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 Structuring Lawyer and Finance Broker - all states 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 Structuring Lawyer and Finance Broker - all states 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 Structuring Lawyer and Finance Broker - all states 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 Structuring Lawyer and Finance Broker - all states Business Member

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    Did the trustee borrow to acquire the property?