Getting your wage deposited into a trust Bank Account and the risks

A client has advised they were ‘advised’, on an expensive course, to deposit their wage into a bank account of the trustee of a trust rather than into their own personal bank account..

This is for asset protection supposedly.

The idea is that the money never touches your account so it cannot fall into the hands of creditors.

How silly!

In situations such as this, the trustee would be holding the money for you as bare trustee. There is no asset protection if you were to go bankrupt, die or go through a family law property settlement as it is still your money.

Furthermore, you have additional issues to consider such as what if the trustee

  1. Dies
  2. Goes bankrupt
  3. Loses capacity
  4. Gets divorced
  5. steals

You would probably have worse asset protection issues.

If you did end up bankrupt the money could easily be clawed back.

Tip: Don’t do this without proper legal advice tailored to your situation.

Discuss at https://www.propertychat.com.au/community/threads/legal-tip-232-getting-your-wage-deposited-into-a-trust-bank-account.40643/

Indefeasibility and the Torrens System

I don’t advise on property law, but this topic is relevant to asset protection.

The Torrens system of registration of title for real property was first introduced in the late 1800 and it has slowly been replacing the existing system since then. The existing system of title is known as ‘old system title’ and it was complex and cumbersome.

In old system title when a property was sold the ownership had to be proved by both the physical title and locating all the previous transfers relating to that title. Sometimes documents went missing and it was a real pain in the arse being both time consuming and costly.

Torrens was introduced as a system of registration to replace all of this. The name registered on title was the legal owner. This is enough proof.

Indefeasibility refers to the fact that what is registered on title is proof. So, a registered owner is proof of legal ownership. A registered mortgage is proof of the legal mortgage. It is said to be a ‘system of title by registration’.

But this doesn’t mean registered ownership takes priority in all cases.

An example is fraud. Where title to a property is fraudulently transferred to someone else then them being registered owner does not mean it is indefeasible. This can happen with mortgages too. There is a recent case where one spouse mortgaged a jointly owned property to borrow money by forging the signature of their spouse. Since this was fraudulent the lending bank could only recover half of their money.

Keep in mind that there are also unregistered or equitable interests. The legal owner may not be the beneficial owner of a property. This happens where they are acting as trustee under an express trust, such as a discretionary trust, or where a trust is implied such as a resulting trust. In these cases the courts will enforce transfer of title based on equitable grounds.

Then there claw back provisions in various legislation such as

  • S 37A of the Conveyancing Act NSW (and other state equivalents)
  • S 120 to s121 of the Bankruptcy Act
  • Family Law Act
  • Succession Acts

Title of a property might be held by person A but the courts can reverse this and transfer it to person B and then to creditors, spouses, missed out beneficiaries etc.

So, in summary, indefeasibility does not mean a property dealing cannot be attacked, but it is evidence of the current legal ownership of property.

Discuss at https://www.phttps://www.propertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/ ropertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/

Trusts and Incapacity

There are several issues which can arise when a member of a trust loses their mental capacity.

Trustees – a trustee must have mental capacity to act as trustee. Where capacity is lost, and that person is a trustee they will automatically be removed as trustee. The terms of the trust deed will need to be read to determine what happens next. Often it will be up to the appointor to appoint a new trustee.

A trustee’s attorney cannot act in their place.

Example

Homer is trustee of the Simpson Family Trust. Homer has appointed Barney as his attorney, under an enduring power of attorney document, if Homer where to lose capacity. Homer does lose capacity and can no longer act as trustee. However, Barney cannot act as trustee in Homer’s place.

Appointors – The appointor of the trust is the person who has the power to hire and fire the trustee. Also called the Principal or Controller in some deeds. If an Appointor loses capacity often, they are automatically removed as appointor – this is often built into the deed of the trust. If this happens a successor appointor appointed by the trust deed or a second deed may determine who the next appointor is. Where there is none there may be no appointor of the trust. Where the trustee and the appointor are the same person this could causes problems as the trust would be out of anyone’s control and an application may be needed to the Supreme Court for them to appoint a new trustee (very costly).

Where the appointor is not automatically removed then the appointor’s attorney may be able to exercise the power of appointment of the appointor.

Example

Homer has made an enduring power of attorney appointing Barney to act on Homer’s behalf. Homer is the trustee and Appointor of the Simpson family trust. Homer loses capacity. Barney cannot use the POA to become trustee, but he can exercise Homer’s power as appointor of the trust to appoint himself as trustee.

Beneficiaries – a beneficiary is just a potential recipient of income and/or capital of the trust. A beneficiary losing capacity doesn’t change this, they can still receive income and/or capital from the trust.

Company Trustees – If a director of a company loses capacity often the company constitution will work to automatically remove that person as director of the company. If a shareholder loses capacity their attorney can act in their shoes by using the voting power and shareholders can vote in a new director. A director’s attorney cannot act as director but must be appointed director of the company first.

It is also possible for a company to have successor directors or substitute directors. These are appointed by the constitution of the company and need to be set up before capacity is lost.

Example

Homer is the sole director of Simpson Nominees Pty Ltd which acts as trustee for the Simpson Family Trust. Homer has appointed Barney as his Attorney. Homer loses capacity. Barney cannot simply start acting as director of the company or operating its bank accounts etc. The shareholders of the company must appoint a new director. In this company Marg owns 50% of the shares and Homer owns 50% of the shares so a meeting of shareholders would need to be called a vote counted – Barney could vote on Homer’s behalf and Marg on her own behalf (the constitution would deal with situations where there is a 50/50 tie in voting).

However, it is later recalled that the constitution of the company was amended a few years ago so that if the current director lost capacity Bart Simpson would immediately be director – no further consent was required (however the shareholders could vote Bart out, depending on the constitution of the company)

Discuss at

https://www.propertychat.com.au/community/threads/legal-tip-219-trusts-and-incapacity.39809/

Are Shareholders Liable for the Debt of a Company?

A worry for some people is that if they become shareholders of a company, they could somehow become liable for the debts of the company.

This is not the case unless the shareholders give a personal guarantee or become directors of the company perhaps.

Example

Bart invests in Barney Pty Ltd which is a construction company. The company has virtually no assets. One day one of the staff members is seriously injured and sues the company. The company collapses and Bart is worried ‘they will come after him’.

This is generally not possible because Bart is a separate legal person to the company. His shares will be worthless, but there is where it ends.

However, there are some limited exceptions to this rule those for cases of fraud, the company acting as agent for the shareholder, shadow director roles, shams, parent companies and subsidiaries – all of which are very rare.

Caselaw

The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42

“The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…” (at 435)

Discuss at

https://www.propertychat.com.au/community/threads/legal-tip-218-are-shareholders-liable-for-the-debt-of-a-company.39770/

Why you should avoid appointing a successor appointor in a Trust via a will

I often see discretionary trust deeds which nominate the next appointor, upon the death of the current appointor, to be the Legal Personal Representative (LPR) of the last appointor upon their death. On death the LPR of the deceased is the executor or administrator of the will.

This is a bad idea!

Example

Homer has set up a trust without getting legal advice. Homer is the sole appointor of the trust and there has been no thought given to what happens after his death. The deed is worded in such a way that the LPR of Homer will become the next appointor. The trust holds assets of approx. $2mil when Homer dies.

What could happen?

  1. Homer’s will appoint his mate Barney as his executor – Barney is now appointor of the trust and removes the current trustee and appoints a company he controls, or
  2. Homer’s nominated executor refuses to act and it ends up being the public trustee that becomes the LPR. They would immediately remove the trustee and appoint a trustee that they control. This would be much safer than Barney being in control, but they may have different ideas on who can benefit from the trust, or
  3. Aunt Thelma could be the only one that applies for Administration of Homer’s estate as he died without a valid will. She is the LPR. Now she is the appointor of the trust. She is also a beneficiary of the trust and the trust deed permits the trustee to act even though there may be a conflict of interest. Thelma could milk the trust and benefit herself at the expense of Homer’s children
  4. More practically speaking, the LPR is only appointed once the courts have granted Probate or Administration. This could take 6 months of more. So until this happens the trust will be without an appointor. If the deceased person was the trustee or the sole director and shareholder of the trustee company the trust will be under no one’s control until the LPR is appointed. This means no access to bank accounts, no ability to make a beneficiary presently entitled to income, of it crosses the end of June, which means the top marginal tax rate on all trust income. Any sales of property won’t be able to happen, contracts entered into may not be able to be completed – litigation potentially resulting.

Solution – seek legal advice about appointing a successor appointor now, via a separate deed. If the trust deed doesn’t allow this, seek legal advice on having the deed amended to allow it.

Keep any clause relating to the next appointor being nominated in the will as a back up, and avoid having the LPR being the next appointor.

Discuss at

https://www.propertychat.com.au/community/threads/legal-tip-216-why-you-should-avoid-appointing-a-successor-appointor-in-a-trust-via-a-will.39689/

Asset Protection and Clawback Provisions

When entering any transaction, especially related party transactions, consider the clawback provisions under the Bankruptcy Act, the 2 main ones being:

Section 120. Undervalued transactions see

http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s120.html

Section 121. Transfers to defeat creditors

See http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s121.html

Most people forget about the state legislation as well:

e.g. Conveyancing Act 1919 (NSW)

Section 37A. Voluntary alienation to defraud creditors voidable

See http://www.austlii.edu.au/au/legis/nsw/consol_act/ca1919141/s37a.html

Each State has its own legislation similar to the s37A

What the above sections mean is that a transaction entered into with the intent of defeating creditors or putting property out of reach of the trustee in bankruptcy (if you were to go bankrupt) could be attacked. This can even apply to future creditors.

So, take care in how you do things, especially related party transfers such as changing title on property, declaring trusts or moving cash.

Discussion at

https://propertychat.com.au/community/threads/legal-tip-2-asset-protection.224/

Strategy of Borrowing from a Testamentary Trust instead of Winding it Up

Testamentary Discretionary Trusts (TDT) are the best sort of trust out there, but someone has to die for them to come into existence. So, they are relatively rare. Also, the capital of the trust has to come from the deceased for the extra tax benefits to work (excepted trust income).

So, I cringe when clients approach me wanting to wind up a TDT that their parent has left them in control of.

Their idea usually goes something like this. I have a $1mil loan on my main residence and the trust holds $1mil worth of assets. If I wind up the trust, I can pay off my home loan and save interest.

It is a valid point, but once a TDT is closed it can’t be reopened again, and even if kept open new capital can be injected, but income generated from it would not qualify as except trust income and would not get the concessional tax treatment in the hands of children.

There is a simple way around this though, and that is to get the trustee to make you an interest free loan.

Example

Bart’s dad Homer dies and leaves $1mil to a trustee of a TDT set up under his will. Bart has a $1mil home loan so winds up the trust and pays off the loan.

Lisa is in the same position, but she controls a separate, but identical trust. Lisa gets the trustee to lend her $1mil interest free which she uses to pay off her loan. She has not no deductible debt now. So, she uses the $3,000 she was paying the bank each month to pay back the trust.

The trust now has money with which to invest. The income from these investments can go to Lisa’s children tax free – because they can each earn $20,000 pa tax free so it will be ages before the trust’s income is more than this.

Meanwhile Bart is making the same investments as Lisa, but he receives the income himself and is taxed at 47%

Over the next 15 years or so Lisa would have probably repaid the full $1mil back to the trust so it is now generating about $40,000 per year in income which comes out tax free to her kids.

Once the kids start working, she will have to reassess where the income goes, but until then there are huge savings.

Tip – Don’t wind up a testamentary trust without careful consideration and legal advice.

Note that this would also give great asset protection as well.

Discussion at:

https://www.propertychat.com.au/community/threads/legal-tip-115-strategy-of-borrowing-from-a-testamentary-trust-instead-of-winding-it-up.39662/

Helping an Elderly Parent Buy a new property

Get some legal advice before trying this.

Some people want to help their elderly parent(s) purchase property. This might be the parents moving to a more suitable property or the parents becoming owners instead of renting.

Helping the parents into a property can also help the children too, because they may potentially inherit the property at a later date and there can be great tax concessional along the way.

There are basically 3 main ways an adult child could help a parent into a property:

a. gift

b. loan – at interest or interest free

c. purchasing part of the property.

There are various estate planning consequences to each of these and also practical consequences.

Some things to consider:

  • if the parents own the home it might be 100% CGT and land tax exempt, if the child owns part it may not be completely exempt.
  • If one child made a gift and they have siblings and the parents die before they gift giver then the other siblings may also benefit from the gift.
  • if it was a gift and you died the next day after making the gift your family would potentially miss out
  • If it was an interest free loan and nothing done for 6 years it could become unenforceable
  • If they have incorporated a testamentary discretionary trust in their will and it the gift all came back to ‘you’ this could provide tax free income to your minor children for years to come.
  • If you gift it and parent A dies first parent B might remarry…

An example of how It could work

Bart and Lisa are adults with one parent left – Homer. Homer lost his house years ago and is renting. Bart and Lisa each have their own homes fully paid off and some cash in the offset accounts to their separately owned investment properties.

Bart finds a property with development potential. It is just around the corner from where Homer lives in his rented flat. Bart is going to purchase the property and is deciding what entity to put it in when he has an idea.

The property purchase price is $500,000. He has enough cash to pay for it so he could just buy it outright, but since his dad is not getting a main residence exemption for CGT Bart talks to Homer, his dad, and they decide to buy it in Homer’s name.

Homer signs the contract and Bart lends him the 10% deposit with a promise to lend him the rest for settlement.

Bart then realises that if Homer dies his sister Lisa will end up with half the property. So to make things fairer he talks to Lisa and gives her 2 options

  1. Lisa put in 50% of the purchase price at settlement, or
  2. Homer leaves the whole property to Bart and Lisa agrees not to challenge this if it happens.

Bart and Lisa decide to ‘go 50/50’ and each lend Homer $250,000 and Homer settles on the property. It is a 5 year interest free loan which they intend to renew each 5 years.

Bart arranges various approvals and the property is now worth $1mil when Homer dies 4 years later.

Under the terms of the will of Homer 50% of his assets would go into each of 2 testamentary discretionary trusts with one controlled by Bart and one controlled by Lisa.

They each now have 50% of an additional property which would be could be sold tax free or held onto with a cost base of $1mil. There has been no land tax along the way because this was Homer’s main residence and they have each gained further tax deductions by using cash in their offset accounts.

Furthermore, any income generated from the property from that point could be streamed to their minor children, as beneficiaries of the trust, with each child getting around $20,000 without having to pay tax.

Just before Homer’s death they also forgave the loans they made him – so this meant that an extra $500,000 was driven into the testamentary discretionary trust so they could generate even more tax free income.

Discuss at:

            Legal Tip 208: Helping an Elderly Parent Buy a new property            https://www.propertychat.com.au/community/threads/legal-tip-208-helping-an-elderly-parent-buy-a-new-property.39377/

Written by Terryw Lawyer at www.structuringlawyers.com.au

What is a Secret Trust?

I would like to tell you, but it is a secret.

These are trusts, usually set up under a will, where property is left to a person on an undisclosed trust for someone else.

Example

Homer dies and leaves $100,000 cash for his mate Barney, but leaves it to Ned on the understanding that Ned gives Barney $100 per week for the next 100 weeks (so Barney doesn’t waste it all in the first week).

Barney is not recorded as the beneficiary under the will.

Naturally there may be problems with enforcing these trusts as no one may know about them other than the trustee. The beneficiary may realise or find out though but even then they will probably have difficulty proving the trust if there is no written evidence. As such you really must trust your trustee when doing this.

There is also the half secret trust, and that is when the trust is partially disclosed in the will. For example the will might say that Ned is the trustee (using above example) but not who the beneficiary is or the terms of the trust. This might have a higher chance of being enforced as it is evident that there is a trust, but not who for and for how long and how much.

Discuss at

https://www.propertychat.com.au/community/threads/legal-tip-204-what-is-a-secret-trust.39248/

Written by Terryw who is a lawyer at www.StructuringLawyers.com.au

Consider the remarriage Risk when doing a Will

When one spouse dies often the surviving spouse remarries. This will mean any inheritance received by the surviving spouse could be at risk of not ending up in the children’s hands.

Example

Homer and Marge are happily married and have 3 kids, they prepare their wills so that if one dies the survivor gets everything, if they both die the kids share everything equally. Sounds good so far.

Homer dies.

Marge inherits Homer’s assets which were 50% of the main residence, 50% of the investment property and 425 pens stolen from his employer over the years.

So far all is well.

A year after Homer’s death Marge gets on tinder and eventually marries a guy called Barney.

Marge’s will is now revoked by the marriage, marge dies and under the intestacy laws of NSW the assets of Marge get shared by Barney and the kids.

Even if Marge didn’t marry Barney, he might still be able to take a share because he is a de facto spouse. If the will was in place still, he could make a family provision claim. There is also the possibility that Marge will knowingly prepare a new will and leave Barney something – or everything.

So, when making a will consider that your spouse could enter a new relationship after your death and plan for it. Assume it will happen.

For a Discussion go to: https://www.propertychat.com.au/community/threads/legal-tip-197-consider-the-remarriage-risk-when-doing-a-will.38888/