Trusts for asset protection.

In terms of asset protection, the general recommendation is you have the assets owned by a trust. The trustee for the trust is limited liability company. So if I want to transfer the trust control I just transfer the shares in the company. The directors of the company are in-effect the trustee.

Some people would claim that those assets are now protected if I am personally sued. However if I get sued and have to pay, surely my ownership in the company is a personal asset.

Obviously I could get around that by giving my parents a third share or something along those lines, etc.

Is my thinking correct?

 

Not quite.

Assuming you are talking about discretionary trusts then the assets of the trust belong to no individual (until a trustee has made a resolution to distribute). This means that trust assets do not fall under the definition of property in the bankruptcy act and are not available to creditors - generally.

There are a lot of ways in which trust assets could be available to creditors, such as:
- if the asset was transferred from you to the trust (or others) prior to bankruptcy
- if you have lent money to the trust
- if you have performed work for the trust and not been paid, or underpaid
etc

Control of the day to day running of the trust is with the trustee, but it is usually the appointor who has the real control because they can sack the trustee.

So, to pass on control of your trust you must make sure the trust deed contains provisions for back up appointors if you are appointor and were to die.

You must also consider the trustee. It is usually the shareholders of a company that elect the director of the company and it is the director that controls the company. So if you personally held shares in the company and then you went bankrupt, these shares, as your property, would fall into the hands of the trustee in bankruptcy. He would then control the trust. And he would likely make a distribution of the trust assets to yourself (ie him) and use this money to satisfy your debts owning (and his massive fees). He might be able to do this before you as appointor can sack the trustee company.

 

Also, if you were the sole shareholder of the trustee and the sole appointor someone attacking the trust may argue that you are the trust as you effectively control it yourself and it is as good as certain you could benefit from the assets of the trust. This is the Richstar line of argument, but it may not work in all cases, see public trustee v smith 2008 NSWSC.

 

Hi Terry.

Thanks for the in-depth response. The last paragraph of your first reply really covered my concerns. I'm considering buying my second IP next year and am trying to work out whether a trust is the way to do it (certainly seems so at the moment).

My intention for the company that holds the trust would be to have 3 equal shares split between my parents and myself. They would update their wills so in the event of their death those shares would come to me. In event of my death those shares would go to them.

In the event of my own personal bankruptcy, even if I had to forfeit that one-third share ownership, my parents would still have contol of the company.

The intention would be for a hybrid trust. At the moment I want to take advantage of negative gearing so I require the income units to be paid to myself.

 

Hi Samaka,

You could have another trust with the shares of the company owned by that trust. if only owing shares then you could have an individual as trustee.

Watch out if your parents are receiving centrelink benefits such as the pension. Assets of the trust may be taken as their own personal assets if they have a role in the trust.

Also, watch out for hybrid trusts. There is no asset protection because the units are property. You could have the units held by a discretionary but then no negative gearing benefits.

Also have to consider Land Tax - especially in NSW. No land tax threshold if discretionary trust, but if a fixed trust the unit holders could still qualify for the tax free threshold.