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Legal Tip 61: Multiple Trusts as an Asset Protection Strategy?

Discussion in 'Legal Issues' started by Terry_w, 18th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Multiple Trusts as an Asset Protection Strategy?

    A while back I mentioned that if the trustee of a trust is sued the assets of the trust can be used to satisfy the liability of the trustee if that debt relates to the trustee’s role as trustee.

    This means where a $2 company is trustee of a discretionary trust and a tenant slips and falls and sues the owner of the property, the landlord, they will sue the company and the company will use the trust assets to satisfy the debt.

    So if the trustee owns 4 properties within the one trust and the tenant of one property slips and breaks their back the equity in the other 3 properties will potentially be at risk.

    However if there were separate trusts the assets of each trust would be segregated from the other trust - generally, as there are always exceptions.

    So one other way to strengthen asset protection is to use multiple entities. Carry different eggs in different baskets so that if you drop one basket you don’t break all your eggs.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    How do banks deal with that ?

    Lets assume XYZ Pty Ltd ATF for Trust 1, Trust 2, Trust 3 and Trust 4.

    Will bank lend to XYZ using security of Trust 1 for Trust 3 ? My understanding is they are only going to lend to XYZ P/L if Trust 1 is the buyer since Trust 1 land is the security. They don't want to be involved in a potential claim between beneficiaries of #1 and #3 if it occurs.

    The issue of banks only lending to the trustee is getting tougher. As someone who see s the legal, trust and lending issues whats the position ??
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The ideal would be to try all trusts as separate and not use the security owned by one trustee for a loan to another trustee - that would be cross collateralising anyway.

    In theory one trust could allow its security to be used by another trust - but I have never seen it happen and don't know how the banks would treat it.