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Will a lender acknowledge 'past total distributed trust income' as future income to me.

Discussion in 'Property Finance' started by ThomasAJ, 3rd Oct, 2016.

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  1. ThomasAJ

    ThomasAJ Member

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    Hm...hard to descibe in one line.

    I have a business that has, for the last 2 years at least, distributed profit among myself and my 2 children. eg $100k profit = $60k to me and $40k to kids. (not real $s).

    I want to get some equity out of my property so in order to service it I will need all/most the profits of the business distributed to me in the future - eg $100k pa from now on.

    So can I say to lender "look this is what the business has made over the last x years, I received 60% before but will get 100% from now on" and the lender will take this into account.
     
  2. tobe

    tobe Well-Known Member

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    might take a bit of haggling, but yes, most lenders would accept this, as long as you and the other home loan applicants are the same as the shareholders/directors for the business.
     
  3. ThomasAJ

    ThomasAJ Member

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    Excellent! Thank you.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    If the kids are dependent children it's not a problem. Banks appreciate that people do this to reduce tax. Trust tax returns generally have the beneficiaries DOB on them, so proving they're dependent (under the age of 18) usually isn't a problem.

    If they're adult children, there can be a problem however. If there's a few years history of adults receiving distributions, it can be argued that the distributions become somewhat of an entitlement. The distributions may no longer be entirely at the discretion of the trustee.

    The amount involved here ($40k), suggests that the distributions are being made to adult children.
     
  5. ThomasAJ

    ThomasAJ Member

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    They're adults.

    So you have personal experience with lenders putting forward the 'entitlement' argument as a basis for not taking into account full future distribution of profits to the applicant/s?

    If so is it a common occurrance in the context of similar scenarios?
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    My experience is that lenders tend to rely on the previous distributions that have already been made.

    The term 'entitlement' might be out of context a bit. For example the question arises of why the beneficiaries were receiving past distributions. There may be working in a family business, thus earning the distribution. If they stop working then the business is less profitable and there's fewer distributions to be had.

    It's possible to convince lenders that distributions can change, but you're going to have to back up that claim. It really does depend on what the larger scenario is.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I think you might have a hard time as lenders will want to average your last 2 year personal tax returns. Are you the trustee or director of tje trustee company? If so you may be able to argue you have the power to distribute the ince to yourself-if the trustee does have this power
     
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  8. ThomasAJ

    ThomasAJ Member

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    Thanks Peter
    Distributions are purely for tax reasons.

    Thanks Terry
    I have all the power to change the distributions. I just need to sign off on $s prior to June 30 in any year.

    OK so to sum up - I think it's worth giving it a go as I'm sure someone will say yes.
     
  9. albanga

    albanga Well-Known Member

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    Or better yet, hit up @Peter_Tersteeg who has commented and sounds like he has dealt with this before. Definitely sounds like one that requires a good broker and most definitely not a go it alone to the bank scenario.
     
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  10. Greyghost

    Greyghost Well-Known Member

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    Off topic, but has your accountant spoken to you about the 'entitlement' to your adult children.
    If the trust's accounts are showing credit loans to those beneficiaries, in theory they could turn around and ask for those funds. Or if they went through a divorce or touch wood one of them passed away their estate may ask for those funds...

    Distributing on paper for tax minimisation is one thing, but you need to understand the implications of the funds (at 'this stage), not flowing to those beneficiaries..
     
  11. Watson1

    Watson1 Well-Known Member

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    Lenders generally do not like it, theoretically, you can use the same pool of income to service multiple debts. For example, the $40k in question could be used to service your own debt and if your children were to apply for a loan, they could also use their distributions as income to service their own loans if they could prove consistency.
     
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  12. Brady

    Brady Well-Known Member

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    Not sure who your current bank is - can't see problem with CBA as long as you current hold the power - trustee. And have actually changed the distribution for the most recent financial year/returns. Pending if you need to use any addback from the trust might be pretty close to a tick and flick senario under the 'simple income method'
     
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  13. tobe

    tobe Well-Known Member

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    Only if you can show the lender the children actually work in the business and actually receive the cash. the kids tax returns showing trust distributions wont cut it.