One popular asset protection strategy is known as a gift and loan back arrangement (also called an ‘asset mortgage’ arrangement).

A gift and loan arrangement is best illustrated with an example.

Assume we have an at-risk individual who owns an investment property valued at $800,000 in their personal name.

The arrangement would involve the following steps:

• A new safe harbour trust would be established following the principles set out in this paper
• The at-risk individual would gift $800,000 to the newly established trust. This gift would be subject to the Bankruptcy Act clawback rules
• The newly established trust would immediately lend $800,000 back to the at-risk individual and take a mortgage over the investment property as security for the loan

The effect of the arrangement is that while the investment property remains in the at-risk individual’s name, the trust is a secured creditor and is entitled to enforce its security over the property, should the at-risk individual become bankrupt.

The arrangement can typically be implemented without any adverse tax or stamp duty consequences.

A number of factors need to be considered when implementing an asset mortgage arrangement, including:

• The initial gift would be subject to the bankruptcy ‘clawback’ provisions and can be unwound for a period of time after it is made. As a result, it is important that the at-risk individual making the gift can provide evidence that they were solvent at the time of the gift was made
• Ensuring the lender is in fact a safe harbour and does not carry its own liability which could expose the asset it holds security over
• If there is an existing debt over the property, ensuring the existing financier consents to the second mortgage
• Ensuring that appropriate legal documentation is implemented and registered to record the arrangement (see for instance, Atia v Nusbaum [2011] QSC 44)
• If the value of the property increases over time, regularly ‘topping up’ the gift and loan amounts to ensure the amount owed by the at-risk individual to the trust reflects the at-risk individual’s equity in the property
• Managing taxation compliance obligations, particularly under Division 7A of the Tax Act where the safe harbour trust owes unpaid present entitlements to a corporate beneficiary

Gift and loan back arrangements can also be implemented in relation to asset classes which can be secured under the Personal Property Securities Register, such as shares and units.

For further information, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au.

• asset mortgage arrangement
• Asset Protection
• at risk individual
• gift and loan back
• Trusts