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To clarify the banks position. Let’s assume you own land outright and want to spend 250k to build – borrow 200k (irrelivant if the land is worth 300k or $1.0M).
You will need to put your 50k in first – either to the builder or into bank, so the bank knows between you and them there is 250k to complete construction. It is extremtly common for clients to get to the end of construction and be short of money. The banks will not generally let you start unless funds to complete are confirmed / locked in.
It is not a position the banks want to be in where they have a customer with a half built house and no money left. Under responsible lending guidelines a bank cannot simply lend because your house is incomplete – you still néed to qualify for the loan if you need to go back for an increase.
If you were out of money, half built, and no longer fit the banks policy – they would be forced to sell the property on you. Some of these policies make banks Seem unfair however they are also protecting the client from mistakes many other customers have made before them.
The biggest problem the banks have is front end staff. Most policies the banks have are quite sound in logic – the problems is the front end staff don’t understand the reasoning behind policy and struggle to explain the reasons ( if they explain at all) to the clients…
Link does not work. Try this one:
Of course the can ask salary. The privacy statements allows them to collect any information to assist with assessing the application. it is a breach of the privacy laws only if they ask non-related information.
Refer example above ( I wrote one yesterday) for an example of short term crossing. You do this by limiting the cross-collateralisation to 1 of the contracts / loans. When that contract is paid / refinanced the balance of debt is uncrossed.
Excuse my spelling. Had to write a long one on iPhone…
Dan42 – that doesn’t suprise me – there are always reasons / times you are better not to cross. I often avoid crossing for a lot of clients.
You also saw my other post re trusts not always providing the protection people think.I’ve just crossed 5 properties for a client buying in a trust. The reason was this:
4 existing properties all with existing loans with the same bank ranging from 65 – 75% LVR. At the moment none are crossed. We are raising to 80% of all existing properties to get the depoist and costs for the purchase – and borrowing the 80% against the new property..
I have set up 2 new loans.
Loan 1- 80% of the purchase – borrower is company as trustee with director guarantee.
Loan 2 – 20% plus costs – borrower is the company as trustee with director guarantee supported by the mortgages / equity in the other 4 properties.Outcome
– all exisitng debts remain uncrossed
– the 80% loan is uncrossed
– only the 20% plus costs is crossedIf you were to do this without crossing for the one loan, you would have been 4 small loans (one against each of the other properties). This would add a massive load of paper won’t, lots of extra fee (each loan being in the trust name with guarantee etc)
you could of couse have 5 lines of credit in peronal names however if you borrow in personal names and contribute equity in the trust; your equity in unprotected due to being a balance sheet asset to the client. Therefore the trust is largly ineffective from an asset protection point of view.
What I’ve suggested offers protection of not crossing for most of the debts / however crosses tonmake the trust more effective and save a lot of unrequired accounts and fees.
If they sell a property, the client would have to pay out the relivant debt and chip some funds in to the small loan to ensure they are still within 80%. In a couple of years we will revalue the property in the trust and increase that loan to pay outthe 20% plus costs ~ at this point in time the crossed collateralisation will cease to exist.
How would you suggest this could be better structured???
I agree that crossing has plenty of disadvantages and can often be avoided. But there are also times where it can be used to you advantage.
Would you go a step further and support the mortgage with some form of loan contract. This could put a dollar amount on the father’s interest. A mortgage lodged by itself would have NIL monitory value?
Hi Terry,
Thanks for the info. I'd like to explore a bit more in to this though.
One of the links you provided relates to a case where a 'Dr Ward' left a property in her will to a women who would 'mind her cats'. The problem is the asset was not owned by Dr Ward but rather it was owned by a trust. Also note that Dr Ward was not listed as an income or capital beneficiary. The major difference here is that Dr Ward, although she controlled the trust; was not listed as a beneficiary.
The case of ASIC v Burnard relates to hundreds of millions of dollars and is far from relivant from the average punter on this site. The Richstar is also less than 12 months ago so far from dead and buried.
Above we appear to have agreed that if you lend or gift money to a trust, the funds can be clawed back if you went broke. We both agree that the best way around this is for the trust to borrow "as much as possible" – from a source not being a beneficiary.
Back to the mum and dad property investor. If they along with the kids are the other beneficiaries of the trust. They are also the only directors / shareholders of the trustee company : – would this protect them against receivers, liquidators, bankruptcy if the family business went bust?
I'm pretty sure the true level of asset protection for the average trust is a lot less than most readers think (especially going by other posts).If we break some of the areas of asset protection down – is the bold scenario protected or not?
I would say no…
Ok so if you lend money to you trust you have a problem – this will effect the asset protection for most trusts for people on this site.
Have you read about the ASIC ruling on matter of Richstar?
Google it : it appears that if one ofthe beneficiaries is the trustee or director of the trustee – the assets of the trust ar no longer protected. Courts ruled against this trust… He problem revolves around beneficiaries having control of the trust.
Dan42 wrote:Banker wrote:Point 1: individual goes belly up. Bankrupt. The courts seize their assets and the balance sheet of the trust shows the trust owes the individual say 200k. A creditor, bank or liquidator can claim against that asset. This could be reassigned to the creditor. Now the trust owes the creditor 200k.
As mentioned above – this comes down to the way the asset is held. If the trust has 100% borrowed from non-beneficial sources it might not be an issue however unpaid distributions relate to money the trust owes the individual – therefore not held in trust.
I understand that point. My view of asset protection is a little different. Using your example above, the creditor is owed the $200,000, I agree. But if all the assets were held in the individuals name, the creditor would have access to ALL of the assets. In this case, where the asset is held in a trust, the asset is protected from the creditors.
eg, Asset book value $1.5m, bank borrowings of $1m, beneficiary loans to bankrupt $200k, non-bankrupt $300k.
The creditor has a claim on the $200k, nothing else, as it is an asset of bankrupt. Let's say the creditor is owed $800,000. If this asset was held in the name of bankrupt, the creditor would stake a claim over the asset, to clear the debt. As it is held in trust, all the creditor can get at is the $200,000.
so we are getting some common ground here. For the average punter with one or two properties in the trust, if the trust can not write a chq for 200k. It might have to sells it’s own assets – either way the door is open.
Maybe later. I have to go to an appointment. But try this.
New Trust is established.
Balance Sheet of the Trust shows NIL assets and NIL Debt
Beneficiaries lend the trust 200k
Balance sheet now shows: Asset – Cash 200k. Debt to beneficiary 200k
In accounting a balance sheet gets its name because assets and liabilities always balanceNow the trust uses the 200k to buy a property and borrows and additional 500k from a bank (700k property)
Trust asset are now:
700k Asset (property)
700k Debt (200k to beneficiaries / 500k to the bank)Beneficiary goes bankrupt. The property is held in trust so might have some protection however the trust owes the beneficiary 200k therefore may have to sell the asset to repay the beneficiary so they can repay their debt.
Potential Solution:
Trust buys are property for 700k and borrows 700k from bank
Asset (property) 700k
Liability 700k – let’s say loan from NAB
As the LVR is 100% the beneficiary may also provide a guarantee supported by property outside of the trust to reduce the LVRNow the trust owes money to the bank – not the beneficiary. Problem is that a lot of accountants and solicitors set up a trust that is defunct from day 1 because the balance sheet shows money owed to beneficiaries.
You then have the problem again when the trust profits 100k however does not actually transfer the money to the beneficiaries. The get the distribution on their tax return however get no actual cash. The distribution goes on to the balance sheet as a debt to the beneficiary (money is retained by the trust).
This is why a trust needs a LOC to ensure it can always pay distributions.
Dan42 wrote:Firstly, Plan B is not different. It's a trust with a company as trustee. It is holding the business / investment assets.Point one – sure, but if the money has been paid out, then the individual goes belly-up, then whats the difference? In the end, the individual is left with nothing, and the trust has paid the money out. What IS protected is any asset that the trust owns.
Hi Dan42. Firstly thanks for the feedback.
Re plan B I don't believe a trading trust e.g. one that conducts business activities e.g. builder, mortgage broker etc should also hold assets as they are more likely to be sued or run into problems of their own. I would always suggest if your trust trades in day to day business activities you should use another entity to hold property.
So if we look at trusts that purely hold assets e.g. investment property (not trading).Point 1: individual goes belly up. Bankrupt. The courts seize their assets and the balance sheet of the trust shows the trust owes the individual say 200k. A creditor, bank or liquidator can claim against that asset. This could be reassigned to the creditor. Now the trust owes the creditor 200k.
As mentioned above – this comes down to the way the asset is held. If the trust has 100% borrowed from non-beneficial sources it might not be an issue however unpaid distributions relate to money the trust owes the individual – therefore not held in trust.
Some buyers put caveats on properties when a depoist is paid – usually larger transactions. They can do this because they have paid a deposit and therefore have a financial interest in the property. For the transfer to take place at settlement, the caveat usually needs to be lifted and then put on again after settlement.
The banks do not actually need a caveat to be lifted to release and put mortgages on a property- the caveat just alerts them to someone elses potential financial interest. The banks prefer to have third party caveats lifted before they settle and then put on after them to confirm they have priority.
If you went through a devorce your parents could claim to have a financiall interest in the property, so could you, so could your wife. If the court deems the funds were provided to you as a gift your out of luck as it takes their financial interest out of the equastion.
Buy the way. Customers with strong assets can use property outside the trust to secured debt in the trust.
E.g. Loan in the trust name- guaranteed by people on title. Very different to lending money to your trust yourself
By giving the trust a large LOC say from NAB. It can draw from the LOC to pay distributions in full. This avoids beneficiary loans – therefore the trust owes the bank – not the beneficiaries money.
You need more assets to do this as you need the equity to give the trust a Line of Credit. You also want to make sure the trust borrows 100% from non beneficial sources e.g. Don’t put cash in your trust for a deposit – let it borrow from a bank and provide security / guarantee if you néed to.
Other trust structures that don’t work include: husband and wife as directors and 100% shareholders of trustee company when the only beneficiaries receiving distributions are husband and wife. In essance it can be argued that the trust is void as your are holding assets in trust for yourself.
Dan42 wrote:Sure, a trust won't protect you if a guarantee is taken by the bank. That is a given.I disagree that the trust property is at risk if the individuals are sued, in most circumstances. If there has been some transfer of assets to the trust, for the main purpose of hiding the asset, then the trust structure probably won't work. This is the same situation as transferring an asset to the spouse to avoid creditors.
OK but trust assets are different to beneficiary loans. Beneficiary loans are an asset to the individual / debt to the trust. If the individual goes tits up the courts can seize their asset. Including reasignment of monies owed to them.
Plan B is different – as I outlined above with a builder. Trading companies have different benefits. I am questioning the protection for your average person buying an investment property in a trust.
You need to think about who is going to sue you. If a company is trading – let’s say a builder. Trading through a family trust allows you to distribute your profits. If you buy assets in a seperate entity then the trust owns nothing and retains no income. This does protect assets but mainly due to distributing the profit away to different entities – if someone sues the building company / trust – it owns nothing…
But on this site you have general mum and dad investors where the trust does own something – the property. With my example of Mr and Mrs Jone – who on earth would sue the trust and not them? If the trust is sued – it holds the asset, if the individual is sued the asset is still at risk.
You mentioned above that the second point is not a risk however it leads to the first point of having the trust owe you money – e.g. If a trust owes you 200k it is an asset to you (Money owed to you is not actually held in trust – it is a debt the trust has to you).
Banks also vtake guarantees so a trust won’t protect you against them. The family law courts don’t pay to much attention to them either.
To prepay interest most banks will need you to have a fixed rate – so they know what to charge for 12 month interest. I dont know who would do 6 month. Usually min 12z
If your loan is interest only and you pay 6 months worth of repayments- the balance of the loan will drop. Therefore you have just made a payment off the priciple which is not deductable. You need the interest to be charged so it appears in your statement e.g. If you have a loan of 300k fixed at 7% they will charge a one off interest charge of 21k. If this appears in your statement before end June it is an actual expense occurred within the financial year.
If you simply pay 21k into the loan. The balance would drop and interest would still be charged / capitalized monthly – therefore will not occur in the tax year you are looking for.
Make sure you are prepaying interest – not simply repayments in advance.
Generally you will need a fixed rate so the bank can calculate the exact interest charge for 12 months. You can not really claim for whilst the property is PPOR. If you claim the full amount you may find yourself having to make an adjustment to your return.
A lot of this depends on the lender. Which bank is it?
