Trusts Again - do they protect your assets?

Do Trusts really protect your assets?? Had this discussion recently with a friend, and I am no expert and I do understand that Terry has plenty of threads regarding this. (not yet read them all)

However, I think many investors are under the illusion that if you purchase assets in a trust you are protecting your assets, however as a Director you can still be sued, you are still personally liable

Many spruikers such as D Boholt promote setting up a trust for each property (cha ching), this is overkill IMO and also will cost a fortune in accounting fees and just adding another layer of complexity.

So the only real way to protect your assets is if they are encumbered, in other words you have debt against an asset (bank loan).

I know this simple, but I thought this may be worth discussing further.

I wonder how many on this forum buy in a Trust??

 

I just have as we exhausted our land tax thresholds each. Plus will be directing some income into the trust and this will offset the losses made (apparently)

 

This should be in the legal section as trusts are nothing but a legal relationship.

Discretionary trusts provide asset protection if no beneficiary has any right to demand payment of income or capital from the trust. The beneficiaries only right is for the trust to be properly administered. So if a beneficiary were to become bankrupt the creditors will stand in their shoes as beneficiaries but they don't have any right to demand income or capital from the trust. Beneficiaries of discretionary trusts generally have no equitable interest in the property of the trust.

The strength of this will depend on the terms of the deed. Where there are default beneficiaries and a closed class trust the beneficiary may have something approaching to an interest in the trust.

If a company is sued generally the director's personal asset are not at risk. Liability for the company is limited to the company. But there are some instances where directors can be personally liable - such as allowing the company to breach OHS laws, tax laws, super laws, corporations act etc. In these situations if the director has personally held assets these will be at risk.

Boholt doesn't know much about trusts in my opinion. I don't think she is even lawyer.

 

Thanks Terry

That is the point though most operating a business' do have to give personal guarantees to their creditors this is pretty stock standard.

The only true way to protect your asset ie properties etc is to have them encumbered, so attacking the asset becomes a fruitless exercise.



MTR

 

I think you misunderstand. The only real way to protect 'your' assets, upon bankruptcy, is to have them in a appropriately set up discretionary trust.

If you do have to give personal guarantee you may still end up bankrupt, but the trust assets may be very safe.

Encumbering assets doesn't really help. A mortgage secures something, such as borrowing money, so the net effect is nil.

 

I'm no expert but giving a personal guarantee is totally different to the asset protection in a trust.

As a director if you give a personal guarantee you are promising that you will personally pay the creditor if the Trustee cannot. Your personal income and your personal assets (not trust assets) are at risk.

The other type of asset protection is where someone decides to sue you personally and then your personal assets are at risk. If they are in a trust then they are generally safe from that as they are not your personal assets.

I use Trusts mainly for land tax issues, distribution of income and asset protection.

 

Each trust is separate from the other. So you operate a business through a trust with a corporate trustee of which you are a director. You control multiple other properties in separate trusts and another business in another trust all of which have corporate trustees of which you are a director. PPOR in own name.

Business number one goes under, your personal guarantees takes you with it. PPOR in own name so creditors take it as well. They can't touch any of the other properties or the other business. If they make you personally bankrupt you will need a new director (I would usually advise a change of director as soon as the first goes down anyway).

You are personally bankrupt for 3 years. Profits from the other trusts can be distributed up to the current limit for bankrupts and the trustee can't touch it. You might even find a relative who will buy a car for you to drive car, pay the rent on a house for you to live in etc. The profits above the bankruptcy level need to be distributed to a relative so you may be keen to do so to that random generous relative who is helping you through this tough time.

 

I disagree that most have to give personal guarantees but even assuming that's correct, a limited personal guarantee to a creditor hardly means your entire fortune is at risk. besides, assuming someone is in a potentially high risk business why would they have lots of assets in their personal names?

also, you referred to investors buying assets using a trust structure, if you're simply investing in an asset through the trust and not say running a business then realistically what are the odds of either getting sued or giving out personal guarantees to all and sundry? shareholders don't need to give PGs, only directors do

cant say I agree with your friend.

 

Unless one is in a risky profession or running a high risk business, why bother holding assets in trusts (for asset protection purposes - trusts do have other advantages)?
Asset protection does sound good, but it's protection against what? As I understand it, mostly creditors. So unless you have a personal risk creditors might come after you, this seems overkill and costly.
Your profession and debt levels would determine your risk exposure.

Realistically, I don't see in what other situations would your assets be put at risk.

 

Any of us at any time could hit misfortune, for example, for some reason your TPPD insurance on car is void, say non payment, unknown double demerit fines, whatever, you have an accident and cause serious injury & or death to multiple people and property, if you have assets, I would say they are now at risk, however I am unsure that there is any way to really protect from this.

If you get dragged into litigation and the side pursuing you has deep pockets, they will probably uncover a way to get a result.

 

a result sure. potentially everything you own, which would be the case if it was all in your personal name, no. not if you're set up correctly.

I hold shares in active/riskier ventures in entirely separate structures to long term hand off investments. they do not crossover and litigation even by someone with deep pockets is not going to change that.

even within businesses you wouldn't group all assets in the same entity, eg the trading entity wouldn't be the one that holds say licences, trademarks etc.

it's vital to get this stuff right imo but like with most contracts, you often only see their worth if/when something goes wrong in a big way

 

btw yes, there are indeed ways to protect against that happening. not entirely sure how that is up for debate to be honest.

 

@wylie - would having the assets in a trust have changed anything though?

@dabbler - nothing is impossible, but getting dragged into litigation seems improbable if your profession/business is not high risk.

In the end it comes down to individual circumstances - simply saying business does not mean much: one could have say a building company, someone else could sell pottery. Obviously the risks profiles are completely different: realistically as a pottery seller, your risk of being dragged into a litigation is close to none.

I think when considering this stuff, it's important to keep things in perspective with regards to risks: nothing in life is risk free - absolutely nothing. You take a risk every time you sit behind the wheel, cross a road, take a plane, eat out, play sports, go for a swim, head out for drinks, ride your bike etc. Then there are pretty much endless potential risks to your health from various diseases and body malfunctions.
Something might happen from doing anything and one has to weigh the risk in doing the activity. For most, driving your car to go where you need to is an acceptable risk for instance.

So IMO, one has to weigh the risks of your assets being attacked and it looks like to me as long as you are not in a risky profession or conduct a high risk business, your assets are rather well protected. I would bet there is a much higher chance you'll die in a road accident than your assets be taken away from you.

Only my opinion.

 

Trusts can be attacked in death if the deceased had any connection to NSW. I mean trusts set up during their life time here. NSW has laws which allow assets that don't form part of the estate to be taken as part of the estate, if the assets of the estate are not enough to satisfy the family provision claims of an eligible person of the deceased.

See
Legal Tip 50: Family Provision Claims Against Estates Legal Tip 50: Family Provision Claims Against Estates

I will write a legal tip on 'notional estates' soon.

Testamentary trusts can be attacked via a family provision claim - in any state.

 

As Ouga says you first have to consider what you want protection against. If it is creditors then mortgaging and asset will not protect you from the mortgagee, whether you own the property or it is held in trust.



If it is creditors then assets held in discretionary trusts will be relatively safe – but some trusts set ups that I have seen offer virtually no protection.



Then you have to consider how you could get sued. It is relatively rare to be sued, especially if not in business. But even in business it is rare – I have never been sued for instance. So for most people protection upon bankruptcy may not be that important.



But consider also that you may need to sue someone. When you sue someone you could lose, even if you are in the ‘right’. Even if you win the matter could be appealed to a higher court which means much higher costs and risks. I have seen someone who sued over a car end up losing an $800,000 house.



Also consider that you may be a mere employee now, but what could happen in years to come if you start to do developments – these tend to be very risky and personal guarantees are needed.



So in summary, asset protection may be overrated for most people, but you never know where your life will lead.

 

And for many of us the asset protection is a bonus on a taxation and land tax friendly entity.

 

Protection from creditors and being sued has been mentioned a bit but a well structured discretionary trust may also protect assets from an ex-spouse when it comes break up time.

 

Even easier to protect from your children's spouses.