Mother retireing this year with property she wants to biuld townhouses/villas on. Looking at a structure to hold assets

Everyone wants to pay as little tax as possible and the best way to minimise income tax is to use a flexible structure such as a discretionary trust. Any other structure is inflexible.

Discretionary trusts offer the greatest asset protection too.

But the problem for your mum is that she already owns the property. Transferring means paying stamp duty and losing the asset protection advantages of a discretionary trust (initially anyway). For family law disputes there is no structure that is safe. For succession disputes using a trust can assist as assets held by a trust do not form part of the estate (but could under family provision claims in some states such as NSW).

Since she is at retirement age there is also superannuation to consider. ie a SMSF. Super does not form part of the estate generally either.

A good way to hold assets such as property would be via a unit trust with the units owned by a discretionary trust. This makes things very flexible as the units can be easily transferred without changing ownership and it may be possible to transfer the units (and therefore the house) to a SMSF without stamp duty later on.

Finance is another issue – will she be developing with cash or borrowing from a bank? It may be hard to borrow if she is retiring.

If the properties are held by your mum personally then she can set up one or more discretionary trusts in her will, ie testamentary trusts and leave assets to a trust which you control. Your sister could have the same trust or a separate.

There are a huge number of issues to consider and you will need detailed advice which will be expensive.

Also your mother may lose any cgt exemption if they are a pre-87 asset.

There is no simple answer but to seek specialist advice once you know what you want to do.

Paul

1. Discretionary trusts enable the trustee to distribute the income of the trust to a wide range of beneficiaries. This is usually done with tax in mind so that someome with a low income will get more than someone with a higher income. If everyone is on a highish income then it is possible to distribute to a company and cap the rate at 30%. The best thing is that the trust is discretionary so the trustee can vary the amounts each year.

2. With discretionary trusts no one beneficiary has any fixed interest. So if a beneficiairy were to go bankrupt the trustee in bankruptcy could step into their shoes, but they would have no rights over the trust assets and only the right to be considered for a distribution from the trust. The trustee would not normally distribute to the bankruptcy trustee but to other family members in stead.

But, if someone transfers property to a trust (or anyone actually) then these transactions can be undone under many circumstances. If the reason for the transfer was to defeat creditors (ie asset protection!) then the transfer can be unwound indefinitely. If it was done with a sale for market value then the period may be 5 years.

3. SMSF have considerable advantages. Great asset protection and when in the pension phase tax free income and CGs. Developing may be difficult thought.

In NSW there is not land tax free threshold for companies or trusts so 1.6% on $1 and up in land value. But with that many properties she would probably have used up her land tax free threshold anyway.

Hi Paul

Yes, the properties would need to be transferred to the trustee of the trust. Stamp duty and CGT would be payable at market rates.

If the trust needs to get a loan to buy the properties then the lenders will require personal guarantees from all trustees and/or directors of the trustee company (and maybe shareholders if these are different). The incomes and liabilities of the individual and the rent from the properties is taken into account.

Its a big move to do this so you need proper and careful advice.

The trust is not a legal entity, but the trustee that is the legal owner of property. So the trustee enters into agreements with tenants and other contracts.

If the tenant sues then the tenant will be suing the legal owner which will be the trustee in its capacity as trustee. The trust deeds will have clauses indemnifiying the trustee out of the assets of the trust. This means the trustee will be liable to pay, but will be reimbursed out of the trust's assets. If the trust doesn't have enough assets then the trustee's personal assets can be at risk. This is why it is a good idea to use a Pty Ltd company as trustee as a company is a separate legal person and generally the directors are not liable unless they do something illegal. Shareholders can't be held liable for company debts. If the trustee is not indemnified out of the trust assets then the directors of the trustee company can be held to be personally liable in some instances under the Corporations Act, s197 from memory.

A trust will need to do a separate tax return and if you have a company then ASIC annual returns and fees too.

So, if a company as trustee for a unit trust owns the property then the company will be the one contracting. It won't have any income and so must lodge a nil tax return and ASIC statements every year. The unit trust is the owner for tax purposes and this trust receives the income and claims the expenses. The units of the unit trust can be owned by your discretionary trust and any income from the unit trust can be distributed to the discretionary trust and from there to the lowest income earners in the family group.

No. If she is sued then the trust is a separate entity and is not directly effected. Creditors could get their hands on anything she owns including shares and units and thereby control the company and/or trust. But the appointor could sack the trustee and appoint a new one easily. With the units if these were held by a discretionary trust they they would generally not be available to creditors.