Legal Tip 341: Pretend loans, Mortgages and Asset Protection

Discussion in 'Legal Issues' started by Terry_w, 2nd Jun, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Legal Tip 341: Pretend loans, Mortgages and Asset Protection

    One legitimate asset protection strategy is to give away someone and then borrow it back. If you later become bankrupt that asset is no longer your asset to take.

    To protect this asset even more, when it is borrowed back there will be a written loan agreement with some security for the loan such as a mortgage or charge over the asset or another asset. This makes the lender a secured lender who will take priority over other creditiors.

    That is a very simple summary of the gift and borrow back strategy.

    There are some lawyers out there that have apparently been advising people to make up loans and figures when they get into trouble. You just say, I owe $XX to the lender.

    This won’t work for 2 reasons

    a) A gift is only a gift if the asset changes hands

    If you tell someone that you gift them $300,000 this is a promise until the $300,000 hits their bank account. Title of the money hasn’t moved – even if a deed is written and signed.

    b) A loan is only a loan when it is drawn down or the asset taken possession of

    If two people sign a loan agreement to borrow $300,000 and the $300,000 is not transferred from the lender to the borrower then it is not a debt. It is like a large credit card facility. You only owe what you take.



    There is also a fraud aspect as well. When you pretend there is a loan when there isn’t it is fraud and a criminal offence. You are trying to gain a financial advantage by deception which carries a prison term of up to 5 years. I am no criminal lawyer but there are probably other charges that might apply as well.



    The buy and borrow back strategy is a legitimate strategy, but not when there is no gift actually transferred and not when there is nothing actually borrowed back. Pretending there is would amount to fraud.



    Beware as there are now accountants and financial planners promoting this sort of strategy without having the legal training, knowledge or insurance. At least with a lawyer you might have some recourse to their insurance if they have been negligent in advising this.
     
    Jaxon Avery and craigc like this.
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I imagine you had someone in mind when you wrote this ? Someone who says "I am a lawyer" but then isnt a lawyer or a law firm when flogging a concept at a seminar.

    I agree it is a growing industry to peddle hope for high fees. Its the modern day "tax scheme" without any proven benefits. Selling expensive things to wealthy people - Its exploitation. Its often as good as a Pete Evans light machine. Pity we dont have a TGA for advisers. And in these days of computer generated advice and paperwork its easier for a non-specialist to spurik areas of advice they lack expertise in. They can complete a checklist and it spits out paperwork that expert solicitors may draft with care and expertise.

    I could be an example. I have access to such strategies and documents for low cost from a few sources who are actually very competent legal practitioners and could easily start to promote that. I wont. IMO its legal work. The paperwork is just relex and toner. Its what goes into the advice, startegy etc that counts.
    I will refer people to a solicitor. I am bound by the NSW Legal Profession Uniform Law (NSW) and particularly s9 and s10

    LEGAL PROFESSION UNIFORM LAW (NSW) - SECT 10 Prohibition on engaging in legal practice by unqualified entities
    All fees these unqualified persons charge are a potential debt to those clients. We dont allow real estate agents to assist taxpayers with property tax. So an accountant of financial planner should not support and assist legal services. They should only refer.
     
    Jaxon Avery, craigc and Terry_w like this.

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