Bullet Proof

Bulletproof Asset Protection


Posted this on Somersoft the other day (see thread below)
BulletProof Asset Protection and Ed BURTON - Somersoft Property Investment Forums



It may be interesting to post here as well as the initial post, comments from a variety of people including Bill, Coasty Mike etc were great, here's some of the details from the new web-site

Interesting to see read some of the Trust references on the site as its always a hot topic

Its also well worth reading the InvestEd article by Nigel

- I've just re-read it

http://www.invested.com.au/77/dont-panic-real-story-asset-protection-4168/

 

I have to say that I agree with Nigel.

I have seen a lot of things done in the name of Asset Protection that either borders on complete overkill, riduculously expensive, and or ineffective. And my personal favourite is where it is so obvioulsy done to defeat creditors that any court with the jurisdiction to rip through it will do their upmost to help in that endeavour.

Just my opinion though.

 

Agree with MattR 100%

Trusts are an instrument of the laws of equity which is based on fairness rather than the letter of the law.

Therefore trusts will be ruled invalid where set up for illegal or immoral purposes or against public policy. But there are other remedies available under equity.

The Richstar case appears on a first reading to radically cut through case law BUT on further reading I see it more as clarifying the boundaries of where people cannot hide behind the 'letter of the law', whilst delicately trying to avoid telling past judges that they were wrong on their narrower interpretations. Hey - that's the evolution of law to cope with modern times.

If the Trustee is merely acting on the direction of others who purport to have disposed of their assets to the trust with the potential to benefit them then no trust exists as far as those assets are concerned.

In my opinion 'promoters' appear to be inducing simple investors into complex structures and arrangements for which they are totally ignorant of their duties and the limits of their 'protection'.

No single structure can fulfil all objectives, you need to prioritise and then look at practicalities and costs.

Get some good independant advice.

Cheers,

Rob

 

it was an interesting read, however i think some of the points raised about HDTs and their effectiveness have now been challanged by the ATO and are hence their is a bit more doubt with them...

 

Why didn't I just say thet you cannot be a discretionary object where the trustee merely acts under your direction ? Therefore the 'discretionary' beneficiary has an interest in that property.

This is another reason why I am amazed at the number of people using a HDT where they do not understand the implications - this is a fine tuned legal invention where you need due dilligence.

Cheers,

Rob

 

Have good HDTs actually been challenged. Are good lawyers/accountants no longer using them themselves or promoting them? I wouldn't imagine so.

 

I don't think HDT's per se.

But they are often promoted as a form of negative gearing in the high rate taxpayers name AND distributing capital growth to low rate beneficiaries.

See the NTAA news site " Using hybrid trusts - advanced tax
planning or tax nightmare? "

You really need due dilligence which is harder with flexible interposed entities as the onus is on you to show intention to derive YOUR assessable income (and capital gain) where an arrangement appears non-commercial.

Cheers,

Rob

 

Also, i think HDTs are promoted also for asset protection as well as the ability to pass on negative gearing to the highest income earner and income to the lowest income earner.

I couldn't find that article on the NTAA website, can you provide a link.

I am pretty sure a good lawyer/accountant could help you with this. What is your point though?

 

The point is that most investors even in simple discretionary trusts do not understand their responsibilities as trustees, both as to Trust Law and Taxation Law. There are duties and limitations which they rely on their Accountant to fix up at year's end - if they find it !!

Its all very well divorcing yourself from your assets whilst trying to keep control of them to stream benefits. But this involves Accountants or Lawyers holding your hand and guiding you through a legal minefield - and this costs money and is ongoing as legislation changes.

Over time your objectives or circumstances may change and your structure may become a straight-jacket. Businesses and investors go through life cycles and you will need to constantly review your structure(s) to see they are still appropriate. Again this is an ongoing legal cost.

And what if you ignore your duties - there are penalties ranging from beneficiaries suing you to the Taxman assessing trust income to you personally at the top marginal rate. Also, you probably won't be able to indemnify yourself from trust property or the beneficiaries to whom you gave purported concessionally taxed distributions.

And what about dealing with Corporations Law and ASIC for your Corporate Trustee, or bucket company beneficiary ?

There is a lot more work involved than just purchasing your trust deed and shelf company and sticking the name 'Director' on your study door.

I see plenty of literature advertising the virtues of structures but there is precious little educational material to help people understand how these structures work LEGALLY. Probably because the people that set up the structure offer you the full legal service of looking after it.

Ultimate responsibility lies with the Trustee (& directors) however.

The NTAA article is:

National Tax & Accountants' Association - Your Association at Work - Using hybrid trusts - advanced tax planning

Which again looks at the overall scheme where it appears non-commercial. It shows how important the legal details are yet again.

The problem is that asking most Lawyers or Accountants if it is a good idea to set up a trust is like asking a sharebroker if it is a good time to buy or sell shares !!!

Cheers,

Rob

 

Whats the alternative for asset protection, retirement planning, succession planning and tax benefits etc

I belive that many doctors have properties in trusts that they do not own per se as litigation copuld see them lose all; they then rent

what do you think of the C&N structure Rob

I have to admitt most of it is confusing to me, hence the need in any game for a competent team and i also realise it's your X on the bottom line

 

Medicos, Accountants & Lawyers cannot incorporate to limit their liability (ignore the limited partnership as it has limited use). Asset protection is a compelling reason here.

Even the ATO recognises somewhat artificial arrangements using trusts within which to hold personal and business assets and to provide services (service trusts) to the medical practitioner. Provided inter-entity fees are charged at market rates.

Assets held in a trust in which you do not have an 'interest' will usually not form part of your estate. So a Trustee of a discretionary trust might be able to dispose of your assets to your (hopefully) best interests without too much fear of being attacked by potential personal creditors or feral relatives. This also goes for super via binding nominations (super is a trust).

Assets held as joint tenants will also pass to the survivor without passing through your estate where it might be attacked. However, Lawyers prefer the flexibility of ownership as tenants in common so your share passes to your estate, along with other assets.

Any assets that pass to your estate may be disposed of according to your will (after satisfying debts). It is very easy to set up a testamentary trust so that capital and income can be distributed tax effectively to beneficiaries, e.g. income to minors without penalty child tax rates. It is the income splitters panacea but it requires you to die first !!

No single structure can satisfy all objectives.

You need to prioritise your objectives and work out the cost/benefit of the available solutions with your Accountant, Financial Planner or Lawyer. Additonally this will need to be periodically reviewed in the light of changed circumstances.

Sorry I can't give a specific answer. You need the most specific tool for your particular requirements.

Your advisor should thoroughly go through your current and intended future affairs (business and personal) and priorities before even considering a suitable structure.

There is no legal snake oil. Family Courts, Solvency, Centrelink and Taxation Law can look through your structure in some cases so nothing is bullet proof. Just use the most appropriate legal tools for the job.

Cheers,

Rob

 

First up i will say that it seems that you have strong opinions on this matter. Is this because of personal experience or purely your thoughts on the matter?

Investors not understanding their responsbilities, and requiring continual assistance from lawyers or accountants. Well, this is inevitable with many things in investing not just trusts. Do you not invest in property because you might need a property manager to deal with the property for the lifetime of your investment? I wouldn't say that having to keep informed and paying for advice on an ongoing basis is a reason not to go forward with anything.

There are penalties that you might incur in everyday life. You might get slapped a copyright infringement lawsuit because you copied a cd from your brother which you shouldn't have. This is just being pessimistic.

As you are not actually running a business with the trustee company, i wouldn't imagine that you have to keep up to date with too much that occurs in Coroporations law. But again, this comes down to you reading any ASIC messages that are released and getting advice from your accountant, probably when you are doing your annual tax return.

DaleGG's books on trusts are quite good at explaining how they work. Sure there isn't volumes on the subject, but i think a couple of good books is enough.

As for your last comment about asking an accountant or laywer about a trust. I try to use professionals in all areas of my life that seem genuine to me. I would expect them to tell me if something is not a good idea for me, even if they might not get a bit more money out of me right now. I try to pick professionals that are already succesful and that while may like to have my business, are not depending on it, so are more likely to be honest. I think this is not that hard to achieve. Sure it is not guaranteed that this will always work, but it has for me so far.

Lastly, i am not trying to say that your arguments are not valid in anyway, it just seems to me (someone who is interested in getting a trust set up) that you are finding all issues that might occur, or are potentially bad, or require money, even though things go wrong in all aspects of life and money needs to be paid continually for lots of things.

 

Simple passive investors holding shares in a limited liability company or units in a trust do not risk being sued by that entity's creditors.

Therefore any risk comes from another area.

Small investors have to watch costs closely to get their returns to grow as fast as possible. You would not advise these people to wrap themselves up in boutique managed arrangements, so why extravagant structures ?

Their main residence exemption gives a very valuable tax advantaged investment so they would need a compelling reason to put their home into a trust.

It is possible for a couple to borrow against their equity and declare income & expenses in a spouse's name (all or partial) so limited income streaming is possible outside a trust for couples provided expenses are allocated based on income (usually).

Even with their house, they can own jointly with a spouse but in unequal shares (in equity) if only one risks being sued and between them still get the full main residence exemption (e.g. risky partner 1%, safe partner 99%).

When you start to become asset rich or actively involved in a business then it is more likely that you need extra protection, then you look upon the extra structure costs as a type of insurance, but remember you should be using actual insurance as well.

I am not saying structures are not important, but they should be appropriate for your investment cycle and objectives.

If you lose compounded investment growth due to high initial costs then there is nothing you need to protect !!

Cheers,

Rob

 

Actually there's now an ability in a couple of states (including NSW) to set up an incorporated legal practice...

 

I think this is what most lawyers/accountants would advocate.

This is true, but this is only a short term solution as the income will grow.

I think the problem with this thinking is that once you have become asset rich, then it is way more expensive to set up an asset protection structure. In this domain i have heard it several times "Start with the end in sight". I think this is a smart approach if you believe you are going down a certain investing path, i.e. purchasing multiple ips over the next 10 years.

Lastly, if you placed your ip's in a trust how are you losing "compounded investment growth"? You might pay more on land tax, but what else??

 

IP's are generally better purchased in a trust, rather than transferred in specie later. I take your point that planning can avoid this transfer problem.

I have met a few people who are employees, have a small amount of equity in their PPOR and taken a modest investment LOC for a seed protfolio. They have been 'advised' they immediately need to tranfer their home to a trust with corporate trustee and rent their house back.

Given their sensitivity to costs and their low risk, they might have been better advised to delay forming a trust until they wish to purchase a subsequent IP or other substantial assets so they can control costs and avail themselves of their CGT main residence exemption and any cheap negative gearing (and avoid land tax).

Cheers,

Rob

 

Looks like we are finally starting to agree! ;-)

That does sound like they got some bad advice!

So Rob, you didnt answer my earlier question. You seem to be quite interested and knowledgeable in the area. Do you work in the area, or have a trust(s) of your own?

 

Hi Leandro,

I don't work in public practice.

I don't wish to hold myself out as an expert as my opinions are my own and you might have noticed that I don't mind airing them in a confrontational fashion.

I hope other readers do not act or refrain from acting based on my opinions, but if it makes people think a little about whether they should get further advice tailored to their specific circumstances then it might be good ?

Cheers,

Rob

 

Hey Rob,

does this mean you are a lawyer or accountant, or were?

I definitely think people should understand 100% why they are entering into a particular structure, and it should definitely take into account their personal situation, after all that is the whole point of paying someone for a personal visit.

cheers