Security Over Equity In Assets
One way for an individual to protect an asset against future creditors is to transfer that asset to a family trust, ensuring it is protected for beneficiaries of the trust. However in the case of property, stamp duty and other taxes become payable on such transfers, reducing the value of this type of protection. This can be avoided by the owner of the property instead ‘gifting’ their equity in the property (net of any mortgages and/or loans) to the trust and the trust then loaning back an amount equal to the gift. The trust then takes a registered mortgage over the property to secure the loan.
The advantages of this arrangement are that the trust will be ranked ahead of any unsecured creditors should debts become due, because of its mortgage over the property. Note that any existing mortgagors at the time of the gift (such as the bank) will be ranked first. As the gift and loan arrangement does not involve any transfer of property, transfer duty and Capital Gains Tax will generally not apply. The mortgage registration fee and legal fees should be the only transaction costs. The disadvantages of this approach are that it does require more paperwork than a straight transfer, including a deed of gift, loan agreement and mortgage documentation, as well as the establishment of a family trust, if there isn’t already one in place. Only the value of the loan is protected, so if the market value of the property increases, or the debt owing to any other financiers of the property decreases (increasing the owner’s net equity in the property) then the loan arrangement will need to be topped up. There are bankruptcy clawback rules which may affect the arrangement and specialist advice should be obtained regarding these provisions. Should you wish to discuss the above issues in further detail, please do not hesitate to contact Marsh Tincknell on 07 3422 8000 or email us Download this Fact Sheet as a PDF. Do you know someone who would find this fact sheet useful? Please feel free to share it with them via email or Click Here to Tweet About It.