Trust – Personal guarantee – asset protection

I’m pretty sure you most probably should have a company as trustee so that if the company gets sued the trust appointee (you) sacks the company. This means further to setting up a trust you have to cough up to set up a company. All up around $1800. There’s also a heap of posts on this subject just do a search on ‘trusts’

Sorry Terry, I’m just sooo excited [happy3]

The structure depends on your circumstances and only a qualified accountant and/or lwayer can work through this with you. However establishing a discretionary trust with a company as the corporate trustee will provide both income distribution and asset protection. If the trustee is a company then the discretionary trust will have limited liability. If the business (operated through a trust with a corporate trustee) fails, the creditos of the business will sue the trust (technically they will sue the trustee as trustee of the trust – that is why you want a company as the trustee). The personal assets of the individual are protected.

If the individual is bankrupted for some reason other than to do with the business, the business itself will be protected as the individual does not own in interest in the trust.

However in some circumstances the individual may be personally liable if they are a director of the corporate trustee or if they have given negligent advice as an employee of the company.

If you have a negatively geared property and are a high income tax earner then note that for tax purposes it would be better to have the asset in your own name rather than through a trust. All losses must be retained in the trust and cannot be distributed to the beneficiaries.

However if you have positive income then a distretionary trusts can provide the following income streaming advantages:-

1. Capital gains to beneficiaries with capital losses. A greater benefit is obtained when the capital gain is not eligible for the 50% CGT discount or active asset reduction. If the 50% CGT discount or active asset reduction applies, the distributed capital gain must be grossed up in the hands of the beneficiary before being offset against the beneficiary’s losses.

2. Capital gains to beneficiaries on low marginal tax rates. Unfortunately this is not as effective as it was when averaging was applied.

3. Link personal-use capital gains to beneficiaries with listed personal-use capital losses.

Be careful however if you plan on transferring assets to establish a trust as it may trigger stamp duty or CGT, as there is a change in ownership.

Because of the complexity of the issues you need to discuss your personal situation with your accountant and/or lawayer to determine the income streaming, asset protection and/or both that you require.

Even if a company is the trustee, the directors of the company can be made personally liable for the liabilities of the trust under S 197 of the Corporations Act 2001 where, for some reason, the company is not entitled to be fully indemnified out of the assets of the trust (for example, where the company acts beyond its powers)

A director may also be personally liable under S 588G of the Corporations Act 2001 if the company incurs debts while it is insolvent. A director of a trustee company has a positive duty to prevent the trustee company from incurring debts while it is insolvent.

Futher, directors and officers of trustee companies can be held personally liable for taxation offences of that trustee (S8Y of the Taxation Administration Act)

Even though there are circumstances in which a director of a trustee company may be personally liable, a corporate trustee still offers the greatest protection than an individual being the trustee.

For ultimate asset protection, you should consider not being a shareholder of the corporate trustee. If you are bankrupted, the trustee in bankruptcy could take control of the corporate trustee and distribute income or capital to you as a bankruptee which would then be used to pay your creditors.

Although, arguable, this may constitute a breach of duty by the trustee and the appointer could change the trustee, it is best not to give the trustee in bankruptcy the opportunity, The shareholders could be your children (if aged 18 or over), your wife or parents, or maybe even a discretionary trust.

Again best to consult your accountant and/or lawyer for this advice.

GreatPig,

The last paragraph of my response answers your question. “Although, arguable, this may constitute a breach of duty by the trustee and the appointer could change the trustee, it is best not to give the trustee in bankruptcy the opportunity. The shareholders could be your children (if aged 18 or over), your wife or parents, or maybe even a discretionary trust.”

Good points Aussiemike.

BTW. I made another post recently about a court case where the director of a corporate trustee was held liable.

Terryw
Discover Home Loans
North Sydney
[email protected]

aussiemike,

Ah yes, sorry, I must have overlooked that part of your message.

GP

If you change trustees, you must notify the lender and the new trustee will more than likely have to fill in a new application and provide a guarrantee. Most mortgage contracts prohibit changing trustees of the trust in anyway without the lenders permission.

Terryw
Discover Home Loans
North Sydney
[email protected]