I'm looking to create a structure that will provide asset protection and tax minimisation benefits for an international property portfolio and allow enough freedom to use the funds for further investment.
I have four properties in the US under a Limited Liability Company structure while I am the managing member. I have used the equity in my PPOR in Australia to access a bank loan for the funds. I'm also in the hunt for quick-turn property deals in Australia to build equity in order to access other positive cashflow property opportunities either in Australia or abroad.
I have heard of many options for structuring but I'm not sure of all the benefits and limitations for each. The stand outs are:
- A (family) discretionary trust with a corporate trustee. This seems to be the popular choice for asset protection as it provides the double layer of distance from any legal action. However, the tax minimisation options are limited once you reach the income thresholds for each of the beneficiaries.
- A discretionary trust with an human trustee and a company as one of the beneficiaries. This provides a single layer of asset protection and allows the trust to disperse income to family members to gain tax advantages and the remainder can be pushed into the company (at a 30% tax rate) for further investment or business use.
- A discretionary trust with a human trustee which controls many of the above structures – this adds a further level of asset protection in the case of a large investment portfolio
Does anyone have any experience with the above? What are the traps for young players? If you have a structure but would do it all differently next time, please also offer some advice. How do you structure your share investments in relation to other investments and business – for example, do you set up a separate structure for each or do you have the same corporate trustee for shares, business and property? If you know of a service provider who can offer any advice, please share their details.
In addition, if you know: How does the flow of funds work? In other words, if you want to re-invest the funds earned, what entity does the investing?
Please share your experience.
Cheers,
JhewisonI would think you should have a separate structure for each country. There are lots of tax implications with investing os and one structure would not fit both countries.
I am not sure what you mean by 'double protection'. its not really double, but protection against 2 separate events.
Having a corporate trustee will protect the individual behind the trust if the trustee is sued. And having a discretionary trust will, in many cases, protect the assets owned by the trust against creditors of the individual.
A discretionary trust can't control structures, you will need a legal entity such as a person or company to control the trusts.
There is no real need to use a company as trustee for a trust that only trades in shares and there is little to no chance that a shareholder could get sued. if investing in property that is a chance that the owned of the property, the trustee, could get sued, eg by a tenant, so this poses more risk.
ideally you would have one property per trust in case the trustee is sued – best to have each one in a new basket, but this may cost a bit.
Most trusts are worded in a way that companies can be added later as beneficiaries if need be.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
A few things to consider
1. Losses in a discretionary trust will be “trapped”. i.e. they can’t be distributed to the beneficiaries but need to be carried forward to be offset against future income. This can present some cashflow issues.
2. Distributing from a trust to a corporate beneficiary. You will need to physically make the distribution (i.e. the distribution of profit will need to equal the distribution of cash to the corporate beneficiary) otherwise you will need to deal with Division 7a issues. If the physical cash is distributed to the corporate beneficiary and you have a discretionary trust as the shareholder you may decide to retain and invest the funds in the corporate beneficiary and pay out franked dividends to the discretionary trust and then from the trust to the beneficiaries to maximise your tax planning opportunities.
3. If the trust or trusts are sued and the assets of the trust(s) are insufficient to meet it’s obligations then having an individual as trustee will mean the individual may have to make up the shortfall. With a company the company as trustee has the same rights but if it is an “empty shell” then this is minimised.
4. Have you discussed foreign hybrids and Controlled Foreign Companies (CFC) issues with your adviser ?
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