Distribute Income from Trusts to minors?

Hi dd81,

First off, I am NOT any kind of accredited adviser, so I simply present a few ideas and opinions that may help you reach a conclusion or two.  Of course, anything I mention should be confirmed via your own accountant or other adviser.

You look to be in really good shape, and have some important choices to make.   Here are a few thoughts that hit me when I looked at your post – in no particular order:-

1. Keeping some cash available to get you through the Maternity Leave without troubles would make sense.  How much depends on the other “numbers” that are involved.  Perhaps keep enough cash to cover a further 18 months of the same income you had prior to the Mat leave.  That will likely still leave a bunch for paying down debt, or simply adding it to redraw on a loan.

2.  You appear to have funds in the Trusts’ Redraw accounts, but not in your Personal Loans.  Was that from earlier advice from your Accountant or someone else, or just a guess on your part?   Certainly paying into Redraw should reduce any Interest Cost on that loan, but will that change your monthly payments?  i.e. You may be paying a fixed rate per month that includes principal and interest – having $$ in redraw might mean you are simply paying more off the Principal (the saved Interest) without actually reducing your monthly mortgage payment.   That may suit you to do that, or it may not – your call.

3.  When you exit the Fixed Rate loans next year, your monthly repayments will likely SOAR !!!  The interest is liable to go from 2.54% to 6% or more.  That is not just a 3.5% lift – it is a 136% lift if an IO loan !!  That could alter your calculations considerably, so do be aware of that likely occurrence.  That alone might make sense of paying out one of those, and even reduce the other loan to a manageable level (but don’t forget point 1).

4.  “I have some properties under my name that the offsets / redraw are full, so no repayment required. Below are the loans that I am still paying interest on.”

Wow, you are doing well !!  Perhaps part and parcel of all this might be to consider your end goals – Steve often promotes the idea of using residential properties to generate growth, then, when the Growth component has reached the desired level of Equity, trade yourself into Commercial where a tenant pays pretty much all expenses and the income then “keeps you”.  What that level of Equity is, depends on your goals and desires.  Is now the time for you to be looking to parlay out of the existing properties?  Or perhaps sell one to pay off the debt on all the others?

Doing the latter would (of course) lead to higher tax payments, but that means you are MAKING more.  Tax deductions never did replace your losses – i.e. Money spent and claimed against Tax owed would effectively replace just the Marginal Tax that you “overpaid”.  Like, you might pay $2,000 on something but only get $600 deduction on your Tax payments (i.e. you still paid $1400 from your own Tax Paid $$).   With a property paid off, then you don’t get to claim any Interest on a mortgage payment, but then you aren’t paying a mortgage anyway – how cool.  And it throws off cash with little cost – and yes, you pay Tax on that cash that is now largely your Income.

I suspect you are already well aware of much of the above – but I include it for newer investors who may be reading this and formulating their own thoughts re property investing (does it work, and how does it?).  And for them, please go back and read the first paragraph of this reply.  :)

I hope some of these thoughts prove to be of some use to you, dd81.  Maybe not, as your portfolio tells me you are already a solid investor.  But your story might attract further comment from members who ARE accredited advisers and can guide your steps.  Or correct me where I stumbled *gasp*  :(

Benny

Hi dd81.  Just starting out myself so not sure I can answer your questions.  I was however curious about the

Family trusts.  Would it be safe to say that after loan 1 and 2 you received advise about structuring future loans

3 and 4 in family trusts.

As I mentioned I am just starting out and looking to purchase my first IP.  If you were starting again would you go it alone

or employ the services of an accountant to set up trusts from the get go?

Thanks

Andrew

dd81 wrote:

1. If I pay off (put money in redraw) properties in trusts, does that mean I get taxed more for the rental income vs properties under my individual name?

2. Can I distribute any rental income to my sons? (they are only 1.5 and 3 yrs old though). I have asked my accountant the same ques but waiting to get a response. And I am opent for any feedback / suggestions. Thank you!

You shouldn’t be paying off trust properties as that will create legal issues. You could gift the trust (the trustee) money or lend it money which it can store in its offset account or pay off the loan. Either will decrease the expenses and mean the trust will have a larger taxable income so it could result in more tax.

2. The trustee potentially could distribute income to the kids, but they will be taxed at 66% on amounts over $416 per year, unless under a disability