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 A trustee Property Beneficiary (one or more) 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.
@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.
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
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
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.
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.
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?
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.
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
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.
@wombat777 - make sure to share the "real life" stories as it would be nice to hear your property journey too. Thanks
My introductions thread is here ( which I update when there are significant changes ) - https://propertychat.com.au/community/threads/wombat777-here.232/ . Other tidbits of my journey are throughout the forum.
Hi Terry, I tried to download the book but I can't seem to find the link. Could you please help? Thanks.