Legal Tip 132: Trusts and Your Assets and Liabilities Statements

Trusts and Your Assets and Liabilities Statements

I recall myself being confused in the early days when drawing up assets and liabilities statements for the banks. Do you declare trust assets or not?


The answer is ‘no’ – not unless you are the beneficiary of a unit trust.


With discretionary trusts the assets do not belong to you, whether you are the trustee, the appointor or a beneficiary. Beneficiaries have no ‘interest’ in a discretionary trust, other than having it properly administered. If there was an interest, then it would be at risk from attack.


Putting down trust assets in your own income and liabilities statement may even be used against you later on. It could be argued that the trust is a sham, or that the trustee is only acting as trustee for you, a bare trust relationship. This will weaken the asset protection aspects of the trust.


Similar with leaving trust assets under your will. Don’t do this as you cannot deal with trust assets this way. If you do mistakenly leave trust assets in your will then the beneficiary who you left those assets to will miss out and can sue the estate and argue that the trust was a sham and that they are entitled to the assets. This is what happened in Smith v Public Trustee NSW from a few years ago.

 

Hi Terry,

How would a beneficiary access an equity top up on a property purchased by a trust to use as a deposit on another property owned by a separate trust? Would it be a loan? Or would it be considered income and taxable?

 

I agree with your overall position Terry, and I've given this quite a bit of thought myself and generally come to the same conclusions. The question is, do the lenders themselves agree?

If you're doing some finance within the trust, certainly assets and liabilities within that trust need to be disclosed as the trustee is generally the borrower.

For transactions outside of the trust in question it's very much a grey area. Cash flow between the trust, trustee and beneficiaries certainly form part of an individual or related entities cash flow. Consider:
* Applicants for a new loan rely on distributions from the trust for serviceability purposes.
or
* The trust relies on money from the borrowers to meet its own debt obligations, which those borrowers guaranteed and continue to service.

In both cases the lender reserves the right (and it can be argued they have a legal responsibility) to investigate financially related entities to the borrowers. Generally the most appropriate way to conduct these investigations would be to require tax returns, profit & loss statements. Simply by viewing these documents, the assets and liabilities of the trust would essentially be disclosed.

 

To access equity in a trust you either have to cross collateralise (not a good idea) or borrow the money. If the trust is borrowing the money, all assets and liabilities held by that trust need to be disclosed.

The tax implications of moving the money from an equity loan from one trust to another is a question for an accountant.

 

The Trustee would need to review the trust deed to make sure this is allowable. It would then borrow and lend to the the other trustee. A written loan agreement would be needed.
Loans are not taxed as income usually.

 

I think your confusing the issue Peter. Trust assets don't belong to a beneficiary so the beneficiary should not be declaring these assets. If a lender wants to investigate income from related parties that is fine - but a totally separate issue.

 

Good to know so as to ensure it goes in the trust deed in the first place.
And on another scenario, where an individual needs to move money into the trust to say, pay for a deposit on a property or repay a loan earlier, can it be a gift? Or is a gift taxed in this case? I think from an asset protection perspective, gifting the money is better because if it is a loan, that means the individual can get it back to pay its creditors.

 

it can be a gift or a loan.
If a gift it just increases the corpus of the trust the capital.
No taxes on gifts.

if you want asset protection do a deed of gift - otherwise it may be argued it was a loan.

 

I understand that trust assets don't belong to the beneficiaries. I'm just pointing out that lenders would generally expect to investigate other parties related to the borrower. I just can't see how this could be done without giving the paperwork that effectively does give some disclosure of the significant assets and liabilities.

If the lender is aware that a borrower is receiving distributions from a trust, they'll ask to see the trust financial. Those financial will reveal that the trust is holding property which then leads to questions from the lender about the nature of the financial around that property. You may not have to disclose the trust A&L, but the evidence will lead the lender there and they are unlikely to fund a loan if you don't give them disclosure.

There are ways to use a trust to your advantage in regards to finance, but it's best done through controlled disclosure upfront rather than ignoring it.

 

yes definitely. I was not suggesting lenders wouldn't want to see these documents.

My post was done because some people actually list the trust assets in their own personal assets statements - which is wrong and naughty.

 

Ambrose as Trustee of the Bankrupt Estate of Athanasas v Athanasas [2016] SASC 63
http://www.courts.sa.gov.au/Judgments/Lists/Judgments/Attachments/2642/2016 SASC 63.pdf

This case is a case where it was argued that the son was holding land as trustee for the parents. The son went bankrupt and the creditors where after his share. If a trust existed it would not matter that he was the legal owner as the land would have belonged to the parents and could not be taken.

But this failed, in part, because the son had declared that he owned the land in his assets and liabilities statement for a home loan with St George:
see no 1 in paragraph 28