Can any one tell me the reasons for setting up a trust for investment propertys. I am currently in the early stages of buying another property and have been asked if i want to set up a trust for this property.
Hi russell
There are four possible ways to own investments:
• one name
• joint names
• company
• trustThe first two are problematic for a couple of reasons. They provide no asset protection and no flexibility. As time goes by and your circumstances change, we will rely on that flexibility to ensure that you are always in a strong position to achieve your goals. The company is not good because there is a potential for asset sales to be taxed twice…. A trust provides
• asset protection
• tax benefits
• flexibilityIt is also a structure that the wealthy people use to own assets that produce wealth. Hence, if we wish to achieve the same results that the wealthy people achieve you really should do the same things that they do…and this is to use trusts to own the assets.
There are really only three types of trust:
• a family or discretionary trust
• a unit trust
• A hybrid trust, which is a cross between the first two.A family trust works well when we buy businesses or cashflow positive assets. It is not good when the assets are negatively geared as the losses are trapped within the trust and carried forward to absorb future profits. In this way, the individuals do not gain any tax benefits from negative gearing.
A unit trust works well when two (or more) unrelated parties buy assets together.
A hybrid trust is best when the one family wants to buy assets that may be negatively geared as it enables the assets to be owned by the trust, but the individual to benefit from negative gearing against their other income such as salary.
Therefore, based on these simple rules…I would normally recommend a hybrid trust for property ownership when your intention is to build a decent portfolio of assets for the future.
The entity is one thing but setting up your loan structure is another. Both go equally hand in hand when setting out on your wealth creation goals.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Thanks , Richard for that info. I have one other question. Once this trust is set up is it possible to move existing investment propertys into it?
Cheers RussRuss
Yes it is but will trigger a stamp duty and possible CGT issue so depending on the indivudal property may not be worth it.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Hi Qlds007 and Russ
My concern is whether it is valid to have the title in name of trust , while loan in name of highest tax bracket individual, for the benefit of claiming interest rebate from negative gearing through the company trust structure.
My question come about as I read through Jan Somer’s book over the weekend. It was made clear that the tax situation is depedent on the name on the title, not the name on loan.
I’m aware the book is dated and don’t mind to be corrected on this issue.
CT
CT
You are talking about hybrid trusts. With these the person borrows money to buy the units in the trust, not the property.
Terryw
Discover Home Loans
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TerryW
Oops, I see that Jan’s book didn’t say if it was HDT, presumably a normal family trust.
With HDT, if structured correctly, the individual lend the borrowed sum to the trust (company trustee) by buying units in the trust. So he is entitled to negative gearing while the trust benefitted from rent revenue and claim full expenses (other than loan interest). At the end of a financial year, a net distribution of income is paid to the unit holder.
Once the loan is paid off by the unit holder, the trust can then borrow from the bank for further investment. This strategy works better when investor has a ‘buy and hold’ strategy as there may be CGT implication later in on sale.
It’s definitely a tax strategy, investors wear tax legislation risk if ATO decides it rich picking….
CT
CT
The unit holder does not lend money to the trust, but buys the units.
There are various HDT deeds and various ideas by different accountants. Some require all the income to be distributed to teh unit holder (to justify the deductions) but others still allow the income to be distributed to the lowest income earner.
The trust doesn’t have to wait for the unit holder’s loan to be paid off before borrowing more – most loans will be IO anyway.
I think if the ATO does get onto HDTs there won’t be mush of a problem as they can still function has a dsicretionary trust.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.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
Thanks Terry for the privilege to learn from your input.
With the added flexibility in HDT, as mentioned in your reply, it’s definitely well worth the initial outlay of legal and finance setup fees.
I must admit I have difficulty coming to grips with HDT and is cautious venturing down this path. My fear of failure is so great it can stop me dead on my track. This forum is my saviour….
Terry, keep doing what you do. I, and dare I say – most of us forumites here, enjoy reading and learning from your posts.
Cheers
CT
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