Who buys with a trust?

ok... so, I’ve been considering the possibility of setting up a trust structure for future property purchases and want to get some advice.

I have 3 houses at present and I’m hoping to build that to 10 over the next decade. I didn’t think about it much with my first few purchase but moving forward I want to make sure I’m buying in the correct structures that are optimised for a larger folio.

one benefit I’m hoping to get is the ability to lend money to the trust that can later be retrieved through a refinance with in the trust. from my understanding if you retrieve money you put in to a person investment it will be considered a personal loan. but refinancing to pay back a trust loan is still considered for investment purposes. have I got that correct?

I’m not married at the moment, but I also want to keep that in mind as I believe there are some TAX advantages there too.

if you could share you experience and knowledge on this subject that would be great. thanks

 

If you want advice you should see a lawyer. If you want some random opinions read on.

I think you should read some of my tips in the legal section.
A trust is not a legal entity so you can't lend it money. You could lend the trustee money though - if it is not you. This could be used as deposit and an income producing asset purchased. Later the trustee could potentially refinance and pay you back your loan. The interest on the increased loan amount may or may not be deductible.

But this is the same outside the trust. You borrow against existing property, use it as a deposit and buy another property.

If you are not married then would a discretionary trust have anyone to distribute to other than you?
A bucket company could be set up, but it may be a while before the trust makes a taxable income, so any losses would be trapped until that point and no tax advantages initially, but disadvantages as if you bought in your own name you would have saved tax and money.

Have you considered the land tax aspects?
Tax Tip 172: Land Tax Comparison owning Property in Own name v Trust in NSW https://www.propertychat.com.au/community/threads/tax-tip-172-land-tax-comparison-owning-property-in-own-name-v-trust-in-nsw.30970/

many more things to consider

 

Trusts have their places but not for everyone.

1. One in a unit trust with the opportunity to move to an smsf later on is worth considering.but please DO NOT put more than one property in the trust.

Ive seen many people and some even clients who have more than one in a trust. A unit trust at that. I cant see any benefit. No asset protection. Difficult to.move to super. E4 issues when you sell one. And extra accounting fees.

Ive even had clients who didnt tell me and then went and put another in the same unit trust and said its ok made sure the loan is in my own name. Umm great now its going to be hard to get that into super as that loan is going to take longer to pay out. Ohh thats ok we can sell that one and move the other. Umm ok but what about cgt. Unless your trust deed specifically allocates units to a specific property (most dont) now you have cgt on both properties and one you didnt sell. what a mess.

I used to love unit trust. still do. But everyone wants to do things cheap and load 3 or 4 in there and i havent found an adviser who can tell me how to mitigate all the issues. I know all the issues. And i get silence when i raise some of them. And with accounting fees an extra 20k over 10 years what benefit did they get. None.

2. Positively geared. Maybe a dt. Consider land tax might not make it worth it. Do the sums. asset protection might be worth it depending on your risk profile.

3. Business with profits ? Distribute to a trust with losses. Can work. again look at land tax.

4. Refinancing principle. Yes it works. Can be good. Again try to keep one property in the trust or e4 issues raise their head again.

Remember as well some well respected people told us years ago hybrid trusts worked and you could distribute capital gains to one party while claiming the losses to another. That turned out to be a fable. Before i did my masters of tax even i believed them. It was all wrong. They all went deadly silent and changed the topic when it was mentioned.

If asset protection is important i believe there are much better and cheaper ways to protect it. But @Terry_w has to comment on that

Sorry written a post longer than @Paul@PFI

 

All good points Mike...Its not a simple Yes / No answer.

Too many people read stories about trusts and think of them like some magic trick (probably because they read about trusts in a book about trust magic). Often the stuff they read is outdated, over simplified and certainly general. Or just rubbish.

Trusts have a place. But setting up a trust solely for the QLD land tax concession isnt always prudent. I have said it a while but I believe QLD can easily change their land tax act and limit to a single trust concession or threshold. And neg geared property in a trust is a hidden cost which added to the extra costs means a poor return every year for XX years.

The biggest (unknown) cost to a trust is incorrectly choosing the wrong structure. And sometimes its the trust. Or the type of trust. Parties to the trust. How the trust finances the property and so on.

 

@Paul@PFI im of the view if you are a millenial and its your first or second acquisition and you are in a low risk industry or profession (can be mitigated anyway later on through other strategies) the ongoing costs of a trust for the first or second acquisition doesnt stack up.

Once someone gets into their 40s its worth considering as by retirement phase it will be close to paid off or fully paid off and then those annual costs will probably make it worth it.

 

I know what you mean. After my time at MGS I can rattle off loads of + and - about a unit trust. However for most PC members who want to parlay property equity into the next property this strategy may not work. Give me a person with equity in property or sufficient cash in super and unit trusts can open some VERY creative strategies.

eg Neg geared human owners alongside a SMSF with positive geared trust income. Use the refinance principles and shift ownership to the SMSF over time.

 

Agreed the ungeared unit trust with individuals holding the correct percentage and the smsf the correct percentage works well.

Thats why i think for a millenial it doesnt stack up as most wouldnt yet have sufficient equity outside super and not sufficient cash in super. Towards age 35 to 40 that changes a lot. and the timing there is just about right.

 

Mike - I reckon I discuss trusts 3-5 times a week. 90% I explain why they shouldnt use a trust (yet). Major reasons
1. Misunderstanding that a trust gives broad asset protection from a spouse / defacto etc. My answer is assume there is none unless your lawyers advises on how it will work.
2. Cost v benefit
3. Neg gearing quarantine issues. By that I mean TAXATION neg gearing not cashflow.
4. Land tax (eg NSW DT has $0 threshold and an extra $10kpa can be come due).
5. Finance issues
6. Stamp duty and CGT issues (eg I want to put a property into a trust or get it out later)
7. Residency / Non-residency issues
8. Centrelink impacts eg parents

For small business it is sometimes a futile exercise
1. Personal Services Income
2. No valid beneficiaries to distribute to eg Maureen is a single 30yo. A flawed bucket company is not a strategy.

In QLD I find for a couple often first 4 properties are best in own names.

In every case I suggest discussion with a solicitor as there is more than just tax to consider.

 

Oh...comon Mike...would love you to elaborate a little...

 

I also find that some people think a trust is something magic. I got a call from someone on their deathbed once who wanted to 'put a trust around' his home so his creditors couldn't take it and he would die and leave it to the kids. They think it is some sort of force field - you just utter the words 'trust' and people recoil in horror and run away.
But of course it doesn't work like that.

Also some people want it to get complex. It excites them to think they have a complex structure. These are often the ones that draw diagrams before they come for the advice. Often they seem to be disappointed when I say buy in individual names.

I think probably 10% of the people that see me for structuring advice would end up using a trust to purchase property.

 

many ways
gift and borrow back
spouse
parents
related party loans
life interests

etc

 

Husband lends $$$ to wife. Wife buys property NOT hubby. Hubby holds a reg first mortgage as part of the related part loan. Its pos geared and wife earns no other income. Hubby is a gynocologist and a high risk worker. ATO looks at it and asks if this is a sham...Hubby says No way. He has serious asset protection risks and this is why he did that. He NEVER wons a thing. His solicitor told him that and he hasnt changed.

Or he went to apparent purchaser route.
Bare trust ?

Just one of many ways as Terry says

One of the hardest trusts of the lot is a testamentary trust. Its unpalatable entry condition turns some off but it can be a real asset protection vehicle. But....you have to die for it to commence. But given good estate planning advice it can be a terrific option or just an expensive waste of time.

 

Anyone who says should i buy in a trust, but doesnt know which type of trust, really shouldnt.

 

What about inter-generational transfers e.g. house purchased in a DT with a corporate trustee.

#1 child turns 30 - Happy Birthday, here’s a house I bought for you many years ago and there is substantial equity now.

BTW its over the road from our place so look forward to us visiting!

 

Thats fine - but land tax (possibly exempt in VIC) plus no main residence exemption - but this could be utilised elsewhere.

If might have worked better if you bought as bare trustee or in the child's name with you taking a mortgage.

Hope you only have 1 kid!

 

No, there are two of them - so would have to do the same for #2 too.

Bare trustee sound interesting. Can this be done for a minor?

And yes, I have read “Trust Magic”. But then I recently read "The Theory That Would Not Die: How Bayes' Rule Cracked the Enigma Code, Hunted Down Russian Submarines, and Emerged Triumphant from Two Centuries of Controversy.”

Before that was “Black Box Thinking”. And many years ago I enjoyed James Gleick’s Chaos Theory.

 

Well thats just not true. A gift you havent given.
1. You never bought anyone a house if its in a trust. You given them control ? or a right to occupy ? Or just pulling their leg ?
2. No CGT exemption
3. In NSW as example 100% land tax = $10K pa extra for each of the "many years ago" and the future.
4. CGT to date is a potential liability for the trust and the future.
If the trust property is given to the child thats fine - except the stamp duty and CGT issue.

A great example of why a solicitor should have given advice "many years ago"

 

You should have a 2nd trust for the other property so you just pass control of each trust to each child.

Bare trusts are common with minors - you could transfer title once they reach 18 without CGT being triggered (or stamp duty).

Are you saying trust magic is a work of fiction? It is not a very good book but can be useful for absolute beginners.

 

If there's one property held in a unit trust and you want to move it to a SMSF, will there be tax due on the move? If so, wouldn't it be similar to selling that property to the SMSF? 100% of the units would held by an individual or by another trust then would be changed to be held by the SMSF.

 

Yes the transfer of units is a CGT event. However if planned appropriately it may be possible to mitigate the gain. You dont need to move all the units across in one go. You can spread it. And with strategies such as making deductible contributions to super you may in fact eliminate the gain altogether.

The problem with resi you cant transfer a property held by an individual or a discretio ary trust into an smsf.