how the family trust protect assets

It is a difficult concept to grasp at first.

With a discretionary trust no beneficiary has any interest in the trust property. So if a beneficiary is sued the trust property is not able to be touched.

Under the Bankruptcy Act property held as trustee is also not considered the property of the individual so this is not able to be touched if the trustee is individually sued.

However, if the trustee is sued in their capacity as trustee then the assets of the trust are at risk. So if a tenant injures themselves and the property owner is negligent then the tenant will sue the trustee (the trust) and if the trustee has no other assets then the property of the trust will be at risk. Changing trustees in this case will not help.

There is also section127 of the Corporations Act which provieds that a director may be personally liable for a trustee debt in some circumstances.

When you change trustee of a trust there is generally no stamp duty payable, or just a nominal sum.

So am I right in my understanding that, in a nutshell – the trust is just a way of separating some assets from others & doesn’t provide any protection if the owner/trustee of that asset is sued. The trust can still lose the asset. If I have 3 Properties in the trust, they are all at risk but if they were in independent trusts they would be quarantined.

Hi

Well sort of.

BJ, the family home may not be 100% safe for a number of reasons. It could be found that the house is really a joint asset with the wife holding he husband's share as trustee for the husband. You would have to look at who paid for the house – initial depost, was it all the wife's? Ongoing payments, was it all the wifes? Non financial contributions, did the husband contribute to any improvements of the house?

One famous barrister called Cummins caught caught out many years ago.

It is still probably tbe best structure to have, you just have to be aware of the risks,

Other risks include borrowing or lending money to the trust. If you lend it and the trust goes down then you would lose it, if you still owe money to the trust then the creditors of the trust will be entitled to that. You have to be careful with these Divsion 7A loans.

Scott, good to have one house per trust so as to not keep your eggs all in hte one basket

Discretionary trust.

Only way creditors can leech the trust is if the trust itself has borrowed funds. Otherwise it can’t be touched even someone hurts them selves and the assets are under a trust creditors can’t access it. But not many people put there own home inside the trust because of the fear of complications of not officially owning the property in your own name and this is where creditors can get you, and I think if you go bankrupt, the trust still isn’t touched IF it’s self sustaining with the rental income.

Get advice from solicitors. And pay through the teeth for it. Because I went through 9 solicitors asking for there advice and explaining what I wanted to do and couldn’t even explain the laws back to me.

I found one that new exactly what I wanted and payed for it. I’ve still got my email on the discretionary trust structure.

Also search google on discretionary trusts and thenbsearch up the bankruptcy laws. It’s 2 different pages but both from Australian law firms.

Also, payment should goto that has the lowest tax bracket. But then later take into note on how the banks will look into the extra income from property and how they would formulate that into your income liability or savings.

I can’t get through to my work email but searching on another firm, came up with this.

Asset Protection
A Trustee of a discretionary trust holds the property beneficially for the beneficiaries.  Property held by a person as trustee cannot be taken by a creditor in bankruptcy, unless the debt relating to the creditor was a trust debt. Similarly, property held by a company, as trustee for a trust, cannot be taken by creditors in a liquidation of that company unless the debt is a debt of the trust.  Any properties held in trust can only be attacked by creditors of that trust.

When will this be effective?
A golfer is found negligent after hitting another player with a golf ball and is ordered to pay $2M in damages. The golfer owns no property in his name, but is trustee of a trust, which owns 5 investment properties with a total value of $2M. Can the creditor attack the trust assets? NO.

A & B commence trading a deli at New Farm. They sign a lease for 5 years. The business goes bust and the landlord obtains judgment against them (jointly and severally) for $300K. A & B go bankrupt.
A is married to X and they have a family home and an investment property with total equity of $200K. A loses the lot and his wife has to deal with the bankruptcy trustee and has to come up with $100K. She can’t and the family home is sold.

B owns nothing. The family home is owned by his wife and there is a family trust that owns 2 investment properties owned by the family trust. B keeps the family home* and the trust assets can’t be touched.
*This position may differ depending upon circumstances. We recommend that specific advice be sought on protecting the equity of your principle place of residence.

Yeah that’s why I was saying, alot of people setup the trust, but do not put there own homes under it also, and can get caught out, but it doesn’t really matter, because you would borrow under the trust to use the equity to acquire more property. Its more for the fact that some banks look at any positive income in a percentage range income, for example if you make $1000 a week, a bank would only calculate 50% (for example) and really the banks look at $500 a week instead of $1000.

Imagine making $4000 a week and the bank only calculating 70% of that. It’s a lot of money missing, and would put a reducer on your borrowing capacity.

Me either, but I will comment on the family home issue. I think in most cases its more like my wife and I where we bought the family home in our own names because we didn't know better, and now that we do its an expensive exercise to transfer it into a trust because of stamp duty on transfer.

Yeah exactly, what I meant though is, I know st. George they have only 75% value of any income from investment properties.

Call up your bank and say to them do they calculate any positive geared income as a full. Most banks don’t, means if your making $1000 a week from your investment property from the same bank, the bank will only take $750 worth in your statement. (as an example).

I'm not going to repeat myself.

Are you a trustee of a company discretionary trust?

I am still unsure of JCCP's point regarding the banks only taking x% of rental income into account?

As far as its relation to trusts, I am confused.

If a person was getting income from a trust a lender may take that income into account as if it is ordinary wage income. They may also take it income account as rental income. After it has been received for a few years it may be able to be treated as ordinary income too, but banks also have a formula for this too and it could be that only 30% of ordainary wage income is taken into account.

There is also the possibility that the lender will not take this income into account at all as it is income of a discretionary trust and the trustee can exercise discretion so there is no guarantee that the income will be received again in the future.