from what you’ve told me a decent lawyer specialising in trust law and a financial planner would be the two to seek advice from. Thanks.

    4. Will do. Unfortunately there’s no one left above us now. That’s what we were thinking with the company, basically the bucket company acting as the 4th beneficiary won’t be sued if it’s just receiving and reinvesting distributed funds from the trust, but if any of us are directors of that bucket company it can be open to litigation?
    Can the director of the bucket company be another entity, as in just a company itself or it has to be a person? This is what I was thinking with the extra bucket company. We could then be directors of the company that does nothing. Apologies if that’s a stupid question, I am not very familiar with structure.

    5. Ok that’s something else to look into. As its an inheritance we were thinking how it could be set up so we are all equal in it. Is there another way to do this? Having one trustee but the other two with the same amount of access/power.
    Perfect that’s what I was hoping for, mostly just trying to cover most scenarios. If there was a divorce so to speak and access to the trust around that.

    6. Ok no worries, we’ll definrely be needing to get some more advice around this then.

    Thanks for your replies, we’ve definitely got a Better idea around what we need now.
     
  6. Terryw

    Terryw Well-Known Member

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    2. You certainly would not want the trust to vest on the possibility of litigation. Not sure what you mean but this paragraph but you have probably misunderstood something.


    3. You would need a lawyer, but financial planners can only give financial advice – not advice about structuring or trusts, but what does to invest in, superannuation, insurance etc

    4. Being a director won’t expose a bucket company to litigation if the director is sue. But being a shareholder will. If you are a shareholder and hold shares and become bankrupt creditors will get those shares.

    5. Discretionary trusts are not good vehicles for different family members as who ever controls the trust can benefit themselves or certain family members. E.g. 2 appointors could gang up on the 3rd and exclude him/her from benefitting – subject to the deed. One of the 3 dying could mean their family misses out. One of the 3 may not want to mortgage property, or may want to sell when the others don’t etc. A far better solution would be to have 3 separate trusts with different trustees who might then join forces to invest – shares in separate trusts but one property could be owned by each trustee as tenants in common = 1/3 per trust
     
  7. SSInvest

    SSInvest New Member

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    Location:
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    Thanks for all your help, this definitely gives us a good starting point to move forward.