All Topics / Help Needed! / Family trust bank loan setup – which account?
Hi,
I was hoping if anyone could help in regards to how banks set up loans for family trust – I am not sure if it needs to be a completely different account or under my exisitng loan.
My situation:
A. Existing NAB choice package home loan 0.8% (negotiated extra 0.1% then) for a home at P+I
— this home became an IP late last year
B. New home purchased in a family trust set up where my partner and I are the appointed directors of the company that is the trustee
— we now have the task of getting finance for new home.
As I understand I need to do the following:
1. Change the existing NAB choice package to Interest only for the existing home (now an IP) to maximise tax deductibility
2. Get a loan for the new home in the family trust where we will be the guarantors.
– 80% IO+100% offset loan
– the remaining 20% will be paid from the offset account that is currently attached to the existing P+I home. We do not need to refinance the existing home or get LOC as we have enough funds.
– once new home purchased I will transfer all remaining moneys in existing loan offset acct to the trust offset account.My questions relate to Task number 2
1. Should the family trust loan to be set up under a different NAB choice package with the company as the account holders (we are the directors)?
2. Does that mean I will be up for 2 annual package fees, one for the family trust loan and one for the personal IP loan? Is this negotiable with the bank? If not I will look at whether it’s cheaper just to pay a monthly service fee for a IO+100% offset loan
3. If ‘NO’ to Question 1, ie if the family trust loan can be a new loan in my existing Choice package, is that indirectly “cross collateralising” my existing home because the loans are all in one Choice package account?
4. I am also trying to negotiate with the banks to have a higher discount off the SVR on the Choice package. One of the factors a bank manager told me once was the total amount borrowed. What are peoples’ recent experiences and outcomes in this?
Thank you for your help in advance,
bb8
1. NAB will probably require a separate package.
2. Probably as 2 different entities/borrowers. You can negotiate.
3. not necessarily.
4. It is possible.I would suggest you get advice on taking the money from the offset to the trust. Is this a loan or a gift? each has different tax and asset protection consequences.
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
Thank you very much Terry for the reply.
We will try to negotiate with the bank re: fees.
We plan to transfer money from the offset currently linked to the personal IP to the trust offset account, as a gift not a loan. However thank you for pointing this out as it does raise another important question –
As a lump sum “gift” to the trust offset account is that considered as “income” and have to be distributed to beneficiaries at the end of each financial year? If so there is serious disadvantage b/c that is a substantial amount to have to distribute to beneficiaries and pay tax on each year!
We don’t plan to “loan” the money to the trust – think that it’s too complicated for now, and from reading previous posts that means it would best be “redrawn from the existing loan”, and also we would have to make sure the interest oncharged to the trust is “reasonable market rates” to avoid it looking like tax evasion
No, gifts aren't income.
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
See how you go negotiating the $660 upfront legal fees for perusing your Trust Deed and Constitution.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Terry for the information. It would be terrible to have to pay tax on the trust offset amount again. However I just thought of a disadvantage in “gifting” the money into the trust offset account. Basically that money will be locked within the trust from thereon and can only be “moved” between or within trusts, because say for example down the track if I needed that money for other personal investments etc then transferring the money out of a trust account to a personal account would be like personal income which is taxable (again). Unless the trust “loans” me the money by paying down its loan then redrawing and charging me slightly higher interest than its paying.
Thanks Richard for the legal fee information, I had no idea about this as the banker made the process sound like a routine background/credit check nor did she mention any fees involved when we asked. Will let you know how I go.
bb8
bb8 wrote:Thanks Terry for the information. It would be terrible to have to pay tax on the trust offset amount again. However I just thought of a disadvantage in "gifting" the money into the trust offset account. Basically that money will be locked within the trust from thereon and can only be "moved" between or within trusts, because say for example down the track if I needed that money for other personal investments etc then transferring the money out of a trust account to a personal account would be like personal income which is taxable (again). Unless the trust "loans" me the money by paying down its loan then redrawing and charging me slightly higher interest than its paying. Thanks Richard for the legal fee information, I had no idea about this as the banker made the process sound like a routine background/credit check nor did she mention any fees involved when we asked. Will let you know how I go. bb8The trust could lend you the money back. Just make sure your trust deed allows it to lend money to a beneficiary.
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 wanted to update on my progress seeking finance.
So far the bank has offered a separate choice package with the same 0.8% discount for the trust. They remain reluctant to offer more than 80% LVR without LMI, and want to know why we won’t cross secure the loans. Not sure if this offer is standard “market rate”. I am not sure if I should be seeking other offers – mainly from the perspective of what you guys have been advising, to keep loans separate.
Richard – the trust perusal fees are around $400 – not negotiable unfortunately. They will waive the first year package fee though so it works out to be the same?
In relation to the trust offset account, we intend to put our wages into this account to try to achieve neutral or positive balance which can be distributed. If these wages are “gifts” then does this have to be done through an intermediary account (eg. the personal offset account), and how does this affect asset protection for the trust property?
Thanks
bb8Is the trust a unit trust or discretionary trust?
Cheers,
LukeThanks for the update BB8
You will find it standard practice to have LMI apply over 80% LVR.
Having wages go into a trust account is a bit of a tricky issue. Unless these are gifts to the trust it will be mixing personal funds and trust funds. There would be various consequences flowing on from this – does the trustee have authority to gift these funds back to you? Will there be any tax consequences if it does so (Div 7A loans?)? Asset protection – if the trust goes down you lose your funds, but if you go down can you prove it was a gift and not a loan? Is mixing funds likely to make the trust a sham? You had better seek advice on this one.
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
Luke – discretionary trust
Terry has a good point. Gifting Money to a DT can ruin any asset protection. You should pay for advice on this one.
You may be able to set it up as a loan (say a 10 or 20 year loan) with the interest capitalised and then repaid in full at the end of the loan term. This will save you from having to pay annual interest to yourself. If the property increases in value, you can refinance with a bank and use a LOC to pay back the personal loan to you.
Cheers,
LukeActually gifting is probably better than a loan. A loan always belongs to the lender, it is repayable. A gift is not. But, there are provisions under the bankrupcty act where a gift can be voided – generally for up to 5 years, but it could be indefinite if it was done with the intention to avoid paying creditors.
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. I’ve attached a post you made recently in relation to gifting cash below:
hi Jack
Since you have a high income you should be able to knock that PPOR loan debt off in 1 to 2 years. After that you should have considerable cash available so I think you should seriously consider a discretionary trust. You can start gifting cash to the trust and park it in a 100% offset account and this will quickly reduce any losses. it will also offer significant asset protection and long term tax benefits.
Whereas if you get the property 99% in your name, then when it turns positive you will be paying 47% tax on the rent and you will cop all the CGT too. It may turn positive faster than you think once the PPOR is paid off.
TerrywFor now our intention is to gift rather than loan to the family trust to achieve neutral/positivity in the trust loan. I will have to check if the constitution allows the trustee to gift the funds back to me. If I needed money from the trust offset account it would be arranged as a loan from the trust.
It seems from your response as though rather than having wages go directly into the trust fortnightly, I need to make “lump sum” gift contributions (say monthly) from a separate account (eg. the offset account linked with my personal IP). What kind of “proof” is required when we gift to a trust? The trustee is a company with my partner and I as appointors/directors. Does that mean we cannot gift money to the trust because we are the directors?
Re: further advice, is the accountant or the lawyer a better source of knowledge to further clarify these aspects?
Thanks again
bb8I think gifting periodical lump sums would be preferable. Otherwise it may look like you are using the trust account as your personal monies.
You dont really need anything to gift, but then it may be arguable that it was a loan. Maybe a deed of gift or at least bank transfers with the word 'gift' added.
It is probably best to see a lawyer about this – but you would also want some tax advice too.
You would need to check the trust deed about whether the trust can gift to beneficiaries. Also check with your accountant if this creates any tax issues.
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
Ok I will ask the lawyer about deeds of gift and also ask the accountant. I am not sure about what you’ve written as follows:
“You would need to check the trust deed about whether the trust can gift to beneficiaries. Also check with your accountant if this creates any tax issues.”
How is whether the trust is able to gift to beneficiaries relevant to the setup? I had a look at the trust deed but it only mentions distributions (income and capital).
The intention was if we needed funds in the future for personal use/investment then the trust would loan us the monies at market rate, hence the interest income made by the trust can be distributed with tax savings.
bb8
ok BB
But, it may be good to have the option of the trust being able to gift as well.. I was thinking this may be classed as a distribution though and taxable.
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 I will ask the accountant about the tax implications of a trust gifting to beneficiaries and see if its worthwhile getting the lawyer to help review/amend the trust deed. My initial layman’s thinking is that it would still be perceived as a distribution hence taxable. Although I think if I set up other trusts in the future (eg for other properties) then I should be able to “gift” between trusts.
Another update on obtaining finance from the bank, basically they are not able to offer anything above 80% LVR without LMI unless I cross secure with the existing property. Their best offer is to lend 90% with 80% IO for 5 years and the rest 10% at P+I (paid down in 3 years).
They were even offering to contact my accountant to explain why they think cross securing is a good idea. I said no, I will approach the accountant myself. It’s a bit frustrating as there does not seem to be any good reason apart from the bank’s own interest to do so.
I am considering their offer of 80% IO and 10% P+I. Even though I can provide the 10% from my existing savings, there seems to be an advantage if I’m using the bank’s money towards the 10% (even if it’s P+I)
However, I am not sure if this “combination loan of IO + P&I” for the one trust property can complicate things eg accounts/calculations in the future.
You can avoid the cross coll by borrowing 80% on this property and then some more money from a LOC on another property. Cross coll benefits only the lender.
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
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