Legal Tip 170: Proving that a Property is held in Trust

Proving that a Property is held in Trust

When a trustee purchases a property the trust is not recorded on title. In fact there is legislation that prohibits the recording of the trust on title – in NSW see Section 82(1) of the Real Property Act 1900 (NSW) REAL PROPERTY ACT 1900 - SECT 82 No notice of trusts to be recorded in Register . Other states have similar legislation.


Therefore, others will not necessary know that a property owned by the person is owned as trustee for the trust.
(remember that a trust is not an entity or legal person, but just a relationship)


Example

Bart Simpson as Trustee of the XYZ trust purchases 123 Smith St, Smithville NSW.

The title will show Bart Simpson as the owner. Nothing mentioning the trust will be found.



So how do third parties know that Bart Simpson is acting as trustee and owns the property in its capacity as trustee? They generally won’t and they don’t need to for the most part. There is no requirement for the trust relationship to be disclosed.


However this can become relevant because if a person that acts as trustee were to become bankrupt as the assets they own as trustee will not be available to creditors – s116(2)(a) Bankruptcy Act

See Legal Tip 46: Is property held by a trustee safe if trustee becomes bankrupt? Legal Tip 46: Is property held by a trustee safe if trustee becomes bankrupt?

It is also relevant on the death of the trustee and the assets held on trust do not form part of the estate of het deceased.

Legal Tip 58: Death of a trustee Legal Tip 58: Death of a trustee


In these situations it may be necessary for the trustee , or for others, to determine whether the assets where held as trustee or not.


There are 3 main ways to do this:

a) The Tax Return of the Trust;

b) Trustee resolutions; and

c) Payment for the property.


A forth way may also be useful:

d) The purchase contract.

The trust tax return and financial statements will reflect that the property is held in the trust. The rental income and expenses will be recorded in the trust’s tax return and not in the company tax return. The property itself will also be listed as an asset of the trust and any loan as a debt of the trust.


What happens if tax returns haven’t been done? This might be because the first year hasn’t passed or it might be because the trustee or its directors are slack – and thus weakening asset protection.


When there are no tax returns or financials evidence could be supplied as to who paid for the property, or more specifically where the funds used to pay for the property came from. In most cases there will be a bank loan for the majority of the funds. If the loan has been made to the trustee as trustee of the trust then this is good evidence.


But there is also the deposit. Where the money comes from the trust bank account this is additional good evidence. However many trustees do not seek advice or choose to ignore advice and pay the deposits from their personal accounts – and later treat this as a loan (often without a written agreement!). Doing this significantly weakens asset protection and should be avoided.


The trustee should also be leaving written evidence – trustee resolutions which state that they bought the relevant asst in their capacity as trustee.


Contracts are another way to show the trust. However, a trust is not a legal entity and it cannot enter contracts. It is the trustee that enters the contract. There is no requirement for the trustee to record the trust on the contract, but sometimes the trust is mentioned by inserting words such as “… as trustee for the XXX trust”. Often also an ABN is recorded on the contract and this ABN should be the trust ABN if the trustee is acting as trustee.


However where a contract is silent with no mention of a trust, this does not necessarily mean that the person entering the contract is doing so in their personal capacity.


The trustee should seek legal advice before entering any contract and this advice should include what names should be recorded on the contract.

 

In NSW at least, one possible way to show that a property is owned by a trustee on behalf of the trust is by way of a Registrar Generals Caveat which can be registered on a title. The trust deed is filmed with the caveat document - See Registrar General's Caveat - Registrar General's Guidelines

 

Isnt this why its usually recommended to use a two dollar company as trustee?

 

There is not one way to demonstrate a property is held on trust. And its also possible to have a property contract that says trust, a caveat the says trust and a tax return that says trust and yet its not on trust. So easy to do. All signs appear to show a trust but its not on trust.

Apparent purchaser (eg payment), implied trusts, constructive trusts, .......Many forms of trust too. We too often think a trust means there is a deed. Doesnt have to be one.

Simple way for a trust asset to no longer be held on trust and contradict all evidence. Merger.
Unit trust. Trustee is Fred. Units holders and Fred and Mary. Mary transfers units to Fred. Merger. One beneficiary who is also the trustee. Legal and beneficial rights have merged according to common law. Not held on trust any more. Fred dies....What his will say ? It leave his units in the trust to his wife but all other worldly assets to his best mate. Talk about asset protection risks

All reasons why its so important to deal with legal and tax practitioners who know trusts when dealing with trusts.

And issues surrounding succession and appointors etc...Lost deeds etc....Oh crap just who controls the trust...what trust ? What deed ? Looks like a company owns the property.

 

No.

The main reason is to limit liability. But a separate company that only acts as trustee won't have any other assets so it would generally be obvious.

 

Trustee generally has a right of indemnity to trust assets. So the $2 company is not its limited liability

 

What do you mean?

 

Having a $2 company as trustee at least avoids issues such as trustee going bankrupt from other operations, and fewer documents to untangle?

 

Yes. A person acting as trustee that goes bankrupt may find the trustee in bankruptcy has taken the property that was owned as trustee and then there could be hassles and costs in fighting to get it back.

With a company as trustee the legal ownership is with the company so an individual going bankrupt will not immediately effect the title of properties owned by the trust.

 

The trust assets will be exposed to satisfy any judgment the company gets while acting as trustee, but the individuals assets won't be exposes if the trustee is sued - directly anyway.

 

If the individuals lent to the trustee they can be exposed however (trustee cant repay loan). Sometimes the related lenders may take security and rank alongside others. Thats one of the dangers in a related loan to a trust which legal advisers address. Asset protection can expose risk in other ways. Its not just the asset that must be protected but the associated debt repayment as well.

Again so important that lawyers address trust structures (which you know but I repeat for benefit of others)