Discretionary Trusts

We have only had great benefit with the creation of discretionary trusts. At the moment we have 4 trusts operating and they work great for the business and property focuses we have. 

Find a great accountant and let them guide you through the best structure for you. There are obviously stages where this structure is of extreme benefit – they will know the best timing for you. we are beneficiaries of the trusts and directors of the trustee company.

When you are making a profit – the trusts have been the perfect structure for us. 

We had a hard lesson with land tax as being beneficiary of the trusts brought the land tax back on to him as an individual, which I thought was very tricky. 

We have properties and businesses so this structure was right for us, but the key is your accountant and advisers – get the best and you will have great advice.

Best wishes

I have had a few email enquires regarding using trusts and not maxing out.

I agree with Richard, the only way it could work is if you can get different people to act as directors for each trustee company and you just be an un named beneficiary.

When I read Steve's book, I also got excited about that section about using trusts to prevent maxing out. I then asked around in the forums, and was told that Steve's exact method doesn't work anymore. I suggest doing what was suggested above then, but have not tried it out as yet.

Hi Terry – in your latter scenario, getting new directors for each company trustee would basically have the same advantages (and disadvantages) of getting someone to go guarantor for you on a loan, correct?

Just wanted to clarify if the option you outlined was simply for the theory of it, as opposed to presenting an option with advantages.

Cheers,

Peter

Not sure what you mean. Every director of a company taking a loan would need to give a personal guarantee. You could be director of one and then your spouse director of the next one. You may have a friend who is willing and able to take the reigns – but this would be a huge burden to them and a risk for yourself too as the director of the trustee controls the trust. (but the appointor could remove the trustee giving you some control).

If you will be using a company as trustee then the company is merely a legal owner with no tax consequences. Income flows through the trust and is not normally taxed in the hands of the trustee. The income is distributed to the beneficiaries who pay tax at their own marginal rates. If the trustee doesn't make a declaration to distribute income before 40 June (and there are no takers in default) then the 'trust' is taxed at 46%. ie not the company but the trust with its own tax return.

The trust can pay private expenses (subject to the terms in the deed) but these won't be deductible unless they relate to the production of income.

Trusts don't increase borrowing capacity as stated in that book, but they do help by making things flexible. So your trust owned property and had equity but after a few years you had a default on your credit file and could no longer get finance. All that equity sitting there not being able to be used. What you could do is to replace the director of the trustee company and/or units in the unit trust with another willing person who would then use their borrowing power to apply for a loan.

I think Richard was referring to serviceability calculations by lenders.