Corporate Trustee in investing accumulation phase

I’ve currently got 1 IP but am looking to purchase approx. 5 more over the next 8 years. My plan is to buy my future IP’s at either cash flow neutral or slightly positive. Amongst others, Steve McKnight and Michael Yardney’s books both seem to be largely pro-trust structures and encourage their readers to consider trusts early on in their investment journey (like me!).

The discretionary structure commonly recommended is below (diagram attached):
* Form a single director company and a trust. Appoint the company as the trustee.
* A corporate trustee can be the beneficiary of the trust - as long as you include the trustee's name and their capacity. For example: 'ABC Pty Ltd in its capacity as the trustee of the ABC Family Trust'.
* The company, which is the trustee of the trust buys the property. The loan is in the company's name, but is guaranteed by the beneficiaries (only me).
* Ideally the trust wouldn’t have a vesting date


I’ve tried to note the Pro’s and Con’s of the above structure below:

Pros:
- Asset protection: from tenants & due to my occupation
- Apportionment of positive income to trustees
- Pay for expenses out of my pre-tax income from the property
- I plan to buy multiple properties in QLD and will look to minimise land tax

Cons:
- Set up costs of a company and a trust
- Ongoing yearly accountancy fees on my tax return

Has anyone here had success with similar structures i.e. have the benefits outweighed your costs?

 

Yes, I have a couple similar structures.

A couple of thoughts on what you've proposed
- you can apportion positive income. But how many properties are positive these days?

- if its only yourself (do you have a partner or family?) It sounds like you'll be all the roles which can invalidate the trust, get some advice on this bit

- for land tax, the free threshold is given per entity. So how far off are you in your name? Then in spouses name? Then in each trust? Can't just put all props in one trust and expect different land tax treatment, so costs of establishment and administration come into play if there's going to be multiple trusts. Buying in other States (since they have their own land tax rules) might be more cost effective (and beneficial from the point of catching different growth waves).

 

What about the stamp duty consequences of such a structure.

Rather than base you structure on ill-informed books it would be best to seek legal advice. Read some articles written by lawyers. There is plenty out there. perhaps start with the Trust Structure Guide for a basic understanding and see my various legal tips for some general ideas.

 

Why would it invalidate a trust if a person took all roles? If it was a bare trust with one trustee and one beneficiary who is the same person then there would be no trust by definition. But what if it is a discretionary trust with various discretionary objects and one named beneficiary?

 

Family Discretionary Trust there's some info on it here on this lawyers site under the Who Should be Trustee section that can explain it better than i , but really you should have covered it in your online degree.

 

A quote from that website - says the same as what I wrote above:
When there is only one individual trustee and the same person is the sole beneficiary of the trust, this will be an invalid trust. The reason is that a person cannot hold an asset on trust for his/her own benefit. In such a situation, a company can act as a trustee with a sole director and that same person can be the sole beneficiary of the trust.

 

Thanks D.T.

a) Initially the properties I'm looking at will only be positive by a few thousand $ per year. However as I look to decreased the LVR say 10-15 years down the track this could be more a significant number- So i'm considering the option of this structure for the future.
b) It is myself at the moment, but I have a long term partner that I would potentially look to have as a director of the trustee business in the future. I will also discuss with my accountant adding my sibling.
c) I haven't got any property in QLD currently, so this is one reason why I'm considering maxing out the borrowing capacity in my own name first given my purchases will be <600k*

*
1) Types of owner for land tax | Environment, land and water | Queensland Government
2) Minimise Land Tax | Tobin Partners
3)h ttps://www.somersoft.com/threads/qld-land-tax-for-trusts.94914/

 

Thanks Terry, I will absolutely read that book

 

a) why would you want to do that?
b) why ask an accountant a legal question?

 

My sister and my partner would be the only people I would trust to be involved with my trust as directors or guarantors. But I would not want to disadvantage either them or myself from a taxation point of view- so I plan on discussing tax implications of the trust with my accountant, set up with my lawyer.

 

Also will discuss w lawyer if legal risk of the girls ever become a director would be worth it.

 

Think about the potential legal implications for both the trust and for the sister and girlfriend. Especially family law.

Also consider the lending issues and strategies.
Trust Strategies to Increase Borrowing Capacity Trust Strategies to Increase Borrowing Capacity

 

Thanks Terry- I've found your tax tips very helpful

 

Don't forget the legal ones - all of my trust tips are in there.

 

Others
- Trust = No CGT main residence concession
- Trust = Possible not asset protection from tenant issues - Asset protection is misuderstood ?
- Trust = Asset protection risks under family law and other parties ??
- Trust - Issues with changes to trust and QLD stamp duty
- Trust - No vesting date ?? Hmmmm/ How is that achieved ?
- Trust - neg gearing quarantined
- Trust pays accounting and tax NOT you
- Trust - ASIC Fees
- Can the trustee be a beneficiary ?
- Issues with loans. Not all lenders allow trust loans and some wont allow 80% security. Some wont allow a beneficiary guarantee. Only a trustee Director etc.
- Loan structure may become crossed. Typically trust loans will need to be crossed.

All those books are not written by trust experts / lawyers. They are property spruikers / vendor agents and may be outdated and contain tax issues which the authors arent qualified to advise on.

 

Asset protection on death too needs to be considered.

 

These are some relevant points Paul and I've re-thought my position to thinking at this stage in my investing and with a career in the 37c bracket I will just purchase in my own name and save the hassle. The bold ones in particular outweigh the ability to apportion income for me. Cheers

 

a rash decision!

 

Anything to add to the "Pro" side of such a structure?

 

have you sought advice?

What is your reason for choosing that structure?