Loans to family trust by sole beneficiary help!

Hi all, I took over as trustee of our family trust when my husband passed away 6 years ago. I am the sole beneficiary and trustee (as a sole director).

We only owned one asset in the family trust, which was our house.

On advice, I loaned money to the trust to pay all expenses until I could sell the house. I couldn't keep paying the mortgage on my own, but it took a few years to sell as it flooded regularly.

My questions are:

I didn't have a formal loan agreement drafted by a lawyer and am very worried what I paid out for the morgage, insurance, land tax etc etc will be considered gifts to the trust.

I was told and have read that you can live in property owned by a family trust without paying rent to it, but now I'm not sure if that was true or not and am very concerned.

Any advice welcome,

Thank you.

 

You are not the sole trustee if there is a company. The company is.

You are also unlikely to be the sole beneficiary.

You are right to be worried but contracts can be oral, so best to put it in writing now. Even if they were gifts since you control the trustee you could potentially cause the trustee to make a capital distribution.

The trustee can only let a beneficiary stay in a property at no rent if the deed permits.

 

Capital gains tax?

 

Thank youTerry_W,

On advice from the lawyer when my husband passed away, the company that I am sole director became trustee. At the time, I had no knowledge about trusts and just did what he thought best.

I am definitely the only beneficiary. There is no one else.

How would I put the loan agreement in writing now? Can I do that myself or do I have to go to a lawyer?

I can't see anything in the deed about rent.

Hi Trainee:

From my understanding I have to pay CGT on last year's personal tax return, which I'm about to do. I originally thought it was the trust that pays and that's how much I don't know and why I'm worried.

At least if I know now I'll be prepared for the worst I didnt relise how complicated this is and feeling suicidal.so if I can just get the real facts no matter how bad at least I will know the truth.

 

Since you are sole beneficiary and sole trustee via the company, there is no issue getting the money back to you.

All the loan/property expenses would have been in the company-trust's name, so they should all be valid expenses when calculating tax on the sale.

any profit will need to be distributed to you as a beneficiary, any remaining funds can be repaid back. or even maybe gifted back.

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My posts are general in nature and do not constitute professional advice.

 

The trust is not a separate entity, since you are the sole beneficiary, all taxes are paid by yourself. It may have been possible to add additional beneficiaries to spread out the CGT, butit would be too late for that now.

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My posts are general in nature and do not constitute professional advice.

 

Thank you, thydzik.

 

I think comfused12 might be confused. It would be extremely unlikely you are the sole beneficiary unless it is a bare trust. It is possible though.

I suspect you might be the sole named beneficiary but there are many other potential beneficiaries.

Why do you want the loan agreement in writing and what are your concerns? Only a lawyer or yourself could draw up an agreement but you may not need one.

Does the deed say something about the trustee dealing with beneficiaries on any terms it thinks fit?

 

For example do you have adult children, grandchildren, siblings etc? Hard to know because you dont realise what is important, but youll need a good lawyer. Though the guess is you are more concerned that you need to be.

 

OP you need to see if you can locate a copy of the trust deed for the trust. Speak to your accountant about it.

Do you have some support or family you can lean on. Sounds like this is causing you some distress - please don’t dispair - you are not going to go to jail or anything like that!

if you made personal contributions to the trust for expenses - was your accountant keeping a track of these via a loan account or another accounting method?

OP when was the property sold? Month and year is sufficient. Has the trust and yourself lodged that years tax return yet? If it happened in the 2018/19 tax year, you potentially have until 15 May 2020 to pay the tax, as long as your tax agent lodged the return and you didn’t do it on mytax.

You mentioned CGT. I imagine this is because the trust sold the property and the distribution flowed from the trust to you as the beneficiary. This should then be included in your tax return. If the home was owned by the trust longer than 12 months, you should be eligible for the 50% CGT discount.

Is the money from the sale of the property still sitting in the trust bank account or has that been distributed to you as well? You should be able to use these funds to pay the tax liability, assuming there was cash left over from the sale. If you sold the property at a loss, then good news is there is no CGT to pay!

Hope this helps, chin up - you’ll get through this!

Has your accountant discussed any implications of living in the property rent free?

 

Avoid to avoid an accountant and get some legal advice. Accountants could only help with the income tax aspects. The issue appears to be legal in nature.

It doesn't seem to be a big deal so far from what has been written above.

 

Thank you all for your answers.

Terry_w the reason I wanted the loan agreement in writing was to be sure the money I paid for the home loan etc. can't be considered a gift. The bank statements should reflect that, as I had to reduce the repayments to the absolute minimum interest only while I was trying to sell the house. It took a lot longer to sell than expected, due to flooding (the house is two story and built below ground level) and there were termites found in the laundry area. It was a nightmare basically.

The deed does definitely stipulate that the trustee has absolute discretion in regards to beneficiaries.

Trainee: no I don't have any children and unfortunately my family aren't close.

Curious2019: I have paid myself the monies loaned, but there is still about 40K in the trust account. A large portion of the sale went to paying out the morgage. We owned the house for 8 years. It sold in April 2017 before the end of the financial year. I have already done my personal tax returns for that year and the next, but not 2018-2019.

Perhaps very ignorantly didn't think the trust needed to be included in those, because as far as I was aware there was no profit made by the trust on the sale. I started to panic when I read conflicting sites saying that you need to pay rent to the trust. That is a very big concern, if it's true, especially after all the years of not doing it.

I preface this by saying I loved him dearly, but my late husband didn't think he needed to do tax returns for the trust because there was no income. So for 4 years as trustee he didn't do any. He had much bigger problems of cancer and facing his own mortaliy and I definitely don't blame him for not doing it. It was only after selling the house that I have become aware that he may not have been managing it properly and I have blindly continued doing things the same way and fallen into this trap.

I have made an appointment with an accountant for December, but I'm feeling very anxious. The rent issue is probably my main concern.

 

Prob not much to worry about.

 

Thank you so much. I really appreciate your help.

After doing some sums I realised that the loan interest was 25K a year. That plus land tax, rates, insurance etc etc means there's no CGT owing.