Common FAQs about trusts (and why they are used to protect assets)

Common FAQs about trusts (and why they are used to protect assets)


The key issues (so you understand the process) are:

  1. Assets held by a company in its own right (rather than as a trustee) are not asset protected…so if shares are owned by a company, then they are not asset protected.
    • Why? Let’s say a company has $1m of assets, and you own 50% of the company that owns those assets – ergo your shares are worth $500k.
    • Then a 3rd party gets judgment for $2m.
    • That 3rd party can have 50% of the shares transferred in partial satisfaction of the judgment.
    • That is why you should use a discretionary trust as the beneficiaries do not have a defined percentage of the trust assets.
    • The trick is to get the assets into a discretionary trust.
  2. If your husband has an interest in the house in your name, then anyone who gets judgment against him can enforce against the house.
    • If your husband could claim an interest in the house during a divorce, and I suggest he could given the length of your relationship and absence of any pre-nuptial agreement, then a judgment creditor could pursue and recover against that interest.
  3. Just because the house is in your name, and you pay for the mortgage, does not prevent him having an interest in the house.
    • If he has an interest, then it is available for any judgment debtors.
    • If you paid for everything, then this may reduce the value of his interest.
    • The amount by which it reduces his interest is dependent upon the length of your relationship, whether he pays for other expenses associated with the house, and the other indicia that apply to property divisions following divorce.
    • Whatever the amount is, there is an interest, and that interest is at risk.
    • Likewise, if someone successfully sues you, then your interest is also at risk.
  4. A valuation is an extra precaution to guard against allegations that the transfer was below value. It is not essential.
    • There should be no maintenance or audit fees associated with a trust if all it does is own an asset because it is not earning any income which would obligate it to pay tax.
    • In this case the trust will just own assets – the net equity remaining after the bank is paid.
    • If the value of the house increases, then you will need to gift that increase over, if you want it protected, however that process is simpler (and cheaper) as the structure is already set up, and it is just the amounts that need to be increased.
    • Given the current property market, I doubt you will need to consider this for some time (and you can ignore it if you do not want to protect the increase in value) – most people “top up” the protection every 3-5 years, if the net equity has increased by $100k or more.
  5. The act of marriage is not the sole risk factor – a de facto couple would have the same issue, as they are treated the same under Australian law.
    • One other approach would be to sign a post-nuptial agreement however these are less enforceable, and involve similar costs.
    • A post-nuptial would bolster the protection of course.
  6. The key players in a discretionary trust are as follows:
    • Appointor = person who appoints the trustee, person who replaces trustee = person with real power.
    • Trustee = decision maker for the trust = person with power unless the appointer replaces them.
    • Settlor = person who drafts the trust and sets it up (me) = person who ceases to have relevance after the trust is set up.
    • Beneficiary = persons who can receive the benefit of distributions from the trust, if the trustee exercises their discretion to distribute.

Please also remember:

  1. It is impossible to absolutely protect assets.
  2. The level of protection afforded by any structure increases as you put more measures in place – eg a post-nuptial agreement would create further protection, as would registering a fixed and floating charge or PPSR charge.
  3. The most cost effective form of asset protection is to sue a discretionary trusts – they are effective, provided they are set up correctly.
  4. The sooner it is done the better – transactions can be reversed in certain circumstances, unless time has passed – the main time limits are 6 months, 2 years and 4 years – after 4 years, the structure is very robust. This is why we need to get this done – delay is to be avoided.
  5. That said, it is never too late – setting up protection just before bankruptcy or liquidation is always a risk, but even then:
    1. There is some protection in place.
    2. There is an ability to scare anyone off from trying to enforce against the asset (eg a house).
    3. You will have negotiating leverage if it is attached or threatened.
    4. You have the potential to have all monies owing after the bank is paid, transferred to the family trust.

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