Forums / Getting Technical / Legal & Accounting / Best method for Asset protection

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  • Profile photo of DonDon
    Participant
    @thedon
    Join Date: 2016
    Post Count: 9

    Hi to you all,
    i’m new to investing and i’m planning a strategy of buy and hold for the long, long term.
    i will be buying 10 properties in a 3 years time frame.
    What kind of structure or strategy should i use for assett protection?
    As this is my biggest concern.
    thank you in advance
    Don

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Hi. I am a lawyer specializing in asset protection. Firstly what are you trying to protect against?

    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 DonDon
    Participant
    @thedon
    Join Date: 2016
    Post Count: 9

    Hi Terryw,
    thank you for your fast reply.
    Primarily i’m concern with possible litigation with tenants or litigation in general,
    but also; as i want to pass on the properties to my kids in my will,
    how can i protect them from loosing some of the properties if they have a divorce?
    i appreciate your help.
    Don

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Ultimately it seems bankruptcy is what you want to protect against and the best protection for this is an appropriately structured discretionary trust that has an open class of beneficiaries and gives the trustee the power to accumulate. Seek legal advice.

    But assets of a trust cannot be willed. Ie cannot be left in your will.

    For family law purposes trusts can be attacked but there are ways to strengthen then against childrens future spouses.

    An alternative is to own in your own name with a discretionary testamentary trust set up in your will. This will provide slightly more asset protection than a yrust set up during life. There will also be more tax advantages.

    To strengthen asset protection for personally owmed assets you can consider using loans from spouses or parents or related trusts. The lender could take a mortgage over your property to secure their loan and this could cause them to take priority over other creditors.

    Also consider that structure is only half the story. The other half is how you transact things. Who pays deposits and how. How contracts are entered. Where rent money is paid etc etc.

    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 Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Great post @terryw . The asset protection question comes up a lot and that’s the best summary I’ve seen yet. :)

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of DonDon
    Participant
    @thedon
    Join Date: 2016
    Post Count: 9

    Terry,you raise some very important issues about transactions,deposits,contracts,rent,ect ect…
    I’m not sure how to go about;as i don’t have any esperience.
    I hope that you can help me,becouse i’m thinking to come and get legal advice at your office.
    But before i do that,can you reccomend me some book or website were i can get a bit of imformation first,
    at least i can familiarize with the language and trade terms,that way the advice will make more sense.

    Thank you
    Don

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    I know of no book that covers asset protection for australia. I have half written one but i keep getting g side tracked so may never finish.

    You should read the bankruptcy act and just dona search on posts that i have written here and at other property forums.

    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 theman73themantheman73theman
    Participant
    @theman73theman
    Join Date: 2016
    Post Count: 1

    Dymphna Boholt wrote a pretty good starter book for asset protection for property investors for Australian residents.

    it’s called “Asset Protection Secrets of a Real Estate Millionaire” – you can just google it and order online they post pretty quick. it’s pretty good.

    Profile photo of DonDon
    Participant
    @thedon
    Join Date: 2016
    Post Count: 9

    Hi theman,
    Thank you for the tip. I had heard about Dymphna i just wasn’t sure of her expertise but i will get the book.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    I have read that book and found it so full of holes it is not funny. The author doesn’t appear to be a lawyer and completely misses many areas that need considering while making mistakes various aspects that she does mention. I wouldn’t recommend it.

    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 DonDon
    Participant
    @thedon
    Join Date: 2016
    Post Count: 9

    Thank Terry!!
    I will not be buying the book.

    I searched Dymphna up and she doesn’t have a very good reputation.

    Profile photo of RedwoodRedwood
    Participant
    @redwood
    Join Date: 2013
    Post Count: 340

    http://www.jenman.com.au/news_item.php?id=428

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
    http://redwoodadvisory.com.au
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    SMSF - PROPERTY INVESTMENT - WEALTH CREATION AND FINANCE SOLUTIONS

    Profile photo of Shane WShane W
    Participant
    @shanewebb
    Join Date: 2016
    Post Count: 17

    Great post. This is one of the questions I am currently trying to answer in structuring my portfolio.

    I recently heard Ken Raiss from Chan and Naylor Accounting talk at a seminar. He talked about the different type of asset protection structures such as companies and trusts.

    He highlighted each structure was specific to the investor, however the most common trust structure was a “Property Investment Trust”. These trusts had been created specifically for property investors with some of the following benefits:

    No vesting date Most trusts had a vesting date in which the trust would cease and the entire contents to be paid out to the beneficiaries. However, the property trust had no vesting timeline – Which is useful to avoid capital gains tax and passing assets to future generations.

    Tax incentives Ability to pay the profits of the trusts to multiple beneficiaries – Those with lower incomes/lower tax brackets. Apparently as the trustee – You can choose how much is paid to each beneficiary. It was also stressed that the creation of a trust solely for tax incentives was considered tax avoidance and a criminal offense. However there are other valid reasons to create a trust such as asset protection.

    Protection of a trust As stated above, protection of the assets within the trust from litigators.

    Dynamic beneficiaries Able to appoint new beneficiaries – Such as children ect.

    Ability to pass on the trust to wife or children if you passed on The trust would continue on, acting similar to a will and avoiding capital gains tax when passing on assets.

    A few questions from me:

    All of the books i have read have indicated the affluent hold most of their assets in trusts. In the next 10-20 years i aim to have a muilti million dollar portfolio and may wish to asset protection such as a trust. Is it a costly and complicated process once I am in this situation? Is it worth starting a trust now before beginning my property journey?

    What type of trust is recommended? A trust similar to what i have described?

    How much does a trust structure cost to set up? Does it cost extra during tax time if your assets are owned in a trust?

    Can anyone validate the information I wrote above regarding a property trust?

    Finally – Is there any good websites or books to research the subject further?

    Many thanks

    Shane

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    The no vesting date – any trust set up in SA doesn’t have to have a vesting date. In theory it could go on past 80 years, but just because there is no vesting date doesn’t mean it won’t vest. A beneficiary can force it to. But would SA law apply to a trust set up in QLD which nominates SA as the applicable law? Would the trustee need to be located in NSW, would the trust assets need to be located in SA. All these questions cannot be answered because these laws are less than 80 years old.

    Most discretionary trusts would have the ability to distribute to lower income earning beneficiaries.

    Asset protection will depend on the terms of the trust and how the trust transacts. A person using it as an extension of themselves would weaken asset protection considerably.

    New beneficiaries can be added, but stamp duty and CGT issues arise. Broad wording can mean people that don’t yet exist are potential beneficiaries – grand children etc.

    If you die any assets you hold as trustee do not pass via your will. Your position as beneficiary doesn’t pass via your will, any appointor postion could pass via you will, but probably shouldn’t. The trust will survive you and keep going under different control. YOu have to make sure that this control falls into the right hands.

    The type of trust recommended will depend on your situation and what you are trying to achieve.

    I charge $1500 plus GST to set up a trust, including 2 hours of legal advice and customising the deed.

    A trust must lodge a separate tax return so there would be extra fees for this at tax time.

    There are no good books on this topic – best is probably the Trust Structuring Guide which is very costly, but it is not so comprehensive – doesn’t discuss land tax at all from memory.

    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 Shane WShane W
    Participant
    @shanewebb
    Join Date: 2016
    Post Count: 17

    Thank you Terry, you have been very helpful.

    How does a discretionary trust work with borrowing money and tax deductions? If I have a trust set up and buy a property using borrowed money and is negatively geared – Am I still able to claim all the depreciations and negatively gear against my income?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    A trust is a separate entity for tax purposes (not for legal purposes though). So any expenses the trust incurs it claims, including depreciation. A trust can negatively gear, but you cannot use a loss in the trust to offset your personal income.

    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 andymandym
    Participant
    @andym
    Join Date: 2016
    Post Count: 2

    Hi Terry, Was reading your comments on Dominique Grubisa’s scheme yesterday. Her/My fear is the all moneys clause. She asserts that a bank uses this in bankruptcy to extract all available assets in the property. Her caveat is purported to safeguard the asset value in excess of the mortgage.- without incurring stamp duty to transfer property to trust. Is there any updates on this. Has her trust been proven to work? I live in Victoria. I already have a trust and company.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    What does she fear about an ‘all monies’ clause?
    If someone ends up bankrupt the bank can use its mortgage agreement with the borrower to secure all monies owed to it.

    So I guess you are asking if there is a second mortgage to a related trustee would the bank take priority over the 2nd mortgagee. I think that will depend on the wording of the clause, and the circumstances. It did happen in a NSW SC case Meldov Pty Ltd v BOQ [2015] NSWSC 378

    But usually the amount owed to the bank would be less than the property value.

    A caveat is just notification to the world that someone other than the legal owner also has an interest in a property. It is not a form of security like a mortgage.

    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 andymandym
    Participant
    @andym
    Join Date: 2016
    Post Count: 2

    Thanks Terry, Dom may well be using a scare tactic here but she stated that banks can use the all monies clause in every mortgage to take what is not theirs. Eg 800k house 400k mortgage, 200k still owed – she stated that the bank can send an employee to London for investigations and charge to the recovery, in fact just add a who heap of expenses and fees and that usually the owner gets nothing of their equity. The suggestion is they can do this as there are no other registered interests. Does this happen? Is it common? Are the banks ethical? Would the pundit in this case be given back his (400k+200k – minus forclosure and selling costs) equity.

    Do you have information on typical forclosure and selling costs?

    I have attended many mortgagee house inspections = all seem badly prepared, the agents make it clear that any bid on the day could secure the property. So if the property was sold for 600k, and the bank believes it spent 50k on cleanup – does the owner get back 150k??

    I was attracted to her proposal because the remaining equity is locked into an unregistered second mortgage noted on title with a caveat. She states that this unregistered mortgage ‘Indefeasibility of title means that once our trust registers on the title it can control the equity remaining in the property’. She also says the unregistered mortgage can be used to procect other personal stuff.

    To work, the trust in not in my name, but someone I trust. I am the appointer, the trustee is essentially a puppet. Based on Rockefeller principle of Own nothing, control everything.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    If a borrower doesn’t pay the bank will take possession of the house, sell it, and recover the money they lent and the associated recovery costs. If they property is valued at $800k and they only need to recover $400k it should be pretty simple. Not sure why they would contemplate sending someone to london to investigate – even if you had hidden assets in London, they are not out of pocket.
    If the mortgagee did do something totally unnecessary and unjustifiable you would be able to argue to have these costs excluded from your debt. This doesn’t make sense to me.

    You would have all the usual selling costs and legal costs which would vary depending how long it drags out – say $10k to $20k usually.

    Yes the owner would get back any excess money – the mortgagee would be holding that money on trust for the owner until it passed back.

    An unregistered mortgage isn’t indefeasible as it is unregistered. Lodging a caveat doesn’t register it, the caveat just notifies others there is an unregistered interest. It may give priority over other non registered interests though. To make the mortgage stronger it should be registered.

    There is also a section in the bankruptcy act which makes contracts and deeds void, including mortgages, if they are undermarket value or done to defeat creditors. So would is the reason you would be giving a mortgage to a trust? You may use the gift and borrow back strategy. Gift money to the trust and then borrow it back but give the trust security for its loan. However then your gift is subject to the clawback provisions of s120 and also the s121 and even the conveyancing act -s34A i think in NSW – if you are trying to defeat creditors.

    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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