Using Family Trust to buy our PPOR

[nads]

Hi
Ive just finished reading Trust Magic and I have a couple of questions I was hoping somebody could answer for me.

At present, we dont own a property but are thinking of buying our first property within the next 9 months which we are considering living in for about 5 years then turning into an IP. This property is currently owned by my mother-in-law.

I have thought of a scenario and would like some clarification:

-We set up a family trust

-My husband and I decide to lend $xxx to the trust to use as a deposit on mother-in-law's property. This money is what we were already saving for the deposit for our first home.

-Trust takes out loan with bank to buy property.

-Trust rents the property out to us, charging us commercial rental rate. In our scenario, the current commercial rental rate would be around $250 per week (yes I know this could change in 9 months!)

-In our scenario, a rough estimate of weekly mortgage repayment would be around $300 using current interest rate and current estimated value of property. Of course this will differ in about 9 months but lets just use these figures for argument's sakes :)

-Using what we currently earn per week as a figure, my husband and I can afford to put about $600 per week towards the mortgage. Are we able to still do this? How are we able to pay more than the weekly rent so that more of the mortgage is being repaid by the trust? Is there a way we can "lend" this extra money to the trust to use to repay the mortgage?

-Or are we better off financially if the trust pays the minimum weekly mortgage repayment and my husband and I save the extra money to lend to the trust to buy another IP?

I hope I havent totally confused all of you, because I think I might have confused myself :)

Also, in Trust Magic, it mentions that banks would want to see the profit and loss statements of the trust for the past two years when applying for a loan- what if the trust has not been in existence for that long, is it sufficient to provide a P&L statement from each individual within the trust?

[NigelW]

Hi Nads

seem comments in CAPS below. Hope this helps.

You should of course go and see your lawyer & accountant about the options.

Cheers
N

Hi
Ive just finished reading Trust Magic and I have a couple of questions I was hoping somebody could answer for me. IN THE ABSENCE OF DALE I'LL HAVE A GO ;)

At present, we dont own a property but are thinking of buying our first property within the next 9 months which we are considering living in for about 5 years then turning into an IP. This property is currently owned by my mother-in-law. JUST A THOUGHT - WHY NOT BUY IN YOUR OWN NAMES, PAY DOWN THE LOAN WITH YOUR $600PW THEN SELL THE PROPERTY CGT FREE TO YOUR TRUST (YOU WOULD BE FOREGOING THE TAX DEDUCTIONS IN THE SHORT TERM AND STAMP DUTY WOULD BE PAYABLE ON THE TRANSFER BUT THERE WOULD BE NO DOUBT ABOUT DEDUCTIBILITY FOR THE TRUST'S LOAN DOWN THE TRACK)
I have thought of a scenario and would like some clarification:

-We set up a family trust MAY BE BETTER AS A HYBRID FAMILY TRUST FOR REASONS NOTED BELOW

-My husband and I decide to lend $xxx to the trust to use as a deposit on mother-in-law's property. This money is what we were already saving for the deposit for our first home. LOANING MONEY IS ONE WAY TO DO IT. ANOTHER IS TO JUST GIFT THE MONEY. A THIRD WOULD BE TO USE A HYBRID DISCRETIONARY TRUST AND BUY UNITS IN THE TRUST TO GET THE MONEY INTO THE TRUST. LOANING MONEY TO A TRUST CREATES POTENTIAL ASSET PROTECTION PROBLEMS AS YOUR BANKRUPTCY CAN VIA THE CALLING UP OF THE LOAN BRING DOWN THE TRUST. GIFTING THE MONEY CAN TOO BUT ONLY IF YOU FALL FOUL OF ONE OF THE CLAWBACK PERIODS IN THE BANKRUPTCY ACT.

-Trust takes out loan with bank to buy property.

-Trust rents the property out to us, charging us commercial rental rate. In our scenario, the current commercial rental rate would be around $250 per week (yes I know this could change in 9 months!)

-In our scenario, a rough estimate of weekly mortgage repayment would be around $300 using current interest rate and current estimated value of property. Of course this will differ in about 9 months but lets just use these figures for argument's sakes :) YOU WILL BE NEGATIVELY GEARED. IF THE TRUST OWNS THE PROPERTY THEN NO DEDUCTIONS FOR YOU. IF A HYBRID IS USED THEN THE INTEREST DEDUCTIONS ARE YOURS AND THE "HOUSE" RELATED DEDUCTIONS ARE THE TRUST'S. YOU NEED TO MODEL THIS INTO YOUR CASHFLOW PROJECTIONS AND THINK ABOUT THE BEST SOLUTION.

-Using what we currently earn per week as a figure, my husband and I can afford to put about $600 per week towards the mortgage. Are we able to still do this? How are we able to pay more than the weekly rent so that more of the mortgage is being repaid by the trust? Is there a way we can "lend" this extra money to the trust to use to repay the mortgage? YOU CAN BUT WHAT IS TECHNICALLY YOUR MONEY HAS TO GET TO BE THE TRUST'S MONEY BY EITHER LOAN OR GIFT OR BUYING ADDITIONAL UNITS (DON'T RECOMMEND THIRD OPTION AS TOO MESSY). THESE PAYMENTS ARE PRINCIPAL SO SHOULD BE TAX NEUTRAL.
-Or are we better off financially if the trust pays the minimum weekly mortgage repayment and my husband and I save the extra money to lend to the trust to buy another IP? YOU NEED TO MODEL BOTH ALTERNATIVES (MAKING SOME ASSUMPTIONS OF COURSE) TO FIGURE THIS OUT FOR YOURSELF. WHAT YOU'RE TALKING ABOUT IS THE "OPPORTUNITY COST" - THE ANSWER WILL DEPEND TO A DEGREE OF THE INTEREST RATE THE TRUST IS PAYING ON THE MORTGAGE AS THAT IS EFFECTIVELY YOUR EARNINGS ON THAT MONEY.
I hope I havent totally confused all of you, because I think I might have confused myself :) NO - VERY SENSIBLE AND VALID QUESTIONS!

Also, in Trust Magic, it mentions that banks would want to see the profit and loss statements of the trust for the past two years when applying for a loan- what if the trust has not been in existence for that long, is it sufficient to provide a P&L statement from each individual within the trust? AS IT'S GOING TO BE A NEW ENTITY THEY'LL JUST REQUIRE YOU TO GUARANTEE THE TRUST'S BORROWING IN ALL LIKELIHOOD. THIS OBVIOUSLY HAS SOME ASSET PROTECTION IMPLICATIONS BUT THERE'S NO REAL WAY AROUND IT FOR MOST BORROWERS (SUBJECT TO YOUR LVR'S AND HOW PERSUASIVE YOU AND YOUR MORTGAGE BROKER CAN BE OF COURSE! :D )

[Puppeteer]

Hi Nads

-Using what we currently earn per week as a figure, my husband and I can afford to put about $600 per week towards the mortgage. Are we able to still do this? How are we able to pay more than the weekly rent so that more of the mortgage is being repaid by the trust? Is there a way we can "lend" this extra money to the trust to use to repay the mortgage? YOU CAN BUT WHAT IS TECHNICALLY YOUR MONEY HAS TO GET TO BE THE TRUST'S MONEY BY EITHER LOAN OR GIFT OR BUYING ADDITIONAL UNITS (DON'T RECOMMEND THIRD OPTION AS TOO MESSY). THESE PAYMENTS ARE PRINCIPAL SO SHOULD BE TAX NEUTRAL.


If this was set up as a hybrid trust and you borrowed to buy units in the trust, then making the extra payments is easy, because you pay off your loan which is sitting outside of the loan structure.

If you want to pay down capital, it's probably better to keep you borrowing outside of the trust - though do seek professional advice on this, coz this is just my opinion ;)

[NormH]

Hi,
why not have a 'hybrid Discretionary Trust' all the money borrowed in your name is then used to purchase "income units" from trust, you can then pay off the loan as quickly as you please, as the loan is purchasing income units in the trust.

Norman

[nads]

Thanks for all of your advice so far.

Another question that I have:

If we were to set the trust up as a HDT, are we able to rent the property from the trust? Or does this depend on who buys the units? If I buy the units, would it be better for the trust to rent out the property to my husband? :confused:

And could someone please confirm that if I am the only person who buys the income units, that I am the only person to whom the trust can distribute the income earnt from those units? So in the above situation, if my husband is renting out the property from the trust, the income gained by the trust relating to that particular property (minus the expenses) would only be distributed to me?

Another question: If I did choose a family trust structure, Im concerned that if I include family members in trust, some of these family members might try to ask for the money that the trust has "distributed" to them and would not be willing to gift it back to the trust. Sounds horrible to say this, but Im not too comfortable with listing certain in-laws in the trust because they struggle financially and might try to claim the money that the trust has journaled (and rightly so). I would be more comfortable having just myself, my husband and our child/ren.

Im sure I will think of more questions soon! :)

[NormH]

Hi my opinion is

yes you can rent the property from the trust and it matters not who has purchased the income units from the trust.

you as the owner of the assets (income units) are the person who is entitled to the income from that stream within the trust, or others if they also have purchased income units.

The income is after all expenses etc.

leave the 'beneficiaries' as broad as possible to maintain the flexibility, don't forget the trust lives for 80years less 1 day. You don't have to journal entry any monies to any beneficiary so those who you do not like/trust/any other reason, then you don't journal entry them anything, it is a discretionary trust and so up to the trustee. It is for this reason a HDT is of value as it "entitles" a holder of income units to income, hence 'removes' the discretionary element and thus makes it tax deductible.

Norman

[DaleGG]

Hi
Are we able to still do this? How are we able to pay more than the weekly rent so that more of the mortgage is being repaid by the trust? Is there a way we can "lend" this extra money to the trust to use to repay the mortgage?

-Or are we better off financially if the trust pays the minimum weekly mortgage repayment and my husband and I save the extra money to lend to the trust to buy another IP?

I hope I havent totally confused all of you, because I think I might have confused myself :)

Also, in Trust Magic, it mentions that banks would want to see the profit and loss statements of the trust for the past two years when applying for a loan- what if the trust has not been in existence for that long, is it sufficient to provide a P&L statement from each individual within the trust?

Hi

Yes, you can either loan money to the trust. This has benefits and drawbacks though so do look into this further, or, you may gift the money to the trust.

I don't know which approach would give you the biggest financial advantage and part of the answer would be to consider how comfortable you are with each option.

With a new trust (and with older trusts, too) the banks will take into consideration the individual's situation more than the trusts own situation. So, they are probably more concerned with your personal financial position than with the trusts.

Cheers

Dale