Re: asset protection and the fear of tenants suing etc. – surely that is the purpose of having public liability insurance as the form of protection. Where do the other risks lie? Perhaps I am blinded as to other risks that could eventuate. Could anyone please fill me in. Cheers Gorforth
There have been 2 recent cases that I know of. 1 is where the tenant complained of a rip in the carpet, the landlord didn't have it repair despite the repeated complaints and the tenant tripped injuring their back. Tenant was awarded something like $1.2mil
I doubt any insurance would have covered this as the landlord knew about the problem and didn't fix it. The landlord's fault and they should have done it no doubt.Another one is where a plumber was electrocuted to death on a property due to the removal of a solar hot water system which was not properly disconnected. Owner aparently knew this and did nothing about it. Both owner and electrician were sued and lost.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Banker wrote:………….
New Trust is established.
Balance Sheet of the Trust shows NIL assets and NIL Debt
Beneficiaries lend the trust 200kHi Banker,
The assumption you have made is that beneficiaries lend the trust. Instead of lending, if the settlor/testator or beneficiary contributes to the capital (not sure of the legal term) of the trust (i,e the amount bequeathed to the trust) and that trust money if used as deposit for purchase of asset, then doesn't it afford asset protection.
We have unit trust. Me and my business partner have bought equal units in the trust. The amount contributed towards the units was used as deposit to purcahse the property at 90%LVR. A trustee company of which me & my business partner are directors were asked to give the Personal Guarantee.
Since it was our first acquisition and we didn't have any other assets for the trust, we gave the personal guarantee. In that sense our personal assets are at risk, if the bank doesn't recover the money from the trust. But my thinking was, once the trust has positive cash flow and property has appreciated, we could request the bank to let go the personal guarantee.
Once we acquire more assets in the trust, we will transfer our units in the trust to our respective family trusts. The family trust could be a discretionary trust, which will help in income distribution.
So I believe we have good asset protection and will potentially have income re-distribution oppurtunity once the family trust is set up.
Your analysis would be much appreciated.
Regards
B
hi B
What you would have done is either gifted to the trust or purchased units. Neither are very safe.
Units are considered property. If you were to go bankrupt a bankruptcy trustee would take over your financial affairs. They would step into your shoes and take control of your assets. They would control your units in your trust and likely sell them or take control of the trust and sell the property. The cash obtained would be used to pay your creditors back. Unit trusts offer no asset protection.
Assuming you had used a discretionary trust to own the units, then it would be much safer. But when someone goes bankrupt transations in the near past can be unwound. So if you have gift money to a trust it may still be possible for the bankruptcy trustee (if you went bankrupt) to claim that gift back. It would be safer than loaning it to the trust, but there is still a possibility that it could be clawed back.
There are also tax issues to consider in whether to gift or loan. Say you had $100,000 cash in your bank account – you could just gift that without too many issues. But if you had to borrow the $100,000 from your LOC then you will be paying around $6,500 pa in interest. If you gifted the $100,000 borrowed, then you could not claim this interest, whereas if you borrowed it and onlent it to the trust then the trust could claim the interest.
As for personal guarantees, there is no lender out there that will lend to a trust without personal guarantees. It doesn't matter if the property is positive geared or not, it is just standard practice for lenders – it may be possible when taking out huge multimillion dollar loans, but not for residential property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
Thanks for your insightful comment.
Its quite glaring, that I need to create the family trust and transfer our units into it as early as possible, to avoid the claw back, in the unfortunate event of me going bankrupt.
Regards,
B
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