Not sure about whether to setup a Trust..

Hi all,

Broad question I know however have been doing plenty of reading and speaking to some accountant friends (macro level) around using trusts to purchase IPs in.

I understand that theres a long list of investment property ownership/sell scenarios which make it hard to generalise whether trusts are the better option. I know a few investors with 10+ IPS buying in their own name still etc..

I estimate loosely that I may own 6-8 IPs in total ($5m) and may develop one or two of them in the future. I may sell down 2 or 3 as I look to reduce debt in the future etc. This all may change however have worked on many long term scenarios on the above.

Happy to pay for advice based on current scenario and future plans, not sure if my accountant is as IP savvy With regards to pros/cons of trusts as some members on here are..

Any advice would be appreciated

 

Very general question.

As a very general answer - you will pay more upfront to get it going and enjoy more benefits later on. It is a massive plus if you have business income to allocate (properly to your family investment trust).

It also varies depending on the state you live in with costs as land tax can vary.

If you are developing you should also consider the asset protection issues associated with holding business assets (development) in the same entity as an investment entity. Estate planning can be considered here as your will does not extend to a trust.

You should decide within an overall strategy.

 

How many properties do you own so far, and in what ownership structures so far?

What states are you looking to buy in? Different states have land tax rules which is the main reason most property investors use them.

In most cases they're not really needed (except for land tax reasons), a lot of lawyers try to scare you into getting them so they can sell them.

 

Trust work well if developing and operating as a business and can be tax effective way to reduce tax

 

I think it has advantages, if you buy in your own name and you make a huge gain, you'll have large amount of tax to pay in the one year as you have no flexibility on who gets the payout. So whoever owns it has to pay tax at their own rates. Whereas if you buy in a trust with a company behind it that you control, you can decide to distribute proceeds (or retain it for periods of lower incomes) or distribute the gains to family members on lower incomes and therefore lower rates of taxes....

Note, I'm not an accountant and not an expert on this. But a smallish upfront cost can reap huge benefits later. Also helps in succession planning, and in Qld trusts get their own land tax thresholds... icing on the cake.

 

Trusts are complex legal relationships - you should be seeing a lawyer as tax agents can only advise on the tax set ups.

The first thing you should consider is land tax as this often is a show stopper - e.g. in NSW it could cost you an extra $7,812 per year in land tax if a trust owns land compared to an individual owning the same land (and no other). If you are not prepared to pay this then no need to consider trusts any further - at this stage.

You also need to consider the structure each time you purchase - before you purchase - as each property circumstance will be different and your circumstances are constantly changing.

I have written a lot of tips on trusts - in the legal section.

 

Wow appreciate all the information sent through.

In the process of acquiring third with total portfolio val to be $2.1m. NSW (apartment) QLD & now VIC (houses) all under my own name. Was planning on exhausting servicing with another 3 IPs then move on and use fiancées to purchase another two. Planned to work through over 8 years.

Thanks Terry, there is a host of moving parts here that I am not aware and thanks for pointing out land tax differences. My NSW apartment should be ok land tax wise however VIC may be a different story. I was mainly in the mindset of exploring trust options based on my plans prior to going ahead with this next purchase. I do need to maintain low running costs however am fine for an upfront payment to setup/seek advice etc.

At this stage I'll review on PC to see whether there's any other roadblocks before engaging any professionals.

Thanks

 

What you really need to ask yourself is why are you thinking of buying in a trust? What is the reason behind it?
There are different angles to be considered, land tax being probably the most relevant for the average investor.
But given you have properties spread across different states and are considering purchasing in your fiance's name in the future you might well avoid the land tax issue completely.

Often asset protection is thrown around but again unless you are in a profession where you are at risk of being sued personally, against what are you trying to protect yourself?

Trusts are not cheap to setup and require ongoing - as in for the life of the trust - accounting fees to run them. You also add another layer of complexity that may be a hinderance down the road if you ever need to undo things.

More complex is not always better - in fact rarely so. You really need to have a specific idea of why you are looking to buy through a trust.

 

I speak to 3-5 people a week about a trust. And in most cases there are reasons why its a poor choice. I would talk more out of it or recommend they then see a lawyer.

- Neg gearing
- Land tax
- Nobody to share income with
- No asset protection ?
- Cost upfront
- Annual costs
- Limitations on borrowing
- Risks of later poor management eg : Undischarged present entitlements
- Inability to involve SMSF $
- Division 7A if a company beneficiary is involved
- Losses and family trust elections
- Blending some assets (revenue and capital and also property sometimes too)


etc

 

And while you are getting advice about setting one up, also find out how you can dismantle it if future events deem it desirable.
Often it is quite hard to unscramble eggs,....
Marg

 

Easy to wind up a trust. But where real property or shares are held it could trigger CGT.

I get a lot of people asking about trusts, and I talk most of them out of it for owning real property. For business they are essential, and for shares a good idea too, see my latest legal tip Legal Tip 151: Structuring the Ownership of Shares

 

Appreciate the advice, I am looking to take opportunities to make smarter decisions now that may benefit to supplement my investment journey/outcome. Essentially seeing whether trusts are suitable or whether it may over complicate and eat up cash/time based on my scenario...I do not know enough yet about setting up trusts however this thread is definitely assisting with giving me a more detailed view.

You make a very valid point that hits home with me being around complexities, I am trying to simplify almost all aspects in both personal and professional life at the moment with so much going on these days.

Cheers