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And now my questions…
1. How does money get from Company B back to Company A so it can buy more things for the trust? Obviously I’ve got access to all the bank accounts, but how is it done from an accounting point of view, as these are all supposed to be separate entities?
2. If you remove Company B, and make Company T the beneficiary instead (so it’s both trustee and beneficiary), doesn’t that negate the asset protection benefits of the trust? i.e. If Company T was sued when it was only the trustee, it has nothing to lose. If Company T was sued when it was both the trustee and the beneficiary, it has all my money to lose (seeing that I would distribute everything to the company to minimise tax)?
3. Can beneficiaries be added to a discretionary trust at any time, or must they all be specified when the trust is created?
I hope this has helped, and I hope that someone can help me.
Thanks,
Mark Leet.
Hello there,
I’m glad you posted this question, as I’m having trouble working things out myself. Not the structure, but how money flows between the entities. I’m just going to start writing what I understand to be correct. If I’m wrong, please somebody jump in and correct it. Otherwise, myself, and potentially anybody who reads this, will assume it’s correct.
Seemingly the following structure provides the most asset protection and tax minimisation. Note, however, that it is also the most expensive to set up:
Trustee: Company T
Discretionary Trust: XYZ Trust
Beneficiaries: You, Company BNote that if you had a family, you would add them to the list of beneficiaries. Also note that you are the director of both Company T and Company B. So you own everything, and you control everything, but you can minimise the tax you pay on the money you earn, and you can protect your assets from litigation.
Having a company as a beneficiary effectively caps the tax rate of the distributions to 30%.
Company T acts as the trustee of the trust. Whenever it buys something, it writes “Company T as trustee for XYZ Trust” in the purchaser field.
Company T never really owns anything. Everything it buys belongs to the trust. Similarly, the profit that it makes does not belong to it – it belongs to the trust.
Once a year, the nett income of Company T, effectively the income of the trust, is distributed to the beneficiaries in whatever proportions seem best at the time (you can do this because it’s a discretionary trust, as opposed to a unit trust where the distributions are fixed). So the money is divided in such a way as to minimise the tax paid. For me, that means all of it goes to Company B as my marginal tax rate is more than 30%.
My questions to follow in the next post….
Mark Leet.
Nice post AD!
The other problem with doing this in Qld is that after you sell 6 houses in any 12 year period, you are considered a Property Developer. Property Developers, under the Property Agents and Motor Dealers Act 2000, cannot access money paid to them under and instalment sale until the final payment. Instead, the money paid must go to a trust fund. So you’re without cashflow until 30 years down the track when you get a lump sum.
But there are ways to get around this, the worst case scenario being you have to set up a new company for every 6th wrap you do.
Now for the questions:
– What are other people’s tactics for getting around this?
– AD – did you have a lot of spare cash to make all these purchases? If not, would you mind explaining how you’re funding the deposits and settling costs for all these places so close to each other? Anybody have their own methods?Thanks,
Mark Leet.
Couple o’ questions:
Tony – by “contract outside the law” are you referring to the way you (as in your company) use long leases so they fall outside the scope of the Rental Tenancies Act in Victoria? Thus you can put in the contract that the tenant pays all outgoings? By your posting my understanding is that you can’t adopt a similar method in Queensland – a lease option falls under the RTA regardless.
Jason – can you explain what an “Assignment of Contract” is, as compared to a wrap as compared to an instalment contract?
Much appreciated,
Mark Leet.
The ticket has been sold to Sooshie.
Mark.
Hey Steve,
Aren’t you going to tell us how to arrange our company structure to get *unlimited* finance at the Masters of Property Seminar?
Cheers,
Mark.
