SMSF Asset Protection - the other direction

Reportedly, trusts are beneficial for asset protection: assets in the trust aren't at risk if the beneficiary goes bankrupt, for example (don't quote me, that part is really just for context).

But does it go the other way? Say I have a property in the SMSF, and in the worst case something tragic happens and the fund is sued (if that's even possible). Does the liability stop with the fund, or is it possible that someone (the courts?) could force the assets of the beneficiaries outside of the trust to be used to pay off any liability?

Badly worded question, probably, but I hope it's clear nonetheless.

 

Discretionary trusts provide asset protection because an interest of a beneficiary, although property that can fall into the hands of a trustee in bankrutpcy, is worthless unless the trustee resolves to distribute.

Super is protected as it is usually not available to creditors. i.e. a member who goes bankrupt usually has their super safe from creditors

However if the trust is sued - for example by a tenant of the property owned by the trust, this is a different story. firstly a trust is not a legal entity, so cannot be sued, but it will be the legal owner of the property which is the trustee of the trust. This is why it is important to have a empty company as trustee. Assets of the trust will be at risk because the trustee is allowed to be indemnified out of the trust assets for being sued in relation to the trust.

Unit trusts are sligthly different as unit holders could be liable.

A SMSF member would generally be safe as well, unless personal guarantees are given - which may be rare as the SMSF would not be a tenant usually or conducting a business usually.

 

Thanks Terry. So to be clear, you're saying that for an SMSF the trustees (and their assets outside the SMSF) would be safe from any legal claim (other than personal guarantees)? Or only if the SMSF uses a corporate structure?

Doesn't the corporate structure just provide one more layer to unravel? If the trustee is a corporation, then won't the corporation be bound in some legal way to "shareholders" of that company?

 

Not definitely not saying that!

A trustee is personally liable for the debts of the trust. A person's personal assets could be at risk if they are trustee.

If a company is trustee the company would not have any personal assets (as it would be set up just to act as trustee). But there are some cases when the directors of the trustee company can be personally liable - insolvent trading, false and misleading issues, etc

Shareholders of a company are not liable for the company debts - and neither are the directors in most cases.

It is another layer, but not 'just' another layer. A company is a separate legal person which will provide a high level of protection of the persons behind it.

 

Thanks Terry, I appreciate your responses

 

Well said, Terry.