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Legal Tip 41: What is a Trust?

Discussion in 'Legal Issues' started by Terry_w, 29th Jul, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What is a Trust?


    Not many people understand what a trust is. Even lawyers. I had a lawyer call me the other day about issuing a notice to complete for a property purchase where the buyer was ‘a trust’. He had no idea.


    A trust is not a legal person. A human is a separate legal person. And a company is a legal person. A company can sue or be sued.


    A trust is not a separate entity either. A trust cannot enter into a contract as it is not a legal person.


    A trust is nothing but a relationship with equitable obligations.

    A owns X for B = the simple definition.


    For a trust to exist there must be

    1. A trustee

    2. Property

    3. Beneficiary (one or more)

    4. Obligations

    The legal entity is the trustee.


    The easiest way to understand the concept is to consider a mother opening a bank account for her 1 year old baby.

    The mother is the trustee

    The baby is the beneficiary

    The money is the property

    And the obligations arise out of the relationship - laws of equity and statute such as the various Trustee Acts.


    To make things confusing for tax purposes a tax is a separate ‘entity’. A trust does its own trust return similar to that of a partnership. (A partnership is also not a separate legal person).


    It takes many years for the trust concepts to sink in. I recall when I set up a family trust many years ago the conveyancer abused me when she asked who is the purchaser and I said “The trust”.


    This is the basics, things just get more complicated from here.
     
  2. wombat777

    wombat777 Well-Known Member Premium Member

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    @Terry_w or @Paul@PFI it would be helpful to see a simple scenario comparing the situation of owning a property in a company / trust versus owning a property as an individual.

    Assume a property at $300k, IO, 88% LVR, $10k depreciation in first year, $350 per week rental, typical Insurance / Property Management / Holding / Maintenance costs. Assume a taxable income of $100k per year.

    i.e. even if it just shows that that tax / cashflow effect is the same??? I'm interested to see how it effects tax deductions against regular income.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Tax is only one of about 12 items to consider.

    What about stamp duty - Wombat wants to buy a property which he will use for income purpose now but will 'transfer' to his son in 10 years time. outside of a trust a transfer would result in stamp duty and CGT. However with a trust Wombat makes the son director of the trustee and Wombat resigns. No stamp duty (NSW) or CGT. (stamp duty laws vary from state to state).

    Or Asset Protection - Wombat will undertake a development in a few years so a new property purchase will be set up using a discretionary trust. Wombat seeks legal advice before doing anything. Wombat stuff up the development and loses $1mil and creditors come chasing. Trust property would generally be safe.

    Death - Wombat lives in Tasmania and has no connection to NSW. Wombat has an evil ex wife, a mistress, a materess, and a kangaroo joey. When Wombat dies the trust assets will not form part of his estate and it will be hard to attack them.

    Land Tax - Wombat has reached his threshold in SA and so sets up a discretionary trust to own property with the trust getting a new threshold.

    etc
     
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  4. wombat777

    wombat777 Well-Known Member Premium Member

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    Wombat seems to have lots of adventures and misadventures and could be the subject of a soapie.
     
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  5. Subodh Shirodkar

    Subodh Shirodkar Well-Known Member

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  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Great question. Lets go with the long explanation. Loads of peeps think of trusts as a tax dodge. However trust law is far older than company law. The Westminster system recognises trusts under common law. Companies are a modern invention that copies Dutch guilds and has been enshrined by statutory law. Ever heard a govt try to suggest trusts are a tax scam ?? They are just venting. The courts dont agree. The Queen is probably the best example of a trust. She doesnt own a thing. She is a trustee. Of the worlds best example of a perpetual trust.

    Trust come in many types and can be structured in a infinite number of ways. Companies have different tax and statutory law to trusts. There are many forms of trusts. There are ways a legit trust or company structure can be operated the WRONG way. A good example of the need for quality tax advice that applies personal needs
     
  7. Art Vandelay

    Art Vandelay Well-Known Member

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    Thanks for the insight Paul and Terry. Could anyone give a quick run down on how loans are structured to buy property in a discretionary trust? It's something my partner and I are looking at for our next purchase for profit distribution/land tax/asset protection reasons. Not quite sure how arranging finance would differ from doing it in our own names though.
    We would likely be trustees of the trust, and set up a bucket company to become trustee in the future.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Pretty straight forward. The trustee will borrow.

    Think twice about using human trustees and think further about using both of you - not a good idea, especially if you are looking at asset protection.
     
  9. Art Vandelay

    Art Vandelay Well-Known Member

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    Thanks again Terry. If the trustee is a bucket company does finance become harder to arrange? Could you suggest any books or articles on the topic?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Bucet company is usually a term used for a company that receives distributions from a trust.

    If the trustee is a company rather than a person it won't make much difference with applying for loans, but it adds so much more flexibility. Loan will be in the company name with the directors giving a personal guarantee.

    you can see the book I wrote on trusts and tax with Micheal "mikelivingthedream" - download free at www.propertytaxsolutions.com.au

    see all my other posts in the legal section too.
     
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  11. hhd88b

    hhd88b Member

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    Terry, can I buy a property with this structure: A family ( corp trustee) own 50%, Trust for family B own 50% . Trustee for family trust B is an individual who is also the director of the corp trustee for family A. please give me some advise if it can work this way..
    thank you
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes 2 trustees of separate trusts can own property as tenants in common. You should seek advise on whether this is a good idea though.
     
  13. hhd88b

    hhd88b Member

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    thanks Terry
     
  14. TyroneS

    TyroneS Well-Known Member

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    @wombat777 - make sure to share the "real life" stories as it would be nice to hear your property journey too.

    Thanks
     
  15. wombat777

    wombat777 Well-Known Member Premium Member

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  16. TyroneS

    TyroneS Well-Known Member

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    Thanks @wombat777. I remember we had a good chat the other night at Wenty's.