Questions about property investment using a Trust as the investment entity

We don't call them LLC's here in Australia - that's a US term.

You'd probably use a Proprietary Limited (Pty Ltd) company here in Australia for an unlisted company (up to 50 shareholders).

However, I believe that a (US) LLC can operate differently to an (AU) Pty Ltd company in that there might be an option to "pass through" income to the shareholders so that tax liability rests with the shareholders rather than the company structure. In this regard, it would operate more similarly to a discretionary trust in Australia.

A discretionary trust must pass on all income (including capital gains) to beneficiaries - and which beneficiaries get that income is up to the "discretion" of the trustee - and it is those beneficiaries who will be responsible for any tax liabilities on the income they receive.

In Australia, a Pty Ltd company is its own entity for tax purposes and will pay company tax rates on any profits or capital gains - at which point it can then pass on dividends (which may or may not include franking credits for tax already paid) to shareholders. It doesn't get to choose which shareholders receive the income (although there may be multiple classes of shares and not all classes receive a dividend) - but it can choose not to distribute any income and instead retain it in the company.

As mentioned - there are pros and cons with both structures.

The main issue with Pty Ltd companies owning property is that they don't get a CGT discount like individuals do - so streaming capital gains to an individual beneficiary from a discretionary trust can be more tax effective in some circumstances. But there are other benefits to Pty Ltd companies too - so it very much depends on your circumstances.

Very few regular investors that I know use Pty Ltd companies to own real estate. Some people use discretionary trusts, but most will hold in their own names so that they get negative gearing benefits as well.

When using a discretionary trust (especially as a "Family Trust"), it is common to have a Pty Ltd company as a "corporate" trustee and the two parents of the family (ie husband and wife or whatever) being directors of that company - they control the trustee, and so get to decide how the trust operates and how it distributes income.

Obviously, if you are trying to achieve something different, you might need a very different structure.

 

Just remember that the primary purpose of trusts are for asset protection. Trying to use them solely for tax purposes can actually work against you in some circumstances - they are more costly to operate than buying directly in your own name, and you lose negative gearing benefits.

Unless you actually need the asset protection a trust offers - you may be better off without one. It will very much come down to individual circumstances and your goals / needs.

 

Yeah, good point - I hadn't really considered the estate planning and wealth transfer options.

The advice I was given very early on was to "start with the end in mind" - meaning to look beyond our initial needs and consider what the future might look like. That would include estate planning and having more flexibility in how we choose to pass on our wealth.

As it turns out, I am now a company director (and regularly get legal threats ) and so the asset protection is also important.

 

Do you always advise them to set up a trust?

Do you ever advise them NOT to set up a trust, or it is more a matter that they already want a trust by the time they come to you?

 

Stop using the term LLC - as I explained, that is not something we use here in Australia.

Having a personal trustee is generally a bad idea - it gives you pretty much zero asset protection.

If your trust deed allows it, you can distribute to another Pty Ltd company (you'd need two - one to be corporate trustee and the other to be a beneficiary). You'd want to be directors of both companies. Starts to get expensive to manage this - you'd want a sizeable investment portfolio to justify it?

Trust structure 2 is more common and is basically what I described I think? Not sure why you'd do that if there's only one of you though? What is the benefit of a trust and company structure when you're only streaming income to a single person? Unless you are planning for the future and have nearish-term goals to get married and start a family?

 

Would including the option for a company beneficiary in the trust deed get around this limitation?

Alternatively, wouldn't you simply make the trust deed more generic "spouse, children, grandchildren, etc" - or is that insufficient if there is literally only a single beneficiary at this point in time?