I asked this question on the end of another thread but wanted to open it up a little more.
I am aware of the concept of setting up a hybrid trust to invest in property and be able to claim some of the negative gearing benefits.
However as i see it, if you borrow money personally, buy units in the hybrid trust which then purchases a property or any other asset, aren’t you (personally) still left with an asset (units in the hybrid trust). Are these assets (units) at risk in the case of litigation, bankruptcy etc? How can this problem be overcome?
Hope to hear from anyone who can offer some information here.
Thanks
The way I see it, in that situation the unit value would be offset by a secured debt to the bank. You personally wouldn’t have anything that could be distributed to creditors since if the units were redeemed, the funds would have to go back to the bank to repay the secured loan.
I’m no lawyer, so I don’t know if it’s that simple or not, but I’m guessing that would be the situation.
GP
Hi
I am no lawyer either,
I think from the bank’s point of view, the money has been lend to buy the property, not the units. So there is no mortgage or security over the units.
If the unit holder goes bankrupt, and if the units are seized by creditors, then the trustee would still have the discretion on where to distribute the income. If the unit holder is trustee, then they would resign as soon as they knew they were in touble, and a new trustee would be appointed.
Also, I suppose a discretionary trust could hold the units, but this would prevent the offsetting of interest against personal income.
Terryw
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Mortgage Broker
North Sydney
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Terry,
An interesting point. I wonder though, since the loan was used to purchase units even though it’s secured against the IP, if the IP could be sold and the capital returned to the bank without the units being redeemed. I would think (or at least hope, as a unit holder) that there’d be a tie between the injected capital and the units that were purchased with that capital. Otherwise, if I purchased units with my own funds (ie. not borrowed), it could be a worry if the trustee could then just go and distribute that capital elsewhere and leave me with units in a trust with no funds.
Also, by my understanding, a unit holder has a right to all income from the assets purchased with the unit funds. Therefore I don’t think the trustee can just decide to distribute that income discretionally. I would imagine a bankruptcy administrator might hound the trustee through the courts if they did that.
GP
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