Hi Forum Members,
I’m new here but have been reading lots of past posts with keen interest.
About us: I am a Chartered Accountant and my partner is an Electrician, he is self-employed and runs his business through his own Pty Ltd company. I am a salaried employee on a good income.
I have a financing question about borrowing within a Family Trust to invest in property.
My partner and I have recently purchased an untitled block of land in Wallan, Victoria which should title in June or July next year. We paid $189,000 for the block and our plan is to build a house on the block next year and rent it out as an investment property as soon as it’s finished being built. We currently do not own a PPOR and are living at home to save as much money as possible towards our first investment property. We have already paid a 5% deposit for the land (in cash) and are aiming to have about 80% of the land purchase price saved up by settlement next year. We will either need to borrow money for the remaining 20% of the land price and the construction or borrow 80% of the purchase price for the land and use our cash for the construction. I am sure there are a number of ways to do this using offset accounts or LOC’s etc.
We want to structure our investment portfolio properly from the beginning, using a family trust – for a number of reasons. Asset protection is our main priority (because of my partner’s being a director of his own business) but being an accountant, I am also familiar with the many tax benefits associated with streaming income within trusts, 50% capital gains discount etc.
Recently I have heard that some banks have tightened their policies around lending funds to Family Trusts for property investing. I’ve been following some of the posts here and it appears that a number of brokers are quite familiar with this type of investment structure. The majority of brokers that I have spoken with recently, seem to want to talk me out of using a family trust, I think because they don’t understand the benefits or they don’t have the experience or contacts to participate in non-vanilla residential lending.
I am hoping that there might be some forum members here that might be able to assist us or provide some advice on how to structure our financing properly using a Family Trust? At the moment the contract of sale for our land is in our individual names, but we will be changing this to our Family Trust as soon as our lawyer sets up the trust. We have plenty of time before the land titles next year – we won’t settle on the property until June or July next year.
If you are able to assist, please let me know and I can provide further details.
Thanks very much,
Celina
I am a lawyer and broker specialising in trusts. lending to trustees is pretty much the same as it has always been. Not difficult and not much tightening up.
But I think you need to seek legal advice as there are better ways to structure your set up where you can get both asset protection and the main residence CGT exemption.
Also watch out for the asset protection trap you are falling in – you have already paid the deposit.
Keep in mind that trusts are not legal entities and cannot borrow or enter contracts. It is the trustee that does. Carefully structuring the trustee and the trust can allow for greater serviceability and more asset protection.
Get proper legal advice and tax advice before moving further.
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
Hi Terry,
Thanks for your response. Good to hear that it might not be as difficult as I am hearing to borrow through a corporate trustee/trust structure.
I have gotten and paid for legal advice regarding this situation, but now am a bit concerned I haven’t gotten the best legal advice. How could we get asset protection and the main residence CGT exemption? We don’t want to put the property in just my name (it has been suggested and debated) as I also plan to start my own business in the next few years, and don’t want our properties to be exposed to any potential creditors – hence the reason for the trust and a corporate trustee. We also want the advantage of income streaming later on for the rental income, as I will likely be at home with kids in about 5 years time.
With regards to the deposit already being paid, our current lawyer has advised us that we can still change the nominee on the contract of sale as we have not settled yet (the land is still not titled) and the vendor has no objection to us making this change. Is this incorrect? We unfortunately realized our asset protection issues after we signed the contract of sale in our individual names and our trust isn’t set up yet, but we have been told that this can still be changed?
Regards,
CelinaHi Terry,
Thanks for your response. Good to hear that it might not be as difficult as I am hearing to borrow through a corporate trustee/trust structure.
I have gotten and paid for legal advice regarding this situation, but now am a bit concerned I haven’t gotten the best legal advice. How could we get asset protection and the main residence CGT exemption? We don’t want to put the property in just my name (it has been suggested and debated) as I also plan to start my own business in the next few years, and don’t want our properties to be exposed to any potential creditors – hence the reason for the trust and a corporate trustee. We also want the advantage of income streaming later on for the rental income, as I will likely be at home with kids in about 5 years time.
With regards to the deposit already being paid, our current lawyer has advised us that we can still change the nominee on the contract of sale as we have not settled yet (the land is still not titled) and the vendor has no objection to us making this change. Is this incorrect? We unfortunately realized our asset protection issues after we signed the contract of sale in our individual names and our trust isn’t set up yet, but we have been told that this can still be changed?
Regards,
CelinaI think you might need additional or further advice.
Although you could do what you are proposing consider the arguments a trustee in bankruptcy could use against you. Research resulting trusts.
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
I think you might need additional or further advice.
Although you could do what you are proposing consider the arguments a trustee in bankruptcy could use against you. Research resulting trusts.
[/quote]Hmm, I think I see the problem – we have paid the deposit – not the trust (it does’t yet exist) so even if we change the name on the contract/title we still have resulting trust issues.. hmmm tricky.
We still have a subject to finance clause that expires on 15th August 2017. Perhaps we could use that to get out of this contract? The vendor is a property developer, perhaps if we pay for their conveyancing they would be open to us creating a new contract of sale for the same block but with the structure set up properly?
Just goes to show even when you pay for legal advice and you think you are familiar with trusts and tax (I’m an accountant) you can still get things wrong! Glad I posted and am aware of these issues now.
Are you interested in taking on a new client? Happy to pay for the correct advice to achieve a better outcome!
Celina
Just terminate the contract, get a refund and have the trustee enter the contract and pay its own deposit – if you want to use a trust that is. you can lend the trust the money which it can use to pay the deposit.
Yes, I am happy to take new clients on – I charge $660 for a 2 hour consultation.
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
Ok, thanks Terry. I will email you directly to set up a consultation.
You don’t seem convinced that the trust structure is the best way to go – I am curious now to see what other options might be available.
Cheers,
Celina
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