Trusts being involved in a investment strategy

Hi All,

We wish to create a family trust and use it to buy IPs to allow us to enjoy a passive income, and maybe purchase a motor vehicle through it as well.

At the moment, we currently have an IP (IO loan) and a property that we live in that are not under a trust (I understand that if I were to transfer these assets to the trust there would be stamp duty, and CGT).

Is it possible to create a trust to buy investment properties still? ie. Leveraging the equity in other properties and putting the funds into the trust, to then buy more investment properties.

From what I've read, it seems apparent to me that trusts are the way to go to building wealth through an IP portfolio.

Thanks,

David

 

You could use equity from property outside the trust to assist purchasing property to be inside a trust but not sure on whether the funds secured outside the trust will be able to be used in the trust. Will leave that to the trust/tax gurus.

 

I am a lawyer that specialises in trusts and I say\

1. Yes you can still set one up
2. I don't think it could be said that trusts are they way to go - it will depend on the situation and circumstances.

 

Couldn't agree more.

Where are people reading this stuff that says trusts are somehow magical things that everyone should be using for investment?

 

Have a good read around this forum.

Trusts for salary earners can often be a bad way to setup, especially early on. Asset protection is great if you need it but you can't distribute losses.

 

Agreed - OP, what are you trying to achieve by holding properties in a trust (other than "wealth") that makes you think that's the way to go?

 

Qak - From what I've read and other property investor journeys, it is the tax minimisation, and asset protection. I understand that trusts help higher income earners more so than myself, but if I were to start earning more income in my career - would it be beneficial to start it now (as I won't be able to have the properties under asset protection)?

 

thatbum - My Four Year Old, The Property Investor - OpenCorp gave me an insight as to how this person started and did their journey. But, I am as skeptical so wanted the opinions of people who have property investment experience. No-one really mentions that they went through a trust on this forum (from what I've seen).

 

Heaps of people on the forum uses trusts. Most use multiple entities. But you need to decide what structure suits you at each particular purchase.

 

From a borrowing perspective, trusts are not helpful. Get advice of course, but in my experience trusts are over utilised and not helpful for the vast majority of people - in fact, they can be more of a hindrance than a help.
As mentioned above, you can't distribute losses, so there's no negative gearing at all in discretionary trusts - this makes quite a dent in your borrowing capacity.

And then there's the additional cost to set up, ongoing accounting, and general added complexity.

If you can only buy 2 properties, is it worth setting up a trust for them? Maybe, but not necessarily.

 

In addition to what Jess said, trusts can also cause drama if they are used to trade with. Most lenders won't want to touch a trust applicant who also conducts business via that trust. Get specific legal advice to decide if you NEED a trust or not and if it's suitable for your needs.

 

Also see my post on how trusts can help borrowing capacity. I don't have the link handy but can post later if you can't find it

 

Trusts also offer a person privacy if your affairs are under public scrutiny.

I know some families who are buying and developing in the same suburb that they live in. The developments are always interesting.

They do not want people asking about the development, or complaining about it, to them in the coffee shop.

So they are not just tax minimisation, asset prot croon or Estate planning.

 

Good way to own a brothel too (if you shy)

 

If the brothel is owned by a company and it becomes so large that it is a “large reporting entity” you will also need to have a statutory audit and disclose your financial affairs to the public (and competitors).

If the head entity is a trust that owns different companies owning different brothels you can avoid the need for an audit and publicly disclosing your financial performance of the business to the world at large.

A lot of people go to great lengths to avoid disclosing their private financial affairs to the world.

A trust is a key factor in keeping your financial performance away from competitors.

 

Also, With trusts you will still need to have one person that doesn't mind going on public records either as trustee or director of trustee.

I remember years ago, before I was a lawyer, I got a loan for a unit trust with mum as trustee and the daughter as sole unit holder as she wanted to hide her involvement with the property

 

I personally set one up because my partner is on a much lower tax bracket than I.

However, in my experience the majority of lenders find trusts to be problematic, if I am trying to show investment income for serviceability.

I personally just use one to house managed funds and other non property related assets, including all the income generating stuff.

 

+ 1.

In my working life, I was the director of multiple companies and used multiple trusts for asset protection (although the best thing one can do is to run one’s businesses professionally and profitably but that’s another story).

Interestingly the two guys who bought my last business (that I ran profitably for 20 years), did so in their own names and went into liquidation two years later - lost everything.

Maybe they should have used trusts for their other investments?

 

Hi Terry, if you could send me that link, it'd be greatly appreciated!