Trust Structuring Scenario

Discussion in 'Investment Strategy' started by Investinator, 13th Feb, 2019.

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  1. Investinator

    Investinator Member

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    JS Pty Ltd owns Property A as trustee for the JS Testamentary Trust
    John Smith is the sole director for JS Pty Ltd
    John Smith is the sole shareholder for JS Pty Ltd
    Property A is valued at $500k and currently unoccupied

    The beneficiaries of the JS Testamentary Trust are;
    Primary; John Smith
    Secondary; Bill Smith (brother), Jill Smith (wife), Future children of John Smith

    John Smith has a personal income of $100k and no debt.


    John Smith goes to bank and borrows $350k using JS Pty Ltd as Guarantor / Property A as security.

    Loan is split in to;
    Split A - $150k – Interest Only for investment purposes
    Split B - $200k – Principle & Interest repayments – Deposit for new PPOR


    John Smith loans $150k from Split A to JS Pty Ltd.
    JS Pty Ltd uses $150k to renovate property A
    After renovation, property A is rented out, yielding a NET return of $20k per year.
    JS Pty Ltd makes loan repayments of $20k per year to John Smith (documented clearly to not be confused with trust distributions).
    After JS Pty Ltd makes loan repayments to John Smith, there is zero income required to be distributed to beneficiaries.

    John Smith uses $200k from Split B (deposit and closing costs) to purchase a new principle place of residence.

    Cash flow as below;

    Note:
    ** Property A has been in the Smith family for several generations and needs best possible protection against any potential future family law claims against John Smith

    ** John Smith has ambition to add several more investment properties to his portfolio in future years

    ** It is likely that property B will become an investment property in the future as the PPOR continues to be upgraded


    So, my questions...
    · What issues are likely to arise with this strategy?
    · Can John Smith deduct the interest payable on Loan Split A from his personal income?
    · John Smith will lose any tax benefit from the depreciation of assets in Property A – Is this correct?
    · Would there be benefit to borrowing in the name of JS Pty Ltd with John Smith as guarantor rather than in John Smith’s personal name?
    · Should Property B be purchased in a trust structure also? (Benefits of doing so)
    · Any other suggestions?

    I am aware that specific legal advice is required which I will be seeking in the coming weeks. The purpose of this post is to better educate myself, highlight potential problems and questions that need to be asked during legal & tax consultations.

    Appreciate all the help I can get..
     
  2. Terry_w

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

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    Family law property settlement is likely to see the properties attacked.
     
  3. Trainee

    Trainee Well-Known Member

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    Is this actually a testamentary trust?
     
  4. Investinator

    Investinator Member

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    Yes, it is a testamentary trust which was constituted as part of John Smith's father's will.

    Any suggestions to help protect against this? Or obvious issues with the rest of the strategy?
     
  5. thatbum

    thatbum Well-Known Member

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    Yeah - what's the goal exactly?
     
  6. Trainee

    Trainee Well-Known Member

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    Not advice but the testamentary trust can distribute to minors taxed as adults. Why structure the loan so that the trust has zero net income? Js ends up with excess income taxed at marginal rates.

    Sounds like the trust asset is used as a guarantee for Js’ personal ppor deposit. Assuming you can even do this, this puts the trust assets at risk. Why if the purpose is to protect the trust assets?

    There is no clear goal here.
     
    Last edited: 13th Feb, 2019
  7. Terry_w

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

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    I don't know what you don't know. There are absolutely heaps of issues with this so a bit hard to comment.
     
  8. Terry_w

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

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    A binding financial agreement is the main weapon for asset protection in family law (or celebacy)
     
  9. Investinator

    Investinator Member

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    In priority order;
    - To protect Property A from potential Family law claims / lawsuits / bankruptcy in the event that future investments go bad (by having the ability to appoint a new director)
    - Maximize borrowing capacity to allow John Smith to build a large property portfolio in the future
    - Tax minimization


    There are no minors that are beneficiaries currently and the wife is on a higher marginal tax rate so no benefit to distribute income there. The trust is structured so there is the provision to distribute to minors as beneficiaries in the future should John have children.

    The trust asset would be at risk to guarantee the PPOR, but should a second IP come in to the equation, call it "Property C", the goal would be to indemnify the risk away from property A. Whilst there is no initial benefit, thinking longer term about 3rd, 4th, 5th etc properties.
     
  10. Trainee

    Trainee Well-Known Member

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    Why is js not able to just buy ips himself?

    This just seems ridiculously complicated especially for those sorts of amounts.
     
  11. Investinator

    Investinator Member

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    Please excuse my naivety as a beginner. I have no doubt there are holes in the plan, but being a testamentary trust this is a structure that has been inherited so now just seeking to understand how I can pick up what I've been left, leveraging it to create further wealth whilst honoring my father's desire to protect the property as best as possible from being lost in a divorce should such thing occur.

    Particularly trying to get my head around what questions I should be asking the accountant/lawyer. Things I should be looking out for etc.

    Ultimately there is the option to dissolve the trust and hold the assets in personal name if there is no benefit to maintaining the trust structure, but given the long term goal is to build a multiple property portfolio I would not care to do this hastily.
     
  12. Terry_w

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

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    Have a read of my legal tips. I have written nearly 200 of them now and most are on trusts, asset protection and estate planning/
     
  13. Trainee

    Trainee Well-Known Member

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    I dont understand what this means. Your talking a 105 lvr ppor. How long will it be before you can get rid of the guarantee and refinance to buy another ip?
     
  14. Investinator

    Investinator Member

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    The same reason any investor buys in a trust. The ability to distribute income to lower income earning beneficiaries, protection from creditors, ability to change directors of trustee company etc.

    The amounts are small now. So maybe there is no benefit initially, This is more about setting up for future needs.
     
  15. Terry_w

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

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    The trustee could borrow and lend to the individual to buy property in their own name with the trustee taking a first or second mortgage over the property. Good asset protection, and gets the benefits of individual ownership such as the main residence exemption etc. but, it might be a bit difficult to overcome the cash out restrictions, especially for a trust.