Imagine the excitement. You have worked, saved and hunted hard. Finally, you have found a home perfect for you. Moving day arrives and you and your possession make their way to your new castle. Over the next coming months, you plan the alterations you want to make and the things you want to buy to make your new abode your private haven.
Lots of energy goes into this planning – after all, buying your home and making it your personal sanctuary is probably going to be one of the biggest decisions you make in your life time. It’s also likely to be the one of the biggest investments you are going to make. So have you done all you can to protect this investment?
Risk surrounds us. It comes from the business dealings we enter into. It can arise from the actions our spouses and children commit. It can even come about from the events we engage in. And when these ‘left wing’ events occur, it is often irrelevant in the eyes of the law whether a person meant to bring about the harm that has been done. An intention not to commit the event won’t mean a person isn’t found guilty. Nor will it mean their assets are safe.
Because of the risk people face, it is important for assets to be protected. For this reason, many people use a family trust to hold their assets such as a family home. Simply putting your home in a family trust however is not enough. The documentation that is associated with transferring the home to the Trust must have integrity and contain appropriate clauses to ensure full protection is had.
Let us take the example of Mr and Mrs Smith selling their home to the Smith Family Trust. Initially, they and the Trustees of Family Trust with sign an Agreement for Sale and Purchase. The Agreement should contain a couple of important clauses including reference to the fact that the purchase price for the home will be paid by the Trustees by them entering into an IOU, often referred to as Deed of Acknowledgement of Debt.
Often when people sell their home to a Family Trust, the Trust won’t actually have the money to pay for it. So in place of the money and to avoid paying gift duty, the Trustees and the owners enter into a Deed of Acknowledgment of Debt. The Deed will record the amount of money owed by the Trust for the purchase of the home. In certain circumstances, you can be made by judgement creditors and the Official Assignee, to call in the IOU. To assist in protecting against this, certain clauses should be contained in the Deed of Acknowledgement of Debt.
So, let us assume Mr and Mrs Smith have sold their home and have a Deed of Acknowledgement of Debt from the Trustees of the Family Trust. Let us also assume that Mr Smith incurs a large business debt which, for no fault of his own, he is unable to pay. Feeling annoyed at not being paid, Mr Smith’s creditor goes to Court and sues him for the money he is owed. Mr Smith claims he has no assets to pay the debt with and the creditor is left to find a way to get his money. After doing some checking, the creditor finds the Trust has purchased a home from Mr Smith and has given Mr Smith a Deed of Acknowledgement of Debt (eg: an IOU) . The creditor would likely then force Mr Smith to ask the Trust for repayment of that IOU. Why would the creditor want to do this? Because, if the Trust repays the debt it owes to Mr Smith it means he will have the money to pay the creditor! To repay the debt to Mr Smith, the Trust will likely have to sell some of its assets, such as the family home, and thus the Trust ends up providing no protection at all. All of this can however be avoided if appropriate clauses are put into the Deed of Acknowledgement of Debt.
In summary, Trusts are a useful and successful means of protecting assets. Anyone purchasing a substantial asset, such as a family home, needs to seriously consider taking protection. After all, you wouldn’t buy a car without insuring it would you? So why spend even more money on a home without doing all you can to protect it? You have to remember however that simply putting your family home into a Trust without having the right documentation won’t offer much protection at all.