Advice on investment strategy

Hi Team,

Looking for some advice around what to do regarding the following investment strategy I’m looking to embark on with my brothers. We will look to set up a trust for asset protection but will look to engage a specialist lawyer for that side of it.

Investment strategy

All 3 of us are aged 30-34 years old and ideally would be investing for 10 years plus before drawing any income (I realise trust earnings must be distributed, so this might be difficult).

Initial investment:
1 million cash (currently planning on purchasing shares, ETF's and LIC's)
1 x business property (450k - no mortgage)
1 x residential property (1.1 million - no mortgage)

We would be looking to invest the cash into shares with a long term approach. Mostly looking at a mix of LICs, ETF’s and individual company shares. The majority being dividend producing but also incorporating some growth assets.
The business premises is tenanted by our own company where two of us hold director roles. After expenses, the weekly rent would be used for further share purchases. Specifically regarding the residential property being mortgage free, we were looking into a debt recycling strategy to inject further capital into the market. Something around 50% of market value (550k) so the rent received would easily service the loan.

Advice/suggestions on this would be appreciated.

 

Invest the cash individually. There is no advantage to investing together in listed shares.

 

Looks promising.

Hate to bring this up in the first posts, however I'm going to echo some comments that I've read from the Legal Eagles on this, and other forums; draw up a legal agreement between you all about management of the assets , the profits, disputes etc.

What happens if you find significant others, your significant others pull you all in different directions, you split from your significant others and they want a piece of the action etc etc. I would hate to see the family pulled apart over money/profits etc.

 

Won't moving the residential property and business property into the trust result in CGT and also stamp duty? If I was in this situation, I would go on my own with listed shares as per @Trainee. Seems overly complex for buying listed shares. My view only - not advice.

 

who owns what?

 

All awesome points and things we were going to bring up with a lawyer when setting up the trust or trusts (shares and property seperate) You might be able to help us out with a couple:

-Do beneficeries have a claim to anything within the trust? Ie. through a divorce or fallout with your children (wives/children as beneficiaries)
I was under the impression they only ever received what the trustees distribute to them.

- Is 1/3 of the trust hard to distribute to the respective trustees family upon the death of a trustee? It has been suggested to us that we each operate our own trust but invest together. How would be do this? Through a bucket company?

Thanks for your reply, we do need to get through all the unpleasantries at some point! Needs to be done.

 

We all own everything 3 ways (inheritance)

 

We have only come into possession of all assets and cash fairly recently. My understanding is the CGT will only be valid for the gains since taking ownership? Also the residential property was a primary residence and has since become an investment property (recently)

 

Do you mean split the cash 3 ways and invest individually outside of the trust?
We were hoping to do it within a trust structure for some asset protection, 2/3 of us are directors at a company and can be open to litigation.

 

See above for investing shares within the trust (asset protection)

 

Who / what owns the cash? Is it owned by a company? Bank account in your joint names?

No idea of your details, so talk to your lawyer about specifics, but a few ideas.

Assuming the cash is going to be used for long term investing, it may make sense to set up separate family trusts for each of you, and put the money in there. This way your individual circumstances wont affect each other. Sounds like you are all involved in the family business together anyway. But if the money is profits in a company, there are lots of tax implications.

Look at the CGT implications of the residential property, if it used to be PPOR for the deceased.

As others have noted divorce, etc is messy when you have jointly owned assets with others.

Do your own wills carefully. This could have been structured better in the first place.

 

1 Under a discretionary trust a discretionary beneficiary has no interest in the property of the trust - generally. But this doesn't mean the trust or the trust assets cannot be attacked.

2. A discretionary trust means there are no 1/3rds or percentages. Whoever controls the appointor position will control the trust. This could be modified so that there are capital beneficiares so the trust could be part discretionary and part fixed, or still fully discretionary but fixed portions on vesting. Seek specific legal advice.

You could invest using separate trusts, e.g. 3 trustees could be tenants in common on the ownership of property or shares or could be unit holders of a unit trust which invests. etc etc

 

My immediate thoughts are that I can't see much benefit of investing together compared to just investing your third individually. At least compared to the downsides.

 

Currently the cash is from a SMSF which is just about wound down, it had been tied up in shares within the fund previously.
We are definitely keeping all options open regarding the trust set up, we’ll look more into individual trusts as an option.

What would be the best investment vehicle to use if we did go individual trusts? Would it be a 4th trust that each individual trust distributed to? I was hoping we could just run a joint trust like a business but it sounds like the appointer position can only be held by one of us and would overrule the trustees. Is this right?

The profit from the business won’t go into the trust, it’s just the commercial property the business occupies that will be in the trust - we want to protect all other assets from litigation against the business.

We’ve looked into the CGT of the residential property a bit already and it’s not a great deal.

I’m not sure how it could have been done differently, all these assets have come from an inheritance and have been distributed as per the will. This is part of the reason we want to get it set up as best we can now.

Cheers

 

I can definitely see your point. The 3 of us are extremely close but we all bring different things to the table regarding investing.

 

1. So basically they don’t have a legal claim to their partners share in the trust but can have a crack at it? As I suppose with anything in court.

2. I see so the appointor can only be one person but all 3 of us can be trustees? And the appointor overrules everyone? I thought I had seen the appointor is commonly a lawyer, why would they be given power over somebody else’s assets? If this is in fact common.

The next part is interesting, that would mean the 3 of us as capital beneficiaries could receive a fixed distribution each and other beneficiaries (wives/children/bucket company) would be discretionary?
Full discretionary with fixed portions on vesting is also interesting. Could the fixed portions be a percentage of the overall trust? Like 1/3 (33%). We will seek specific advice around this.

Thanks for the suggestion of a unit trust, I believe that clears up the question of the investment vehicle or 4th trust which could be set up for investment purposes.

 

Thanks a lot for all your info so far, it’s been a great help.

What were your thoughts regarding the debt recycling process as stated in the investment strategy?

We have extra cash we could use but thought this would be a great idea with the rent from the property ($750/week) servicing the investment loan + dividends coming in.
The property is currently freehold.

 

A family with a corporate trustee IS an investment vehicle. Personal trustees have their own problems, and generally a $2 company as trustee would be more flexible. Even 1m would only produce 70, 80k income from shares. Distribution to non working spouse, adult children on low incomes or bucket company are options. A 4th trust to hold all the distributions of the other 3 trusts defeats the point of separating each sibling's assets.

The will could have been done differently. Some testamentary trusts would probably be more efficient for those SMSF asasets, especially if you all have kids of your own. Think about this for yourselves.

The idea is to set things up as if you all wake up tomorrow and never see each other again.

 

1. I didn't imply this I hope. No beneficiaries of the trust has a claim over the trust assets but the Family Law courts can treat a trust and its assets as property of the marriage/relationship or as a financial resource. For bankruptcy purposes a discretionary beneficiary has no interest in the trust - but a default beneficiary as a contingent interest generally, weakening asset protection on bankruptcy.

2. I didn't say this either. A discretionary trust could have 3 appointors. Trust assets are not your assets, but you want to make sure you have control of the appointor position. No lawyer should be given control generally - it could work in some limited instances where some impartial person held the position but was not a beneficiary.

depending on how it is set up
a) 3 of you would be discretionary objects for income but capital beneficiaries - so any corpus coming out would go to you equally
b) or capital beneficiaries on vesting only
or
c) default capital beneficiaries unless the trustee makes a decision otherwise

things could be structured differently to allow for greater family law protection, protection from claims on death etc

There are many reasons not to use a unit trust - get some legal advice and tax advice.

 

What debt would you be recycling? You seem to be wanting to borrow to invest so the interest would generally be deductible anyway.

Sounds like you are not after investment strategy advice but about structuring strategies.