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Do trusts really provide asset protection?

Discussion in 'Accounting & Tax' started by Moist, 9th Dec, 2015.

  1. Moist

    Moist Well-Known Member

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    I'm re-evaluating my understanding and beliefs that discretionary trusts provide asset protection especially from creditors if things go bad.

    If lenders always ask for a personal guarantee from you as an individual, how does owning and having a mortgage in a trust provide protection against creditors? for instance in the situation where you lost your job and started defaulting. They'll just come after you as an individual as you've given a personal guarantee and would be liable.

    I suppose it would work better with a very large portfolio where if you owned everything personally, you would stand to lose a lot if you started defaulting and provided a personal guarantee to a lender.
     
  2. wogitalia

    wogitalia Well-Known Member

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    A trust itself provides only very limited protection but if you have a corporate trustee (as nearly every trust should, imo) then you essentially have a company between yourself and the creditors, the same protection that a company itself offers with the tax advantages of a trust.

    If you're giving personal guarantees on everything nothing is going to protect you though, I'd argue that giving personal guarantees is the problem in this scenario and not the investment vehicle that is being used.

    I mean what you're saying is no different to a parent saying that their kids buying a house in their own names offers no protection if they go guarantor on the loan because the bank will come after them if their kids default.
     
  3. Moist

    Moist Well-Known Member

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    Yes. And when would a lender not ask for a personal guarantee?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes an interest in a well drafted discretionary trust provides the highest asset protection in bankruptcy of a beneficiary. The only comparable is an interest in superannuation.

    But it is not just the trust that is important, but how it is set up and transacted. These sorts of things will reduce the effectiveness:
    - contracting and/or nominee
    - paying the deposit for the purchase from personal funds
    - treating the trust assets as your own
    - transferring money to the trust and not documenting it.
    - transferring assets to the trust
    etc

    I have seen some dreadful mistakes where trusts have been set up using online deeds where people seen to think the mere 'having' of a trust is enough.

    Personal guarantees means you are personally liable for the debts of the trustee for the transaction that you guarantee. Of course this will mean you are exposing yourself and your personal assets. But if you give a bank a personal guarantee for the trustee's loan then you are only liable for that loan if the trustee doesn't pay.

    If you went bankrupt for other reason the trust assets cannot be attacked before of this guarantee (they may be attacked for other reasons).
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    lenders would always ask for a personal guarantee where a company is involved.
     
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  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Use of a trust to avoid a mortgage is not asset protection. Its a fanciful dream. You aren't going to get far arguing the trustee doesn't owe a bank the loan proceeds because its a trust. One of the reasons the bank seeks guarantee/s but not the sole reason.

    Asset protection and loan liability are different concepts. Example - You don't "own" discretionary trust assets in many cases (not all). If you become bankrupt the trust is a distinct matter and may not be a personal interest. However you would need to ensure that control is safeguarded so if you were banned from being a Director for example the question of who controls and manages the trust etc is not at risk. That's asset protection.