Legal Tip 119: Moving existing assets into a trust

Discussion in 'Legal Issues' started by Terry_w, 26th Mar, 2016.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Moving existing assets into a trust


    Some people want to get their existing assets already owned into a discretionary trust. The reasons they want to do this may be for:

    1. Increased asset protection
    2. Debt recycling
    3. Land tax savings (some states)
    4. Tax efficiency
    5. Estate planning​


    How to do it
    Before going down the path and spending big money you would want to work out the costs involved. The 2 major costs are stamp duty and CGT.

    There are 2 ways to ‘get the asset into the trust’, the first is:

    a) Transfer title to the trustee.​

    If you are the trustee and the current owner there will be no transfer but

    b) A declaration of trust.​


    Costs involved
    Both will result in stamp duty if the asset is ‘dutiable property’. Land (houses) is dutiable property, shares may be in some states, cash is generally not. So the first step would be to work out what the duty involved will be.

    The transfer or declaration of trust will both be Capital Gains Tax events. CGT would apply, but there may not necessarily be any tax to pay as this will depend on whether there is a capital gain or a capital loss.

    There will also be other costs such as:
    • Legal advice
    • Taxation advice
    • Setting up the trustee and trust
    • Conveyancing
    • Loan exit fees, including discharge of mortgages
    • Loan entry fees


    Consideration for the transfer
    Transfer to a trustee can be done in 3 ways, in relation to payment:

    a) No charge (a gift)
    b) Under market value
    c) Market value​

    How you charge the trustee will have far reaching current and future consequences with both tax and asset protection.

    CGT will be on the market value anyway, as will stamp duty, so I generally see no advantages in transferring under market value, in most cases. There could be benefits if you want to divest your assets as an estate planning strategy (so they don’t fall into your estate at death for example).


    Example of why you should charge full market value
    $1million house with a $500,000 loan. Owned in personal name.

    X gifts the house to the trustee of a discretionary trust. X still has the problem of dealing with a $500,000 loan. X can no longer claim the interest on this loan. The Trustee cannot claim the interest on any loan associated with the property as it was a gift. X has no money to pay off non-deductible debt.


    Y transfers the property to the trustee for $500,000. Trust pays Y and Y pays off Y’s loan. Y may be able to get 100% finance from a bank because the valuation would be much higher than the transfer price and it is a related party transaction. Y uses the $500,000 to pay down the original debt and the trustee can claim the interest on the loan.

    Z transfers the property to the trust for $1mil. It is a market value transaction. The trustee borrows $1mil and pays Z who then pays out the $500,000 loan and still has $1mil left over to pay down more non-deductible debt. The trust will claim the interest on the $1mil loan. (100% may be borrowed without crossing by using a few strategies such as related party loans).

    Keep in mind if the trust ends up in a negative income position on the property and it has no other income any loss cannot be used to offset the person income of those involved.


    Asset Protection
    In the examples above X and Y have made under market value transfers. These transactions will be attackable by creditors if either X or Y becomes bankrupt.

    Where the transferor later becomes bankrupt the transfer to the trustee may be able to be unwound in some instances, such as if the transfer was done to defeat creditors, but generally any equity growth will generally be more secure.

    Legal Tip 2: Asset Protection and clawback provisions Legal Tip 2: Asset Protection

    A declaration of trust is weak from an asset protection point of view as there is no transfer and no consideration paid.

    Consider transferring assets at full market value and, if your aim is to divert assets in the trust, then gift cash back. This way the growth on the asset will be more secured.


    Estate Planning
    Any asset owned by yourself as trustee or by another as trustee cannot be left via your will. So there are some careful planning considerations to make. Building up considerable assets in a discretionary trust can be advantageous or it can also be disadvantageous. Not many consider this aspect adequately.


    Loans
    Any transfer of title or declaration of trust will mean new loans have to be applied for. Due to the tightening up on serviceability check whether the trustee would qualify for loans.


    Land Tax
    This varies from state to state. Transfer as a trustee can result in less duty in some states such as QLD, but it could also result in more land tax in some states (including QLD depending on the value).


    Seek legal advice before attempting this.
     
  2. KDP

    KDP Well-Known Member

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    Hi Terry and also any mortgage broker with knowledge on this subject

    If a person makes a declaration of trust on an existing property, how would the bank views it and would this trigger a full application/reassessment of the loan?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This would be a breach of the loan agreement with the lender so you would need to obtain their consent. They would then need to reassess the situation based on the terms of the trust.
     
  4. Keentolearn77

    Keentolearn77 Well-Known Member

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    Hi Terry,

    Gathering from the above that new loans would need to be applied for....

    Is another option - that the loan secured against that property which is to be moved from ones name into a trust.......
    Would the bank be fine with the loan - being 're-secured' against another property in ones portfolio, removing the need for the loan to be 're-applied for'....?

    If one was to then seek a new loan for the property in the new trust (ie construction funds for a development - Is there an easy explanation on how the bank assesses this)
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes new loans would be needed as the owner is changing.

    Existing loan security could possibly be substituted to other security but the loan would then become non deductible.

    Banks will asses the serviceability based on the trusts income and the income of the personal guarantor
     
  6. Keentolearn77

    Keentolearn77 Well-Known Member

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    hmmm
    I wonder how accomodating the banks would be if the loan was a 'fixed loan' and ensuring 'exit / break fees' are waived - if the loan is to just continue on so to speak....

    if the loan is secured to another property but was originally initiated for / and can be proven - for investment purposes - why would the loan be non deductable.....
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Did the trustee borrow to acquire the property?
     
  8. JoeK

    JoeK Active Member

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    Hi Terryw. Thank you for sharing.

    Wonder if you can quickly guide. I've been doing a some reading. Considering the above, does this mean it is straightforward to move/transfer cash from my personal bank account, as well as the my spouse's account, to the trust's bank account. I assume gift (with minuted doco?) would be the best and easiest? I don't necessarily see a loan as the best way because the say my loaned amount is still considered mine as oppose the trust's asset.
    We'd like to practically fund the family/discr. trust with some funds to begin with and we will be investing long-term in companies which may distribute dividends or just for potential capital appreciation.

    Are there some tax implications that we need to think about and costs?
    We are in QLD. Beneficiaries are the two us, the our kids, bucket company and our parents.


    Thank you

    Petro.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Get some legal advice if you intend giving away large sums. Lots to consider.
     
  10. JoeK

    JoeK Active Member

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    Thanks. What is large here? Up to $150k from each of us?
    Do we really need a legal advice? What is at stake with a gift?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What is large? Well would you miss it if it disappeared?

    Ask yourself some what if questions such as:
    What happens if you give money away but want it back?
    What if you lose control of the trust
    What if you die
    What if you become bankrupt
    what if your brother divorces
    what if you lose capacity
    what if you have 2 kids

    And then some how questions
    - how to you prove it was a gift?
    - how to document it?
    - who should gift?
    - how could it be clawed back?
    - how could it effect social security payments?

    And some tax questions
    - What are tax consequences at death?
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I came across a client who did a transfer of an existing property from his own name to that of a company as trustee of a discretionary trust - no consideration was paid so the purpose of doing it for asset protection was greatly diminished.
    Don't just use a conveyancer to transfer title, get some advice and sell at market value using a contract.
     
  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Loss to you or your intended beneficiaries and perhaps exposing other trust property. Gifts can also be attacked as being a sham.
    Gifting is a legal matter and on that basis really should be given legal advice concerning the proposed transactions, documentation and reasons. There are merits of loaning funds to a trust over gifting. One of them is the refinancing principle (FC of T v. Roberts & Smith 92 ATC 4380) ...

    Example : Dave and Mabel inject $400K to a trust that intends to buy equities that produce income and achieve growth. They lend to the trustee with 0% interest charged. Two years later the trust assets have doubled in value. Dave asks...Can I get my $400K back out ? Can the trust borrow to pay me ? Yes. A sort of debt recycling since Dave plans to use the $400K to buy himself a better house. The trustee can borrow and may then payout the original loan. Now the trust incurs interest and is self servicing and self supported. Despite Dave and Mebl using the borrowed funds to buy a house the deductible purpose for the trusts is met through refinance.
     
  14. USR

    USR Member

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    Hi Terry,
    What is the GST situation if the transferred asset is a newly built house/duplex (a duplex before the strata subdivision) in NSW?

    Lets say person B (who is spouse of person A) bought a land and building a duplex, so the title has only person B's name on it. Both are guarantors to the loans though. Land purchase and building contract both had GST built in them. After the built:

    Scenario 1: They think of transferring this (selling at market price) to the corporate trustee of a new discretionary trust, where they both are beneficiaries. Both are directors of the corporate trustee.

    Scenario 2: They think of transferring this (selling at market price) to the corporate trustee of a new fixed unit trust, where only person B holds the units of the trust. Both are directors of the corporate trustee. Fixed trust can save on land tax in NSW.

    Scenario 3: They think of transferring this (selling at market price) to the corporate trustee of a new fixed unit trust, where person A and B both hold the units of the trust. Both are directors of the corporate trustee. Fixed trust can save on land tax in NSW.

    Does the GST apply in all these three scenarios? Is the act treated as "carrying on an enterprise for GST purposes" (obviously sell is happening within 5 years of built)?

    If it does, isn't there anyway to avoid the GST when transferring a newly built house to a corporate trustee of a trust, or to a company (not acting as a trustee)? I understand that even if it is possible, still person B has to pay CGT and the corporate trustee/company has to pay stamp duty, but comparably GST (1/11th of market price) is far more than they both.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    the normal gst rules apply. It doesn't matter if they are beneficiaries of the trust or not. Generally a taxpayer doesn't pay both CGT and GST.
     
  16. USR

    USR Member

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    Did't quite get that. Do you mean it is possible to transfer (sell at market rate) a new house to a corporate trustee without incurring GST, and only pay CGT (by person B in the example) and stamp duty (by corporate trusyee)?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could be.
     
  18. USR

    USR Member

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    Great. Is it possible to work with you on this please? Have contacted two other tax lawyers already to no avail. Your office redirected me when contacted a week ago though!
    I suppose we may have to ask for a private ruling, not sure if this is the tax lawyers territory or the accountants'.
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I have a long waiting list. You prob best off seeing an accountant
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is also worth considering whether to just leave existing assets as they are owned and to acquire any future assets in a trust.

    These days with high interest rates it might be better to debt recycle to buy shares in your personal name and then later on set up a trust for future share acquisitions, especially as you approach the end of your debt recycling journey
     

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