Legal Tip 139: Hybrid Trusts and Asset Protection

Discussion in 'Legal Issues' started by Terry_w, 18th Jun, 2016.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Hybrid Trusts and Asset Protection


    With trusts there are 2 levels of asset protection to consider:

    1. Protection if the trustee is sued

    2. Protection if one or more beneficiaries are sued


    The trustee can be sued as owner of the property. This may relate to a negligence or a contractual dispute. Having a $2 limited liability company as trustee will likely prevent the beneficiaries from being sued in most cases.


    Where a beneficiary is sued there are 2 aspects to consider:

    a) Unit holders, and

    b) Discretionary objects


    A hybrid trust is a trust which has both discretionary aspects and fixed aspects. There are many ways a hybrid can be set up but one version is a unit trust in which the trustee can redeem units and when this happens it will convert into a discretionary trust. Another version is where capital can only be distributed to unit holders with the income being distributed to any beneficiary at the trustee’s discretion.

    A unit is ‘property’ that can fall into the hands of the trustee in bankruptcy if the unit holder becomes bankrupt. If this happens the creditors will get into the shoes of the unit holders and they will be entitled to all the income and capital that the original unit holder would have been entitled to. They would also have the powers of the unit holders – which will depend on the terms of the trust deed and/or trust law.

    Depending on the trust set up, the trustee in bankruptcy could possibly do the following:

    - cause the trustee to sell trust assets,

    - take control of the trustee position by using their powers to appoint a new trustee,

    - receive income,

    - receive capital

    - wind up the trust

    but whether they can do any of this will depend on how the trust is set up.


    Where the trust deed purports to cancel units on the bankruptcy of a unit holder this term would be void because of s 302B of the Bankruptcy Act 1966. Similar if the clause would allow the trustee to divert income and/or capital to others other than the unit holder. See BANKRUPTCY ACT 1966 - SECT 302B Certain provisions in trust deeds void


    Discretionary beneficiaries of a trust generally have no rights other than for the trustee to properly administer the trust. If a discretionary beneficiary were to become bankrupt the trustee would simply no distribute any income or capital to this person until they are released from bankruptcy.
     
  2. RichardN

    RichardN Member

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    Hi Terry, I have been reading all articles and they are very informative. Thanks for sharing valuable information.
    Terry and expert forum members, appreciate if you help with my query here.

    I am planning to set up a Discretionary trust, and comfortable with the rules like negative gearing lock in trust as I am planning to build property portfolio with positive cash flow and strategy is gain financial freedom through real estate investments in next 10 -15 years. After doing all the homework, I come to know that with Discretionary trust, we end up paying high land tax as normal tax-free thresholds don’t apply. After reading some articles, I understand that land tax issue can be dealt with Unit trust, but I am not sure if I can easily transfer units from Wife’s name to my kids when they are 18 years with attracting any taxes like CGT, stamp duty, etc.
    I am curious to know if it’s easy to transfer Units to any of the trust beneficiaries if any family circumstances changes (income to beneficiaries in trust) without attracting any taxes.

    And also appreciate if you can share any good accountant (knows in and out of trusts related to RE investment) who can setup the trust for me.

    Many thanks,
     
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    In NSW a unit trust doesn't get a separate land tax threshold. If the trust is a fixed trust then the individual thresholds of the unit holders apply.

    Transfer of units may be exempt in some situations but is a CGT event.

    Best to see a lawyer to set up a trust as it involves more than tax advice
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    Transfer of units in a land rich unit trust can still be dutiable in some cases eg QLD !!!. Value of the land, state and other issues impact. Transfer of units is often NOT recommended depending on the deed. Redemption and reissue may also be considered but there can be catches to this and legal advice is a absolute must. The value at which these changes occur ordinarily must be based on present market value and this determines the CGT outcomes.

    Land tax is more complex and depends on state and if the trust needs to be a fixed unit trust (NSW for example). Its also limited in appeal as it doesnt access further thershold. It access same threshold the unitholder would have in their own rights.

    Normally change of unitholders is a CGT event. A unit confers rights and when these rights change thats a CGT event of some form. Except death ! Many issues affect this.
     
  5. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    if the trust is land rich i would think duty would apply in all states on the transfer of units. It would in NSW.
     
  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

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    If ...its a transfer. A redemption and new issue of units in NSW that isnt in a land rich trust may be different :)
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    It is different!
     
  8. RichardN

    RichardN Member

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    Thank you Terry and Paul. Appreciate your reply.

    Also I had a chat with Paul on phone, he was very helpful.

    I have decided not to setup trust based on my situation as there is no much benefit.
     
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