I have often been asked whether we should have an individual or a Company as Trustee of a Trust? To answer that correctly we need to "start with the end in mind".  What is the ultimate goal?

Are you simply going to buy one or two properties, or are you going to buy quite a few?

From an Asset Protection point of view, if you are only going to buy one or two properties than perhaps using yourselves as Trustees will be sufficient. However, if you are planning to buy lots of properties over the years then we definitely recommend a Company as Trustee.

Why?

If someone plans to sue you, such as a tenant or even a customer in your business, then generally they sue the Trustee.

If you are the Trustee then they will sue you and everything in your name … such as your home and shares in a company, plus other investment properties will be at risk. If you had a $2 Trustee Company act as the Trustee of your Trust, then the predator can only take the assets of the Trustee Company which is $2.

And what of the concept and practicality of the concept of using Trusts: I have heard everything spoken about Trusts from, "they are no good because they trap the negative gearing", to "there is no need for asset protection hence there is no need for a Trust".

I have even heard that one lender would not lend money to Hybrid Trusts because they thought it was bordering on tax avoidance. Yet there is a Tax ruling # 28993 from the Australian Tax Office that clearly states that using Hybrid Trusts is fine. You would like to think that the banks should stick to banking and leave the tax matters to professionals who deal in tax.

What about the Finance Broker who says that if one buys a property in a Trust then the loan goes from a Residential Loan to a Commercial Loan ... add it to the thousand other old wives' tales.

Back to the risk component supporting the establishment of a Trust. If you only had one Investment Property then you will only have one tenant. The risk of one tenant suing you is very low, and taking out some landlord insurance will further mitigate the risks.

However, if you had 10 investment Properties then you have just increased your risk ten-fold - now have 10 tenants (with 10 times the risk of someone falling over an old piece of carpet, or a tradesman coming in to fix something in the house and hurting themselves).

Some naive people out there say that there is no way that a tenant can sue you. That's a bit like saying that I do not need car insurance because I have never had a car accident. It only takes one event to wipe someone out completely. I have seen it happen personally with some clients who have taken that attitude.

Naturally, when nothing happens then one is accused of over-reacting. However, when you run a business (and let's be realistic here, when you have more than one or two properties you are now in the "business of real estate") any prudent business must have a "Risk Management Plan" which should include landlord insurance and Trusts.

I have also heard people say that all you need is "landlord insurance" and everything is fine.

Not so.

I can tell you story after story of insurance companies who are happy to take your premium but, when you attempt to make a claim, they fight tooth and nail to find loopholes not to pay; meanwhile you have to pay solicitors to defend the claim and counter-sue the insurance company, and the legal bills just keep mounting up.

One particular story comes to mind: a client tried to claim, the insurance company argued that the steps in his building were too wide apart and were "not regulation", and under their policy they did not have to pay the claim.

Another story: a client was a contractor to a builder and another contractor had kicked and dislodged a power cord to the refrigerator at a major hospital, destroying millions of dollars of blood. The hospital sued the builder and the builders insurance company sued all the contractors. The client incurred some $200,000 in legal fees because he had assets in his own name and could not afford to sit back. If he had no assets in his name, or he had a Company as Trustee, then all he needed to do was to declare the company bankrupt (lost of $2) and the claim would have "gone away".

When you run a business you must take the attitude "an ounce of prevention is better than a pound of ... ", well, you know the rest.

When you are buying an investment property, or indeed several of them, you are investing quite a few hundred thousand, or even millions of dollars. It is not worth trying to skimp on the cost of setting up a Company, which is around $1000. This is simply false economy.

While you could use the same Trustee Company over and over again as Trustee for other Trusts, it is false economy. It's much better to use a different company as Trustee of each Trust.

For one thing we find that the banks get confused when the same Trustee Company is used for a lot of Trusts. They generally want to cross collateralise all your other properties held in other Trusts with the same Trustee Company. Generally one can "talk" and "explain" one's way through this, but it can still cause a few more hurdles when financing.

As you are building your property empire take the time to educate yourself and understand structures. Indeed, there is an old saying: "a little bit of information is dangerous". So read some good books or go to some seminars to learn the basics of trusts.

Arm yourself with the information, so next time someone tries to advise you on property ask yourself 'How many properties does he / she have?' And next time someone tries to give you investment advice, ask them 'How successful have you been in investing?'

Next time a Finance Broker says that it's impossible to get finance through a Trust, ask him how long has he been doing this.

Next time someone tries to give you advice about Trusts, ask them 'Do you set them up? More importantly, are you currently a practicing professional in this area? What experience do you have that qualifies you to speak with any authority on this highly specialised area?'

Be confident in your knowledge. And, more importantly, build a trusted team of professionals around you.

---------------------------------------

<<To find out more about these great books and other resources to make you a better investor, check out our online bookshop by clicking here.>>

--------------------------------------------------------------------------------------------