Join Australia's most dynamic and respected property investment community

Distributions from family trust to non loan party adults

Discussion in 'Property Finance' started by Marty McDonald, 29th Jan, 2016.

  1. Marty McDonald

    Marty McDonald Mortgage broker

    Joined:
    22nd Jun, 2015
    Posts:
    228
    Location:
    Sydney North Shore and Norther beaches
    Hey ho fellow brokers,

    This one has me stumped. Self employed clients with business run through a discretionary family trust. The trustee is a company with sole director and shareholder the husband. The trustee distributes net business profit to the beneficiaries who are the husband and wife plus a couple of adult family members not currently working and who are not a party to the proposed loans.

    Now the issue is all the lenders I have spoken with so far (CBA, ANZ, Macq, AMP & Suncorp) as expected will only consider the distributions to the husband and wife even though the husband as sole director of the trustee gets to decide where distributions get paid to. Its one of those things isn't it? I can see both sides of the argument here.

    Any of you legends know if any lender will consider the full business profits ie ignore the fact that the past distributions weren't 100% paid to the husband and wife ??
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Its like paying staff through a company - still a business expense so I think all lenders will go on the previous 2 year history and not take payments to others into account as income of the trust or family involved.
     
  3. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    641
    Location:
    Sydney
    Husband and wife are sole directors and provided the other adults are not shareholders of the company (which I'm assuming they are not) then Homeloans and Macquarie will take it.

    You will need to ascertain a letter from their accountant stating that the payment to the beneficiary is not reoccurring next financial year.

    The argument here is that your customers are directors and shareholders of the company and its at their discretion where they distribute the funds.

    Can I ask who in Macquarie told you that you can't do it because I have done 2 in the past with them?

    Also we are talking 80% LVR yes?
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,095
    Location:
    Melbourne, Nationwide
    Hey Marty, that is a tricky one. The lenders I've spoken to about this sort of thing tend to base future distribution projections on what's happened in the past.

    I don't have a solid answer, but I'd be asking a non-conforming lender like Liberty or Pepper.
     
  5. Marty McDonald

    Marty McDonald Mortgage broker

    Joined:
    22nd Jun, 2015
    Posts:
    228
    Location:
    Sydney North Shore and Norther beaches
    I spoke to my Macq BDM who said they used to do it (with the letter as you mentioned) but have now decided they wont allow. 80% yes.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    But how could an accountant provide such a letter?
     
  7. Marty McDonald

    Marty McDonald Mortgage broker

    Joined:
    22nd Jun, 2015
    Posts:
    228
    Location:
    Sydney North Shore and Norther beaches
    I know like the accountant signing off on income without having prepared the latest years figures. They cant really but they often do.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Yep, probably there will be one out there that will write such a letter. But how will the accountant know what the trustee is going to do in advance.

    If the trustee decides before the end of the financial year then they have acted with improper purpose and this has all sorts of asset protection complications and tax consequences. Any of the potential beneficiaries of the trust could then sue the trustee for not properly acting within their powers. Distributions could be reversed with subsequent tax consequences. It could be a right mess.

    It would be silly for a lender to ask for such a letter as it would be essentially meaningless from their angle as well.
     
    York likes this.
  9. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    641
    Location:
    Sydney
    An example of what the Accountant may say going off previous letters ascertained from the accountant, is that they confirm that the distributions to ABC parties were purely discretionary for that year only and that further distributions are at the discretion of the Trustee.

    The accountant is saying we don't believe (based on what the client has confirmed) there will be future payments to that beneficiary or any other beneficiary which is why most lenders are not willing to accept the income.

    The argument however is that if the directors are on the loan and only shareholders then its at their discretionary where they want to distribute the income.

    If the beneficiary is also a shareholder then this makes the argument a whole lot weaker.
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Such a letter would be dangerous from a legal point of view potentially. But if the accountant is making the statement and not the trustee or directors then it would be less of an issue but still something a beneficiary could use to attack the trustee.
     
  11. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    641
    Location:
    Sydney
    Im not a lawyer so I can't comment on the legalities of the letter but it's something lenders have asked for to be provided specifically by the Accountants and something the Accountants have always been willing to supply. I personally can't see it being an issue - you are the director, you and are shareholder and you decide to pay a beneficiary one financial year. You then decide not to pay them next financial year. Again I'm not a solicitor and stating what lenders may request in these types of scenarios.
     
  12. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,757
    Location:
    Perth WA
    How can a beneficiary attack a trustee Terry? Distributions are not a right, nor is there any promise that they'll recur. What rights do they have?

    May be time for a new legal tip ;)
     
  13. York

    York Finance Broker Business Member

    Joined:
    24th Jun, 2015
    Posts:
    1,621
    Location:
    Sydney
    Not necessarily from a 'beneficiaries rights' point of view. I think Terry is referring to the beneficiaries attacking trustee based on 'improper purpose' of the trust.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    The trustee has duties to properly exercise their powers and one of these duties is to properly consider all beneficiaries. If one of more beneficiaries can show that they were not considered by the trustee when she/he/it was deciding who to distribute to then the trustee has not properly exercised their powers.

    Where there is a history of distribution and that changes this can become more of an issue.

    While everyone is all friendly these challenges are generally not made, but where there are disputes, especially family law disputes this is when the problems can arise. An ex-spouse that is now out of the family can then go through all the distributions (and beneficiaries can get hold of trust financials and documents) and then challenge them.

    So these letters are potentially dangerous and any broker should cover themselves by saying, in writing, that the trustee should seek legal advice on such a letter.
     
    Jess Peletier and York like this.
  15. Marty McDonald

    Marty McDonald Mortgage broker

    Joined:
    22nd Jun, 2015
    Posts:
    228
    Location:
    Sydney North Shore and Norther beaches
    The other issue with this is if uncle Jed is getting an annual distribution from the family trust of which he is just a beneficiary and he has 2 years history of this he can take it to the bank as income.

    So potentially CBA for example could lend to Jed then to the people who control the trust using the same income twice (if the bank was to make an exception and ignore the previous distributions to Jed which is what I want them to do :rolleyes:).
     
    Terry_w likes this.