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Downsides of a discretionary trust?

Discussion in 'Property Finance' started by Creamy, 10th Oct, 2015.

  1. Creamy

    Creamy Active Member

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    All over the internet, I can find good compelling arguments on why a trust is beneficial, but what kind of negatives are we looking at? Please correct me if I'm wrong.

    Cons I can see:
    • Dissolves after 80 years, property must be transferred to a beneficiary and results in CGT
    • If the trust has a corporate trustee and presumably you're the sole director of the company, if the company doesn't make money, you may have to give a personal guarantee to borrow from the banks to acquire the asset, therefore reducing asset protection? I'm assuming all other companies with you as a director, would be at risk then if you've given a personal guarantee?
    • No negative gearing - can offset this against future income (can you transfer profits to another trust that made a loss?)
    • In QLD, higher land tax, lower land tax threshold.
    • Not protected from divorce, although I've read that prenuptial agreements may be upheld.
    • Maintenance fees
    Personal Background: Average Australian Income, unmarried, occupation is not an at risk occupation

    I'm trying to see how a trust would be beneficial for me and while I can see some benefits (future distribution of income when married and kids, some asset protection etc). The con's are putting me off.

    Thoughts?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    Not all trusts "dissolve" (is that the right term?) after 80 years. Ones in South Australia live forever. Other states may have different rules too.

    No negative gearing, but if you're smart you put negative geared assets in a unit trust and positively geared ones in a discretionary trust so as to make use of the benefits of each. Additionally, you can add a class of beneficiaries to a discretionary trusts which says "all other trusts and companies I'm associated with" so that they can distribute to each other, allowing you to soak up each others losses if needed.

    Not being protected from divorce doesn't really belong in a trust thread, since nothing is protected from divorce anyway.

    Different states have different land tax thresholds. QLD and NSW is affected here. Some others have the same threshold - I think WA and SA is in this camp.

    Maintenance fees is just $243 to ASIC and whatever your accountant chooses to charge you for tax returns. In some states you can use the one trustee for all your trusts, which reduces that $243 cost further (as you spread it thinner).

    If I was in your situation (and I once was), I'd buy up to the land tax threshold in the states you're interested in in own your name first. Then repeat ad infintum with each subsequent trust. Remember that circumstances change in the future, whether you're predicting it or not.
     
    Greyghost and Redom like this.
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Beneficial for what purpose?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    "Vest" is the term.
    South Australia is the only state which has abolished legislation relating to the laws against perpetuities but that doesn't necessary mean south australian trusts never vest. There are many reasons why they may not go past 80 years.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Personal guarantees are standard practice with lenders whether the trust has its own income or not. This will reduce asset protection for the guarantor if the trust cannot pay the loan as they mortgagee can come after their personal assets. Other companies you are director of would not be at risk unless you have caused these companies to give guarantees as well.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Trusts can negative gear like other tax payers. I think you mean a loss inside a trust cannot be used to offset income outside a trust - i.e. you cannot use a trust loss to save tax on your personal income. This is the same with all tax entities including spouses.

    And one trust could distribute to another trust - but there are various legal issues to consider.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But separate trusts can get separate thresholds in QLD saving the family tax - if set up correctly.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Trusts can be safe from divorce - it will depend on the circumstances and how they are structured and run.
     
  9. Elives

    Elives Well-Known Member

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    how so? wouldn't you have to declare all assets when going to court etc?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It all depends on
    when the trust was set up
    who contributed to the trust
    who the trustee is
    who the appointor is
    history of distributions
    powers of the trustee
    type of discretionary trust
    etc.