Hi Terry
Just as its wrong to say that everyone should have a Trust, its also wrong to say that no one should have a Trust, which is what some commentators are saying. For every 10 clients that see us, around 6 to 7 out of the 10 would need some form of a Trust and the other 3 or 4 would need some other solution, other than a Trust.
However in the event that a client does need a Trust (but the correct Trust as all Trusts are different in their application) than there are many more reasons to have the property in a Trust than in ones own name.
For example the flexibility of directing income to the lower tax payer without the transfer of the property which attracts capital gains tax and Stamp Duty costs.
Although in a Trust the Income Units needs to be redeemed at market value the definition of what market value is quite different to what market value is when the property is held in ones own name. Hence there could be substantial differences in the redemption value of Income units when compared to the market value of transferring a property.
If you bought Income Units in GPT Property Trust or Westfield Property Trust the Income Units, although gave a 8-9% income return also had a 2%-3% Capital Gain component to them. Hence as long as your own Trust Deed reflected the same commercial terms than you have complied with commerciality.
Commerciality could also be valued by taking the aggregate years that the property were negative plus the aggregate years that the property were positive and as long as the total years were positive than that constituted commerciality.
As you can see there are many ways to value “market value” and in most instances they would be less than what the market value of a property was. It was clear after discussions with the ATO that they wanted some connection with the “market”.
They mostly objected to the Trust Deed that required a redemption of Income Units “at cost” but they acknowledged that sometimes the capital component could be in negative territory and that investments do not always go up in value.
There is also no stamp duty in most States when units are redeemed and reissued. There are substantial stamp duty costs when transferring properties held in ones own name.
Some argued that there was a lost of Asset Protection because the Units themselves were an asset. However the way we have structured our Property Investors Trust Deed ™ requires that both the Directors of the Trustee Company is required to agree to the forced sale or redemption of the Units before a Creditor is able to force the Unit Holder into redeeming their units.
A creditor could force a sale if the property was held in your own name.
This means the asset protection feature is retained in our PIT’s. This is confirmed by our Tax Lawyers who have assisted us in putting our Trust Deeds to reflect what we believe was required in a Trust that held property which as you know is quite unique to other asset classes such as Shares. We believe the standard Hybrid Trust is more appropriate to Shares but totally inappropriate to properties. Again that is only our opinion. We respect others may not share our opinion.
Also we have included a feature that allows the properties held in our PITS to clone into several Trusts without CGT and Stamp Duty such that should mum and dad want to pass 3 properties to their 3 children’s own Trusts this can be done without CGT and stamp duty.
Also we have found a way around the 80 year Vesting Date so that our PIT’s do not disappear after 80 years triggering a CGT and Stamp Duty event. When we first discovered this we were criticized by our competitors because they claimed that this was impossible and somehow we were doing something illegal. However as I understand it there has since been other Legal Firms who have also found a way around the 80 year Vesting date.
The only difference was we saw the 80 year Vesting date as a huge problem and we threw time and resources in finding a solution where as at the time other Lawyers did not see it as being such a problem and did not allocate time and resources towards finding a solution. Everything has a solution, it simply depends on how important and urgent it is perceived to be before one would throw money and resources towards it. It was very important for us because we ran a property strategy called our Wealth 4 Life which required the properties to be passed from generation to generation and the 80 year Vesting date was totally inappropriate and needed to be corrected.
No doubt before someone claims we are advertising our products here, let me just say that to answer Terry’s question as to why a Trust is still a valuable tool to use in light of the need to redeem units at market value, there was no other way to answer it without highlighting the advantages of our PIT’s versus the other Trusts that are out there.
If we did not differentiate the 2 than it simply creates more confusion especially when someone gives what appears to be contradictory advice but in fact they are referring to 2 different products.
Naturally you are free to continue to use the other Trusts as long as you are fully informed to make an accurate assessment because there is so much misinformation out there.
There is an old saying that “a little information is dangerous” and it could not be more true in people’s understanding or misunderstanding about Trusts and their appropriate use.
Again this is meant to inform and educate and you are free to buy whatever Trust Deeds you and your Advisor believe are appropriate for your needs.
