Trusts Again - do they protect your assets?

Example:
Athena is a Single person with no immediate family or relatives in Australia

With a Trust structure,

• Athena is both the Risk and Safe person hence there isn't much protection
  
• Athena has no immediate family or relatives she can select as Trustee while she is the Appointor of the trust; Who can she trust to be Trustee? The Trustee could be taxed at 46.5% - who would choose to be Athena's Trustee?
  
• Athena could set up a Company as Trustee to the Trust but Athena has no immediate family or relatives she can select as Director while she is a Shareholder; if Athena is allowed to be both Director and Shareholder, there isn't much protection
• Athena has zero Primary Beneficiaries and zero General Beneficiaries, how is she going to distribute income if any? What about loss? If she distributes to another Company or another Trust - the same issues mentioned above apply

I am trying to figure out how Trust can be useful to a Single.
What have I missed? ta

 

That’s easy:


Athena sets up a company as trustee. She is sole director and sole shareholder.


A discretionary trust is set up – Athena is the sole appointor.


Trustee company buys an asset for the trust. Income is distributed with Athena in control. Depending on the type of income it can go to Athena or she may consider another company as a bucket beneficiary.


Athena gets

Asset protection if she goes bankrupt

Tax streaming – ability to save tax now and in the future

Flexibility – if Athena has future relatives they may be beneficiaries of the trust.

Estate Planning – trust assets don’t pass via the will.

 

When you set up a trust with your mother as an appointor, does she have to sign the trust deeds? Or does she only need to sign anything when/if she wants to change the trustee? Just trying to figure out the practicality of having an appointor that lives overseas for instance, if that makes thinks too difficult when it comes to removing/adding trustees and/or setting up the trust.

 

No and No

The appointor doesn't even need to know that they are the appointor.

I had one client whose father died and he, the son, was appointor for about 12 years but didn't realise it.

 

Ok. What would be the process if the appointor needs to change the trustee and they are an overseas citizen and resident? Do they need to come to Australia to sign the new trustee appointment or can they do it in their home country through a JP?

 

This will entirely depend on what the rules are in the deed.

They would usually be able to remove a trustee by deed and to appoint by deed.

 

BTW, I don't know if there are any income tax consequences of having a non resident appointor.

 

Bump

We use Trust in the main for tax purposes, distribution etc

I was reading about another form of asset protection which is equity stripping, so basically the property has no value therefore the chances of being sued will be very slim.

This was sort of what I was getting at but not necessarily same as equity stripping....... if you own property which is encumbered, basically owned by a bank why would anyone sue you?

Hope this makes sense. @Terry_w is the expert interest in his input

MTR

 

When you borrow against property the bank gives you money so essentially you are in the same position unless you buy another property with the money and end up using some of it on stamp duty etc.

You could let another entity use your property as security. But this could be attacked as an uncommercial transaction. The security property would still be yours though and available to creditors if the security released.

But having more mortgages on a property makes it look like there is less equity and that there would be complex disputes over priority so it does have some minor benefits

 

Another new asset protection case with trusts has appeared.

Fordyce v Ryan & Anor [2016] QSC 307

Richstar argument failed

 

Richstar did have quite limited application to the argument of an alter ego. As I recall the issues surrounding the financial adviser was compelling due to licensing etc. A bit like a medical specialist using a company and trying to argue they have corporate limited liability.

And richstar concerned trading activities and not passively held property.

 

@Terry_w Do you have a post which talks about how mom and pop investors can go about setting up discretionary trusts and protect their properties (buying through trusts) ? I understand this needs legal advice, but considering the advice given can be substandard, it'd pay to atleast know the outline.
Or do we all just have to buy your book ?

 

I don't think there is a specific thread ton the but will write one soon.

 

And ironically went under in first place due to irregularities with their statutory trust account.

 

My general experience with liquidators is they are quite lazy. More often than not they are appointed by the courts and all the money is gone - so much so that they will not be paid but they have to wrap the job up.

So yes: I have seen trusts act as effective asset protection vehicles. The liquidator pretty much sees the trust and gives up. I am sure for larger amounts they investigate further but the cases I have personally come across have assets in the range of $400k to $1m and nobody batted an eyelid.

This little starter egg for a person coming out of bankruptcy is incredibly precious. Starting from zero is very hard.

 

So if Athena already has those assets in her name and wants to go that route, would transferring her assets to the trusts incur CGT? Also, would there be any ongoing costs with these trusts? like yearly fees?

 

1. Yes - Maybe even GST for some (commercial property etc). Question would be - where did the trust get the money from. And yes annual costs etc. The ATO could pursue Athena if she cant pay the taxes exposing her further.
2. Stamp duty for property assets
3. May still be an unprotected asset. Assets moved close to liquidation are a easy target for liquidators.

All such decisions require personal legal advice. May be a waste of time and just be a blatant scheme to defeat creditors. Corporations Act penalties could arise. Trusts assets could be exposed if trustee director was found liable for breach of duties.

To follow Ross's comments above. I wouldnt call liquidators lazy. They are risk averse. Its expensive to go to court and sometimes its uncertain. Liquidators tend to look at a job and ask Am I going to get paid ? Is this worth it ? Sometimes its not. If its easy they will pursue it and if its a good chance of recovery. I worked with one who often sat down with former Directors and said - You seem to have taken company property. I want $X or I go to court. I will make the transfer void. Hard to fight that position IF they use it. Trusts that existed long before a issue are much harder.

 

Yes and another question to ask is would there be any asset protection?

Answer is it depends but possibly not much.

 

My view of liquidators and trustees in bankruptcy is that they want to maximise their earnings. If there is money available they will want to use it up as fees. But if there is a chance they won't get paid they will be less keen to spend time doing things such as digging into financials.

 

One of my IT clients went under a year and a bit ago.... debts of a couple of million. Administrators did their bit and sold the business pieces off, and liquidators were appointed by vote from creditors. A small error in setup of the asset vs operating vs employment trusts (was to do with an ABN against wrong entity or something) unravelled the trusts and the liquidators got a lot of the money back from the former company owner (he had got about a million from the business parts and asset sales).

So yes a trust is a good asset protection, but only if setup completely correctly.