Peter: You mentioned you have Service Packs for helping people protect their assets. Can you explain one of them and how it works.

Yuk: Yes. I’ll explain an asset protection method we use.

This is a method to protect the assets under your name using a trust, but without transferring the title of the assets to a trust.

We do it by ‘gifting’ your equity to trust, but without real cash transfer. We then create a loan agreement to record the transaction, and register the debt with land title office to secure the debt.

Peter: Ok, that sounds interesting, how does it work?

Yuk: When you gift your equity to the trust, the house title does not transfer.

Existing loan and tax benefits do not change. The only change is that your property has an extra secured creditor – that being the trust.

In the case you lose a legal case, or become bankrupted, your bank (mortgagee) and your trust rank first and second to access to your assets before anyone other creditors (including the one suing you, like the tax office or a customer). They need to get in queue behind your trust. This way, your assets protected even if you lose a court case.

Peter: So what are the main benefits of using this strategy?

Yuk: The main benefits are:

1. You protect all your properties under one trust
2. The ownership of your properties does not change (saving you huge amounts of stamp duty and a big tax bill)
3. Your existing loan structures do not need to change
4. Existing tax benefits do not change at all
5. The trust does not need to lodge a tax return each year, so there are no ongoing fees
6. There is no extra land tax to pay
7. You can pass the trust down to next generation easily
8. You protect your single beneficiary’s assets from future relationship breakdown.

 

Peter: And what are the limitations of this strategy?

Yuk: The main limitations are:

• When the value / amount of your properties increase, you need to add them into the trust (but there is no need to setup new trust)
• If you setup the trust after you are in a relationship, it won’t protect your assets from relationship breakdown.
• If you do a refinance for your properties, your trust may need to remove the caveat / mortgage before you apply for loan, and put it back later.
• This strategy need to have been implemented for four years before it may provide any protection from bankruptcy.

 

Peter: What are the costs of doing a strategy like this?

Yuk: The costs are as follows…

• Set Up fee
• $1650 (GST inclusive) for trust design and setup, preparing the deed of gift, loan agreement, caveats / mortgage forms (for up to five properties in Australia)
• $990 (GST inclusive) for a trustee company setup fee and legal documents.
• $200** land title office fee to lodge each caveat or mortgage form
• Extra-legal cost to register caveat in South Australia.

** the cost of government fee may change without notice, the services fee change will be confirmed with you before the job starts.

Annual fee – Nil

Peter: Can you explain how this may work for the average person?

Yuk: So let’s say John is 50 and single.

He has a home in Parramatta worth $800K, with a current loan of $200K (equity $600K).

John creates an AP trust, and gifts $600K to the AP trust.

Because John doesn’t have $600K cash, he creates a loan agreement with the Trust for that $600K with security.

Thus the AP trust becomes the secured creditor of John’s property.

One year later, John lives with a partner for 13 months, and then separates. Because the equity was gifted to the trust before John stepped into the relationship, the spouse cannot ask John to pay her 50% of the house.

Four years later, John goes into bankruptcy.

The bank takes $200K from the house sales.

The trust takes $720K ($600K plus interest). The house is sold for $1M with the balance of sale $80K going to the liquidator only. John walks away with the trust and $720K cash to purchase another property in the next month.