Recommrndations (general guidelines) on how to establish trust structures prior to start investing i

Discussion in 'Legal Issues' started by Johnny.House.Aussie, 7th Apr, 2022.

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  1. Johnny.House.Aussie

    Johnny.House.Aussie Member

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    We (my wife and I) do not have properties, but would like to start buying/investing in property. We would like to target to target to have initially a portfolio of say 4 investment properties in the next couple of years. But starting our investing journey, we would like to plan the best way to go ahead. In this regard, one of the things that we would like to approach correctly from the start is the one related to how to device and implement a simple family trust structure for these future investment properties.

    I know I am going to receive answers like: "you need to talk to a specialist adviser to discuss your particular situation and specific strategy to follow". What I am after here is: what are the general overarching principles and guidelines to take into account when trying to plan/organise a trust structure for property investment? For instance, I have read that trust structures allow to avoid Cross collateralisation/cross collateralised loans (Konrad Bobilak has several videos on this). I also believe that this makes easier and cheaper to include dependants in the ownership of the properties.

    And still, many people will recommend me to go and talk about this to an specialist, so who exactly would that be: a broker, a tax accountant, a lawyer?

    Thanks for your suggestions.
     
  2. db9

    db9 Well-Known Member

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    We're busy setting up buying structures for our next property purchase and went through similar things trying to figure out who to use to actually set it up! We ended up going with a company as trustee for a discretionary trust, setup by our accountants.

    Have a listen to @Terry_w 's 'structuring' podcast.

    Some considerations:
    - Asset protection vs tax minimisation.
    - Tax considerations may vary if the property will be income producing vs sold for capital gains later etc. Eg. a company may have a tax rate of 25% but there are no capital gains discounts. Whereas a trust has access to capital gains discounts if properties are sold. (I think)

    Definitely get specific advice as wrong decisions can be extremely costly long term and you'll probably only be aware of wrong decisions when it's too late. Perhaps many years later.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What!

    A trust is a complex relationship between different parties, only a lawyer should be advising on the establishment of the trust itself, but you will need a broker to advise on the credit issues, and a tax agent can advise on the tax aspects - only Commonwealth tax, not land tax.

    I have written about 200 tips covering trusts in my legal, tax and loan tips.

    Index of Legal Tips Terryw's legal Tips Index
    Index of Tax Tips Terry's Tax Tips
    Index of Strategies Terryw's Structuring Strategies
    Index of Loan Tips Terry’s Loan Tips
     
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    There is nothing inherent in a trust that helps you avoid cross collateralisation. That will be a function of how you structure your loans and which entities actually own the properties.

    So yes, if you hold one property in your own name and another in a trust - then you are unlikely to be able to cross-collateralise them (although perhaps a mortgage broker could comment on whether a lender would ever take security over two properties owned by different parties where they are related - for example, the same beneficial owners etc?).

    I suspect what they are saying is that to avoid cross collateralising, you hold your properties in different structures - or even use multiple trusts? I don't see the point in doing that - avoiding cross-collateralisation is simply a matter of getting a good mortgage broker who knows what they are doing.

    Unless you work in a high risk industry or are a company director (or intend to be one in the future) - then trusts typically add unnecessary complexity and expense and are probably best avoided. I do use one myself (I am a company director), but I am hesitant to suggest them to others - it will depend very much on your specific circumstances and long term goals as to the appropriate ownership structure - which is best discussed with your advisers.

    If you haven't already done so - I highly recommend reading through all of Terry's tips - there is a goldmine of knowledge there which will get you up to speed pretty quickly, and you can always ask if you have more specific questions not already covered.
     
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  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Seek advice. There is a lot of misinformation to tax issues.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    They could be cross collateralised even with different owners.
     
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  7. Simon Hampel

    Simon Hampel Founder Staff Member

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    How does this work in practice?

    Do all parties become jointly and severally liable for the debt?

    Does it matter what the relationship between the borrowers is?
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    The first question that I'd be asking is whether you need a trust at all - are you in a high risk occupation and require asset protection?

    Will all of the additional costs of holding make it unviable?

    Can the trust bear the losses?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    cross coll is just using 2 properties (or more) as security for one loan. It happens with different owners all the time such as parental guarantees.

    When a trustee is borrowing to buy trust property the property of a beneficiary could be used as security in addition to the trust property. The bank could take the beneficiary's property to satisfy their debt if things go wrong.

    But when an individual wants to borrow and use a trust property as security this is more complex as the trust deed must allow it or the trustee would be breaching their duties (or keep the trust secret from the lender) - but I think many banks would still allow it - we have done them before.

    If the property is not owned by a beneficiary I don't think the lenders would allow it. They may even require a named beneficiary or limit it to the controller of the trust. A trust controlled by Homer might not be able to cross coll with Ned Flander's home as they are unrelated and Ned is probably not going to be a beneficiary of the Simpson Family Trust
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What if it is a bare trust?
     
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  11. Scott No Mates

    Scott No Mates Well-Known Member

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    Now you're exposing yourself. :eek:
     
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  12. Johnny.House.Aussie

    Johnny.House.Aussie Member

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    Hello everyone. Thanks for all responses so far.

    Although I am not certainly an expert in property, I can appreciate that besides the obvious aspects in real estate investing (buying the right type of property, in the right suburb, at the right price range for you, with potential for improvements and added value, etc.) I can see that debt structuring and the loan, borrowing capacity and finance aspects are as important as the other ones mentioned earlier in this message (after all, what makes real estate investing superior to shares and stock market investing is the capacity to use the banks' money and money leverage multiplying abilities without the traditional risks associated to margin investing).

    So, being cognisant of my lack of understanding, I would like to ask the experts in this forum if they could suggest books on Australian Real Estate Finance and Structuring (please no US or overseas markets, just books on Australian market).

    For instance, Konrad Bobilak (who I mentioned in earlier in this thread and whose video, "How To Correctly Optimize Your Property Portfolio Structure In 2021 – By Konrad Bobilak" www.youtube.com/watch?v=vex-oFcq-EQ, explains the need of using structures for real estate investing and avoid cross collaterisation) has a book called "Australian Property Finance Made Simple".

    And I know that when the time comes for us to buy property later on this year we definitively would have to use the services of experts (broker, accountant, lawyer, etc.) but I would like to have at least an overall basic understanding of the principles, guidelines, risks associated to Australian real estate investing and structuring (I do not believe in blindly relying and believing in experts).

    Thanks again.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Beware of who you listen to! Is that person licensed?
     
  14. Trainee

    Trainee Well-Known Member

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    How many of Terry's legal tips have you read, as was suggested?