TRUSTS???

Dangermouse, I'm in your boat! Accountant has told me to setup a trust for my Investment properties. I think it's a good idea but it is so confusing. You don't want to get it wrong cause it could really cost you.

A trust is where A owns something for B.

Easiest way to understand is to think of a parent opening a bank account for a 2 year old. The parent is the legal owner of the account, title is in the name of the parent. The parent is the trustee. But it is the 2 yr old who really owns the money. 2 yr is the beneficial owner or the beneficiary.

So a trust is where the legal ownership is separated from the beneficial ownership.

If mum goes bankrupt can they take the money in the account? Generally not because she is just holding it for 2 yr old.

Similar with property. You will have a trustee, which could be a company or a person. But you will also have many beneficiaries. The trustee just owns the property, legally, for all the beneficiaries of the trust.

Where it is good is that the income of the trust can go to any beneficiary (under a discretionary trust). So the trustee (which you want to be or to control) decides to distribute the income to the lowest tax payers of the group – the potential beneficiaries may be hundreds of people but the ones that control the trust will generally limit the distirbutions to benefit their close family.

It is good with bankruptcy too. Because if any one beneficiary were to go bankrupt the trustee would simply not give them any money while they are bankrupt – otherwise it would go to creditors. If the trustee were to go bankrupt then the trust assets don't belong to them so they are generally not able to be taken.

But if you are looking at buying real property then there are many things to consider – trusts generally pay more land tax. The trust is a separate tax entity so any loss cannot be used to offset your personal income. Also trust taxation law is very complex so higher fees.

Lin. Why do you want a trust. Ie what are you trying to achieve ?

Confusing!

Trust assets don't form part of your estate so you cannot leave them via a will but this may have some beneficial aspects if in future your will would be challenged (not effective in NSW though) and/or your child was bankrupt at the time of your death. So there is this estate planning aspect.

Tax minimisation involved the trustee distributing income to the lowest income tax beneficiiary of the group to save tax. But this only is effective if the trust has an income. If the trust is buying residential property then it may be 10 years or so before there is an income to distirbute and in the meantime losses mount up and these cannot be used to offset individual taxes. Must also factor in extra land tax.

Asset protection is greatly improved by holding assets in a discretionary trust because no one beneficiary has any fixed entitlement to the trust assets. But transferring existing proeprty to a trust will significantly weaken the asset protection aspect and also cost in terms of stamp duty and CGT and legals and new loans too.

Sorry, yes not really extra but in NSW no land tax free threshold for most trusts so a trustee may end up paying land tax where an individual wouldn't/

I haven’t done this yet and don’t need to yet but I was told by a mentor that you can link trusts.
I think you add the trust as a beneficiary?
So the windfall from one trust can pay for the debt of another.
This would be used if someone had many properties,positive and negatively geared, and didn’t want to hold them all in one (trust) basket

Can anyone validate this or add any information?

yeh,
that’s what I thought.
They did say that it had to be set up properly from the start.
More for an investor with a varied portfolio looking for balance.

I have been told to be cautious of hybrid trusts and just stick with a discretionary trust.
A discretionary trust can be set up easily and offer good flexibility.