Remote asset protection strategy & parent support?

There is a wealth of information here and I have looked for answers but come up short. Apologies if my question below has been answered already - a link would be appreciated tho
Scenario: Adult child (Bob) just started full-time job and wants to buy a house in new work location. Parents would like to chip in.
Proposal: Loan funds from Family Trust, structure loan as reverse mortgage (no payments needed), and document a second charge on property.
Overtime: Loan compounds in value to represent a large portion of home value. If the value is greater than property equity then Bob owns zero equity and nothing is there for unsecured creditors.
Outcome 1: Bob lives a reckless life and gets sued or becomes bankrupt or divorced. Documented loan and second charge over property enables the property (or at least the loan value equivalent $) to be protected from claimants. (Maybe the existence of a second charge on title docs is also a deterrent for an aggressive legal claim...)
Outcome 2: Bob lives a sensible life but wants to sell the property. Family Trust makes a "distribution" to Bob by way of loan forgiveness thereby removing the second charge.
(I suppose the loan could also be with any parent; at least the sensible, stable and low-risk parent - not me)?
I wonder if this is a good strategy to effectively get 2-for-1; asset protection and parental support? (asset protection of the gift; and overtime, asset protection of the property for Bob)
Then again; maybe there is some tax liability to the Trust for the compounding reverse mortgage...

 

Is Div 7a a concern here?

 

PS. I'm not a new member just a recycled member!

 

what about the tax consequences? The trust would be getting interest which is compounding and this wouldn't be deductible to the son if it is living in the property.

 

That I don't know. How do banks account for reverse mortgages anyway...
Maybe it is an unrealised gain until repayment (much like a rising share price until sale triggers capital gains)

 

And if the loan is 'forgiven' would it be a deemed distribution? And the whole distribution is taxable to Bob in one tax year?

 

Forgiven perhaps in the sense that you agree to remove the second charge (allowing property sale unencumbered) and exchange the underlying security to an unsecured personal debt.

Or more to the point, assume it was just a private parent loan (with a release clause in will perhaps). The second charge can just be removed by agreement - right. Evidence of the loan only required when needed to exercise security rights - then at least perhaps some legal options to sort out.

Just spitballing...

 

Div 7A can only arise if there is a company involved - other than as trustee.

 

The first issue is why there is a borrowing ? The more non arms length the more likley its going to be seen as a sham.

 

I don't believe a properly documented loan from a parent or family trust is any issue.

 

There is if there isnt a basis for the loan. The documentation doesnt evidence a loan. Its just terms. The true test is review of the settlement of the borrowing or advance and how it was used and maintained. If the parents assist the purchase thats fine. If the loan is then not serviced it becomes statute barred and courts/ATO etc could consider it a sham. Sure it was settled but then it isnt repaid. In fact its inflated as no payments were made. Its a sham loan. Each loan must be maintained as arms length if any reliance on the mortgage for asset protection is later needed. Debt forgiveness also has tax consequences and is a likely assessable trust benefit for example. I'm sure the parents (or trust) would not appreciate paying tax on the interest that is their income that they never receive. They earn it as it is accrued...Not when its paid. Generally speaking loans make a poor asset protection strategy vs other remedies.

The issue for the parents is also that of their incomes and assets. Human Services would count their loan as a asset and subject to deeming and/or gifting.

Based on recent property value growth history it would likely take a significant loan to erode equity that is developed through the unpaid loan in any event. eg Interest is 3% of say a 25%n borrowing where growth of 20% of the whole sum. You cant catch up.

This is a common thought of many people. Its a indication of considering just a small part of a bigger issue. There is no strategy here. Nearly all tax schemes seek to use loans to defer income. Courts, liquidators and the like are all wary of apparent debts which must be proven before they are treated as real.

 

For a loan to exist there has to be an advancement of money or assignment of debt etc.
The loan doesn't need to be arm's length and it could be on an interest free basis. If there are no payments for 6 years or so and no acknowledgement of debt the loan could become unenforceable at law. But that doesn't mean there is no loan or debt, there still is and it could still be repaid and potentially reduce the assets of the marriage/relationship.

Keep in mind a loan is not a mortgage and a mortgage is not a loan.

Only lawyers should be advising on this sort of thing.

 

However banks, and let's face it the entire USD$27 trillion debt securities market, clearly take a lot of comfort from securities law to protect their assets. So why not be the bank.

 

100%, and good point to close on. Good to chew it over tho.

 

Its no where near the same thing. They're doing it for a profit and at arms length. Not as a dubious asset protection strategy for your close relatives.

So you're going to face a lot of issues. I see this sort of thing tried all the time in the family court. Usually not done properly and just ends up making things worse if anything.

 

Properly documented loans, especially secured ones are a very good strategy in family law asset protection in my opinion.