Entity structure

Steve used to use (and maybe still does?) a discretionary trust with a company as trustee.

With these entities, if is the director of the company that guarantees the loan. the director will need an income to prove serviceability. You can have 2 directors, but if something happens and the loan cannot be paid back, then the lender will take action against the guarantors – so for asset protection reasons it would be good to have one director and this director have no assets in their own names.

Yep, you would need to show an income for serviceability. You can't always have you cake and eat it too. But if the guarantor had income from employment that would be great. They can also receive income from the trust as a distribution each year – though for tax minimisation reasons the trust income may be distributed to lower income earners first. If trust distributions are to be relied on, the banks will generally want 2 years tax returns for the trust and the individual.

Could someone please verify my understanding of discretionary trusts with a compay as trustee?

1) set up a company that will hold no assets of its own
2)set up a trust with the company as trustee and a couple of people as beneficiaries (the company can also be a trustee and therefore have a max 30% tax rate)

3)funding hmmm, a)beneficiary gifts money to the trust
                                  b)beneficiary loans money to the trust at the same rate or higher as they borrowed it (am not sure how a beneficiary gets a loan for this or if its only done for a unit trust)
                                  c)company takes out the loan and has the director as gaurentor with their income verified.
                                  d)trust loans the money in its own right having provided previous tax returns

is there anyway a trust can loan the money in its own right without financial history? i.e low lvr or pos geared

What effect does be being gaurentor have on the director lending money themself?

what effect is there on a director for financing property in there own names?

thankyou for your help

regards
lordoftheundead

pete

Hi Pete

The company is set up and should only operate as trustee – no trading etc to limit risk.
The trust deed should be worded so that it has thousands of beneficiaries- eg all children, step children, adopted children – inlcuding those yet to be born.
– for lending purposes keep the named beneficairies limited as some lenders will want a guarantee from all named adult beneficiaries

having a company as trustee will not change the tax rate. Trusts don't pay tax, it is the beneficiaries of the income that pay tax. So the amount paid will depend on their other income and the trust income. Where all beneficiaries will pay more than 30% you can then distribute to a company.

Becareful with gifting and lending to a trust. There are asset protection issues and tax issues. Eg you borrow to lend the trust and then go bankrupt – that loan can be clawed back. If you borrow and gift to the trust this interest will not be deductible.

A brand new trust (or company) can easily borrow as the lender will take a guarantee from the trustee/directors 9and maybe others) and their incomes will be taken into account – as well as rents etc.

Hi Pete

Trusts can get the same LVRs as individuals. 95% or maybe even 100%.

If you guarantee a loan you will need to declare this if you apply for subsequent loans – not matter which name/entity.

It is generally not a good idea to hold valuable property and operate a business via the same trust.  Doing so exposes the property to the trading risks of the business, ie, if someone sues the business, the trust may lose the property upon litigation. 

However, if you are talking about share trading, which is relatively low risk, I don't see any issues with holding shares for trading, shares for dividends, and properties in the same trust.

Eddie
[email protected]

Hi Pete

If you guarantee a loan it is the same as taking out the loan in terms of effect on future borrowings. Future lenders will want to know all the loans you have taken out and any loans you have guaranteed.

Furniture for a rental property could be added along the way – but if you are adding furniture your rent should be rising too to make it commercially viable.

Also be aware that the trustee of a trust is legally obliged to take care of the trust assets for all of the beneficiaries, So everything should be at market rates.