Pay off which first? Trust property or ?

Hi everyone,

Just wanted to run my thinking past you. I am ready to start paying down one of two properties. Both are Line of Credits used to pay 20% deposits.
Options:
1. Property owned in both our names.
2. Property owned in a trust.

I'm thinking I should pay down Option 2 first so that it quickly becomes positively geared and so no loses are trapped in the trust (as I don't have any other properties in the trust yet).

Thank you. I am new to trusts, so not sure if I'm correct.

 

Hi @Jasper

are both IPs? and why do you have to pay them down? do you have an offset account that you could build up?

 

Why are you paying down trust property debts? How would you go about this too?

If the trust is running at a loss it might be better for it to pay its loan off faster than you paying off your loan. Paying your loan off faster will result in more tax being paid quicker. Also better to have a higher profit inside a trust than outside as the trustee can deal with it more effectively.

 

They are both IPs. I have another IP with an offset account which is now offset in full, so I'm trying to work out where to put my money next (I can't buy more properties at this stage due to serviceability).

More about the loans:
IP1 in our names has 80% fixed and 20% in LOC which I could start paying down.
IP2 is in a block of land in a trust waiting to title before we build. I will get an offset for this once the build completes, but for now I could start paying down the 10% in the LOC.

I hope that helps

 

Hmmm, I just realised I don't particuarly understand what I'm talking about . I guess if my only options at the moment are to pay down the LOC deposits, then these are all in my name anyway.

 

Lol!

You should keep your personal assets separate to the trust assets. If it has a loan then you shouldn't be paying that loan, the trust should. if it hasn't got enough money to do so you could gift or lend it money, but make sure whichever you do it is clearly documented.

If the LOC is in your name, and you are not the trustee, then you should have a written loan agreement with the trustee, otherwise it won't be able to claim the interest on the loan - and you won't be able to claim it either.

 

And if you are going to start paying down discretionary trust loans make sure money is gifted to the trust and not treated as a loan. Appropriate signed gifting resolutions on file as well.

Increment to corpus vs loan to x. Two totally different scenarios. Once you go down one route however you might then be subject to commercial debt forgiveness provisions and unable to easily fix a loan to a trust which should never have been a loan.

Look at your balance sheet. If you have in liabilities section loan to beneficiaries (poor description if a loan ATO might argue it is a paid present entitlement) or loan to xxx and dont have an increment to corpus in the equity section ask your accountant why.

Batten once said anyone who doesnt gift to a discretionary trust doesnt understand the tax act well.

 

There are very good reasons not to give your money away, even if it is to a trust you control. Control is only temporary, and can be lost - then you have lost your money. See the Reinhardt case for example. And then there is the estate planning aspects. assets you don't own at death won't form part of your estate and therefore can't get into a testamentary discretionary trust.

Also anyone who has non-deductible debt may not want to gift as it would result in more non-deductible debt. It would be debt recycling in reverse!

An example may be a person who is at no risk of bankruptcy, they could make an interest free loan to a trust to invest, but then the loan be repaid at the death of the lender.

 

Agreed and even then complications arise. Low risk person makes a 1m loan to a trust to acquire property and payable on death. Low risk person seperates from partner and changes her will to leave everything to their lawyer daughter. Hasnt seperated legally from their partner and loan is called in from the daughter. But thats for the lawyers to sort out

And then issues when low risk person becomes high risk person.

Unfortunately no ideals.