Discretionary Trusts - Q's & Pro's / Con's ....?

My accountant recently suggested strong consideration for putting my IP (soon to be developed & retained) into a family / discretionary trust.

Q's before I call him back today.

1. If I have a bank loan against the IP title at present, What happens if we want to put the title into the trust.
2. If I plan to borrow / loan from bank for development funds, is it borrowed against the trust and not in my own name...
3. Will the bank do this, will they seek further security / how is the revenue / serviceability factored in....
4. Can my Investment loan for funds borrowed for the property in the trust be Neg geared against my wages income.
5. how does tax minimisation work for IP expenses in the trust....
6. Yearly cost of running a discretionary trust - does $3k sound about right.....

 

i think I've found some of my own answers....
1. dont know answer
2. dont know answer
3. dont know answer
4. No ...???

 

Think of the trust structure as like another entity. If it were another person, and you were giving or selling the title to them, what would happen to the loan then?

 

Perhaps I have this all wrong, but if you are planning to do this will attract stamp duty on the property again? Unless I have misconstrued what you are trying to achieve

Also losses will be captured in a Trust, negative gearing will be out the door.

I am sure Terry the expert on this will have all the answers.

Costs of operating a Trust will dependent on many factors including the number of properties etc you have in the Trust.

 

The trust will need to borrow money from somebody to pay the bank back. That borrowing could be from you or a bank but the bank will be involved in the sale if the property is used as security.

If you borrow you will then need to lend to the trust and you should document that loan.

No

Same as ever other entity - but net losses are quarantined.

Don't forget stamp duty.

Maybe - that price point would typically have advisory built into the quote for that price if it for just one property - it would not just be the form T prep by email remotely.




I have done this before for some people to clear personal debt. It is rare. The stamp duty payback can be around two years depending on lots of things.

 

Selling the IP to the trust will trigger CGT and stamp duty and change the land tax situation for the property. May be costly. Neg gearing needs to be considered for the developed property and a DT may be a poor choice for a property that produces a tax loss as the loss will be trapped in the trust rather than benefit the owner as a neg gearing benefit.

The trust would need to apply for finance to buy the property from you just as if its a new member of the family.. If the trust is setup badly this could be a problem too. The trust may be unable to borrow for the development but may access equity when its completed. A bit of finance planning needs to be explored. Trusts borrowing $$ isnt quite the same as a individual buying an IP.

Annual trust costs likely $1200ish.

What benefit is there in using a disc trust v's personal ownership ?

 

1. A trust is not a legal entity so cannot go on title. The property must be either transferred to the trustee’s name or the current owner must make a declaration of trust that they now own it as trustee. Both will trigger stamp duty and CGT and a new loan application will be needed.

2. The trustee will borrow.

3. Yes if the trustee meets the serviceability requirements

4. No

5. It is the income of the trust that can be streamed to lower income earning members of the group that is the benefit. The trust is a tax entity so it will claim its own expenses

6. High. Maybe $1000 for a trust that owns one property



Why is your accounting advising ‘transfer’ to a trust for an existing property. Just becareful as there are a lot of asset protection issues which they wouldn’t be aware of and other legal issues so make sure you get legal advice before you go ahead.

 

Stampt duty, CGT and trapping of negative gearing losses mean this is an expensive strategy. Better to purchase initially via a trust and ensure the financing does not create losses (which can be carried forward and offset against future profits, AFAIK).

 

Much thanks peoples for your comments and advice
Yes was aware of cgt and stamp duty costs = negative.
And wasn't sure on the neg gearing - that is a big negative for our circumstances I believe if I can't neg gear.

Positives being future proofing from copping big land tax bills 5-10yrs down the track. But I don't think it would cover what I'd lose in cgt, stamp & neg gearing.

I'll await more answers from ny accountant but anticipate this may not be a viable option.
Thanks again

 

Land tax will depend on the state laws where the property is located. In Nsw it could result in more land tax.

 

My partner and I have just purchased an IP using a trust. Our accountant advised us to do it this way for tax minimisation (not avoidance) and the fact we plan to hold this IP long term and never live in it. Also should we drop to one income we can distrubute the income to that person.
I am not sure about transferring assets into a trust but it does trigger a tax.
With the lending side, my partner and I, as directors of the trust, are also guarantors of the loan which is in the name of xxx pty ltd ATF xxx family trust.
A loan for an entity is regarded as commercial so may take longer to process through the bank. We learnt to allow longer for approval as the lawyers had to read through the trust deed, and then wanted to double check it. We had to open a business transaction account too

 

What did your lawyer recommend?

You can't be a director of a trust, only a company. Why have 2 directors?
Trust loans are generally not commercial loans but can be done under resi if the security is resi.

 

Sorry, wrong wording. We are directors of the company. And I did make an assumption on all loans been commercial, my mistake. Our lender is ING.

 

Is the property tax positive after depreciation? Do you ever plan to refinance to buy more?

 

What happens when you die?

 

That is an unresolved great mystery.

 

Hi All - Everyone says no to this point, but I'd like to check it please. If all incomes (wages, rent, investment) come through the trust, and then distributed to beneficiaries, wouldn't the associated deductible expenses from the trust also offset the tax payable by the beneficiaries? Or do all beneficiaries lose all tax deductions? I'm a little confused on this one...

 

A trust can negative gear like all tax payers. That is if the trust has other income a loss generated from a negative geared property can be used to reduce the taxable income of the trust and therefore the amount of income distributed to a beneficiary.

 

A trust distributes net income. If net loss, cannot distribute anything. Losses are carried forward in the trust.

Thats it.

 

A trust cant receive salary and wages income