Buying 1/3 share with testamentary trust?

Discussion in 'Wills & Estate Planning' started by ZenSapphire, 10th Nov, 2019.

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  1. ZenSapphire

    ZenSapphire Active Member

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    Homer (68), Marge (62), and Bart jointly own a commercial property in NSW worth $1.8m with $960k in loans. They are considering a testamentary trust so that they can pass down the property to their children and possibly be eligible for the pension.
    1. Homer and Marge have 2 properties, home residence and commercial property.

    2. Homer and Marge move their share of the commercial property into the TT ($1.2m, assets, $640k in loans, $70k gross rent being 2/3 of $105k).

    3. What are the tax implications if Homer and Marge move their 2/3 share into the TT?
    4. Can the TT then borrow $600k to buy the remaining 1/3 share from Bart?

    5. Will Homer now be eligible for the pension?
     
  2. shorty

    shorty Well-Known Member

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    I don't think a TT can borrow money because as far as I know it doesn't exist until the testator (Homer/Marge) dies. You can't take out a loan if you're dead.

    Do you mean discretionary trust?
     
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  3. Terry_w

    Terry_w Well-Known Member Business Member

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    Has someone died?
     
  4. ZenSapphire

    ZenSapphire Active Member

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    Well I guess it would be a discretionary family trust attached to a TT that I am thinking of to address the estate side as well.
     
  5. Terry_w

    Terry_w Well-Known Member Business Member

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    Trustees of TT can borrow
     
  6. ZenSapphire

    ZenSapphire Active Member

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    Not yet. Simpson’s are all alive and kicking!
     
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  7. Terry_w

    Terry_w Well-Known Member Business Member

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    Someone needs to die for a TT to be established
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    Grandpa Simpson?
     
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  9. Trainee

    Trainee Well-Known Member

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    You want a tt someone has to die. In the op’s example it would just be a family trust, stamp duty and capital gains tax all apply, making it more expensive.

    Moving assets would probably be caught by the gifting rules for pensions.

    How does any of this help the kids inherit?

    op, you dont know what a tt is or how it works.
     
    Last edited: 10th Nov, 2019
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  10. ZenSapphire

    ZenSapphire Active Member

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    Thanks everyone. New to all the trust stuff. So would it be correct to say this would require two trusts?

    A. A discretionary trust while Homer and Marge are alive.
    B. A TT to be setup as as part of the probate.

    how do the two get linked?
     
  11. Trainee

    Trainee Well-Known Member

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    No idea what homer and marge are trying to achieve. Divest the assets to get the pension? Rules against it.

    Put the assets in a family trust and the assets no longer form part of the estate though trustee company shares and appointor powers might be.

    you have to form strategy based on what you want to achieve, not throw shiny things together because it sounds cool or you read somewhere that tts are good without understanding what they do. You havent even mentioned the tax advantage of tt over family trust which is a weird omission when thinking about tt.

    Much better off reading all of terryws strategies than concocting you own based on bad information.
     
    Last edited: 10th Nov, 2019
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  12. ZenSapphire

    ZenSapphire Active Member

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    Thanks Trainee for the pointer questions. Objectives are asset protection, income splitting, retirement planning, possibly gifting into the trust to protect risk of Bart going wild and losing the bundle.

    I didn’t know there were additional tax advantages with a TT over a family trust. Is there something I can read up on this? Thanks!
     
  13. ZenSapphire

    ZenSapphire Active Member

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    I’ve read a bunch of terry’s stategies and I must admit I do get a bit confused hence the post.

    I found below. Is this what you are referring to?

    One significant difference between family trusts and testamentary trusts is the tax treatment for income distributions received by beneficiaries who are under 18 years of age. Under a testamentary trust, children are taxed at the same rate as adults rather than the higher rates applied to distributions from a family trust. “Thus, a high-income earner with three small children could gain access to three additional adult tax-free thresholds by receiving an inheritance via a testamentary trust instead of directly. And, as trustee, the high-income earner would retain access to capital as well,” says O’Callaghan.
     
  14. Terry_w

    Terry_w Well-Known Member Business Member

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    If you hold as assets as part of a trust set up during lifetime when you die that asset cannot pass via your estate when you die. The control of the trust must be passed on. Or the trust must vest.
     
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  15. ZenSapphire

    ZenSapphire Active Member

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    Armed with new knowledge from PC, I think this is more the question(s) I am looking to answer. It seems simplifying didn't help, so here is a more wholesome version:

    1. Homer (68), Marge (62), and adult Bart (30) purchased in 2012 for $1.5m, a commercial property in NSW. It is now worth $1.8m with $960k in loans.

    2. Homer and Marge are both in 50k/year jobs. They are looking to plan for their retirement income, while also setting up structures so their three adult children (Bart, Lisa and Maggie) can inherit their properties when they pass.

    3. They are considering if it would be worthwhile moving the commercial property into a discretionary trust so the kids inherit and for the time being - split the rental income to family members with lowest tax rates (themselves). They are also wondering if they would be eligible for the pension to fund their retirement and they have no super.

    4. Bart also read about an 'equity transfer' or 'equity transfer trust' claims no CGT and stamp duty are triggered and does not understand how this works. Protect your existing assets without triggering tax and stamp duty

    5. Homer and Marge have 2 properties cross-securitised at purchase of commercial property), home residence ($360k loan) and commercial property ($600k loan).

    6. If Homer sells his 1/3 share to a discretionary family trust, will he be eligible for the (a) CGT discount, (b) 50% active asset, (c) retirement exemption?
      $100k profit, less 50k (a), less 25k (b) = 25k capital gain which is exempt under (c).


    7. Would Homer's sale then result in NSW stamp duty of $18k (500k purchase) for the DT?
    8. How does the DT actually 'purchase' the 1/3 share given it starts with no assets? i.e. Will the bank loan $600k to the DT that can then pay off the $360k loan, thus removing the cross-securitisation?
    9. Can Marge also sell her 1/3 share to the DT as per Homer with 25k capital gain being exempt?

    10. Homer continues to work part time 2 days a week earning 20k, while Marge continues to work full-time earning 50k. Is Homer now eligible for the full aged pension?
     
  16. ZenSapphire

    ZenSapphire Active Member

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    This makes sense. Thanks Terry.
     
  17. Terry_w

    Terry_w Well-Known Member Business Member

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    2. They can only inherit if owned by a person that dies.

    3. They need to work out the costs v savings and see if worthwhile. Unlikely I would think.

    See s1227 onwards social security act. Trust assets still counted for pension due to the source test.

    4. Avoid accountants and get some legal advice from a lawyer.

    5. They should fix this


    6. Couldb bedepending on the circumstances.

    7. It would be dutiable at ad valorem rates

    8. Trust could consider borrowing the deposit or receiving a gift.

    9. I don't see how.

    10. Would need to consider both the income test and assets t st
     
  18. ZenSapphire

    ZenSapphire Active Member

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    Thanks Terry. Very useful information, especially the social security act and trust receiving a gift for the deposit.
     
  19. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Using a TT or a Disc Trust (that could revert to a TT on death although it may be problematic for both Marge and Homer to die at once !) as it will affect any pension entitlements. Basically Homer AND Marge would both be assessed on the assets and income test for ALL of the trust each. Not even just 50% each.

    I believe relevant law is s1207 onwards.
     
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  20. ZenSapphire

    ZenSapphire Active Member

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    Sounds like a horrible strategy. Who came up with that idea?!