Forums / Getting Technical / Legal & Accounting / Structuring a Discretionary Trust Part 1

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  • Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Trust Structuring

    Trusts are complex legal structures which can be confusing for most people – even most lawyers do not really understand the concept.

    A trust is not a separate legal entity but it is a relationship. A trustee will own property on behalf of the members of the trust. These members can be beneficiaries of a discretionary trust, unit holders of a unit trust or members of a SMSF.

    It is therefore very important to consider the structure of the trustee. Broadly there are 3 common ways that are the most common trustees:

    1. Individual

    2. 2 individuals (often spouses)

    3. A company

    Since a trust is not a separate legal entity the trustee will own the trust assets. So Dad acting as trustee for the Smith Family Trust will own the bank account, any real property owned by the trust and any shares owned by the trust. This poses 2 main problems.

    a. It may be difficult to determine which property dad owns in his own right and which property he owns as trustee for the trust.

    b. Dad will be personally liable for any debts of the trust.

    There is also a 3rd problem often over looked:

    c. Dad resigns as trustee or dies – title has to be changed for all trust property.

    Two individuals acting as trustee results in all the above issues, but also another is that both trustees will occupy a single office so they must work as one. If they cannot agree then they cannot make a decision. If 3 trustees then 2 cannot override the 3rd for example.

    For these reasons (and others) a company is preferred to act as trustee. The company should not be trading and its only activity will be acting as trustee. So there can be no doubt that all the property owned by the company will be owned in its capacity as trustee. Death of the director won’t necessitate the changing of the title to property because the company will survive the death of the individual(s) behind it. Death of director will mean a new director comes in and can continue to operate the company. If there are 2 or 3 persons behind the company acting as directors they need not agree on all decisions (this will vary depending on how the company is set up). The company itself, as a legal person will be making the decisions.

    The most important aspect of the company is that it limits liability. A company is a separate legal person to its members. Shareholders cannot be liable for the company debts (unless they personally guarantee company debts). A director is also not liable for the debts of the company or trust, unless they have contravened laws such as causing the company to trade while insolvent or breaching OH&S laws etc or unless they have given personal guarantees.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of PimobpiPimobpi
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    @pimobpi
    Join Date: 2013
    Post Count: 60

    Hi Terry,

    Thanks for the 1st part (of what I hope to be many more).
    If property is to be purchased, should an entity nominate the name of the trust or the name of the company (or both names) on the contracts?

    I’ve never purchased within a company/trust partnership before but I think that I’ve seen just the Trust names on contracts.
    Have you seen this too?

    I must be wrong, as you say that a Trust is not a legal entity.
    Maybe contract details are added at a later date.
    (I think that some entity name changes are still possible in VIC, after signing the contracts). I don’t know about the other states but I’ve heard that the purchaser must buy in the name of the nominated entity (within contracts) when in QLD. If not, there is a very good chance that Stamp duty will need to be paid again.

    Cheers.
    It’s always great learning from you.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    A trust is a relationship. it doesn’t exist as a person. A trust is where A owns property for B obligations attached. A trust cannot enter contracts of be sued. It is the trustee that enters contracts and the trustee that is sued.

    Whether the trustee discloses on contracts that it is acting in its capacity as trustee is up to the trustee. It need not be disclosed at law. The most common way for a trustee to enter a contract is “XXX as trustee for the YYY trust”

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of PimobpiPimobpi
    Participant
    @pimobpi
    Join Date: 2013
    Post Count: 60

    Oh OK, a Company is considered as a “non biological” individual & can make purchases in the same way as a “biological” individual.
    ……whereas a Trust cannot do the same because a Trust is considered simply a relationship between entities (not an entity itself).

    Sorry to put it so crudely but that’s the impression that I get from your explanation.
    Hope I got it now.

    Regards.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    A company is a legal person. It can enter contracts and it can sign by having its directors sign. A trust is not a legal person. It cannot sign a contract because a legal person needs to sign a contract.

    It is like a person with a power of attorney. The person holding the power enters the contract. Same with trusts. The person holding the power of trustee is the one that enters contracts.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of PimobpiPimobpi
    Participant
    @pimobpi
    Join Date: 2013
    Post Count: 60

    Well written. Thanks again Terry.

    Profile photo of Delta Strategic HoldingsDelta Strategic Holdings
    Participant
    @delta82
    Join Date: 2015
    Post Count: 7

    Hi Terry

    I have been running a FT setup for years with a company trustee. I am director and wife is shareholder. In your experience is this the right way of setting it up, I am most litigious and have no assets. Any family assets are in wife’s name. Reason I ask is a friend of mine has it set up with wife both director and shareholder, but his circumstances are same as mine. He believes he got legal advice from one of the big city firms, whereas I did mine on cleardocs after discussions with my dad (has same setup) and own research. Thanks in advance. Callum

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Hi Terry
    I have been running a FT setup for years with a company trustee. I am director and wife is shareholder. In your experience is this the right way of setting it up, I am most litigious and have no assets. Any family assets are in wife’s name. Reason I ask is a friend of mine has it set up with wife both director and shareholder, but his circumstances are same as mine. He believes he got legal advice from one of the big city firms, whereas I did mine on cleardocs after discussions with my dad (has same setup) and own research. Thanks in advance. Callum

    Two directors doubles the risk as there will be 2 personal guarantees as well as other potential issues such as breaches of the corporations act.

    I can’t say whether you have set the trust up correct or not based on the above.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Delta Strategic HoldingsDelta Strategic Holdings
    Participant
    @delta82
    Join Date: 2015
    Post Count: 7

    Sorry for the confusion but there are not two directors on any of the trusts mentioned.

    Example A Trustee company
    Dir – Husband
    100% shareholder – wife

    Example B Trustee company
    Dir – His wife
    100% shareholder – his wife

    If in both examples the male is the most likely to be sued and all personal assets are in the wife’s name which is the best structure?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    If the husband ends up bankrupt he can no longer be director. The company is a separate legal entity to the director, so there would generally be no effect on this. The trust is a different matter. it will entirely depend on the terms of the trust and how it was transacted. Assuming no breaches of the trustee’s powers, no default beneficiaries and an open class trust and that the husband has not gifted or lent any money to the trust then assets of the trust will generally be safe. Any distribution to the husband would fall into the hands of the creditors, but the trustee would just divert the income elsewhere.

    In either case, what would happen if the wife were to become bankrupt? Creditors could control the company which controls the trust. They could cause the trustee to distribute to the wife and this would all go to the creditors.

    Also consider what could happen if the wife dies. Hope she has a will in place with special consideration given to who should get those shares.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Delta Strategic HoldingsDelta Strategic Holdings
    Participant
    @delta82
    Join Date: 2015
    Post Count: 7

    As the appointer of the trust I can remove the corporate trustee and elect a new trustee.

    Am I missing something here? I thought this was as bulletproof as it can be. I do agree my wife and I need to do a will and I will ensure on her death the shares transfer to me and on mine she takes over as appointer and director, and in the event both of us die the trust becomes a testamentary trust for our children.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    If there is an appointor then the appointor may have the power to remove the trustee. Read your deed and see what happens if the appointor loses capacity or becomes bankrupt, or dies. Any exercise of power must be valid and performed strictly in accordance with the deed or the removal of the trustee will be invalid.

    far from bullet proof. It is not as simple as buying a trust deed.

    If your wife dies just as you are becoming bankrupt the shares would go to the trustee in bankruptcy. The trust CANNOT become a testamentary trust for your children. It is a trust set up already and the assets of the trust are not your’s to will. You should seek legal advice about setting up a testamentary discretionary trust in the will.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Delta Strategic HoldingsDelta Strategic Holdings
    Participant
    @delta82
    Join Date: 2015
    Post Count: 7

    Thanks Terry you raise some valid concerns. I will consider these further. Can you recommend a Melbourne based lawyer than understands property investing, tax and structuring?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Try Allan Swan

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of sherryplazaksherryplazak
    Participant
    @sherryplazak
    Join Date: 2006
    Post Count: 1

    Hi,
    Very new to this forum. My son and I wish to invest in property and small business. My son and I are purchasing our first small internet business and from what I can glean from these posts is that it would be best if we kept our business dealings separate from our property investing, ie. We want to setup a Pty Ltd company along with a discretionary family trust. Which one do we set up first? My husband, son and I will be beneficiaries of the trust and my son and I will be directors of the company. Can we incorporate our business into the company/trust or should we keep the business separate as sole traders? I was told it was important to set up the company first before setting up the trust. Is this correct?
    Thank you in advance.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    The trustee must exist before it can start the trust relationship.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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