Distributing from a HDT

[Coach B]

Goodday,

I know the primary values of using a HDT are;
- Asset protection;
- Avoiding incurring losses that cannot be distributed.

However, I am wanting to know what other benefits can be derived.

For example if, the Unitholder in the HDT is on the highest personal tax rate is there a requirement that [B]all of the net income is distributed to him? Or is there an option of distributing some or all of the net income under the Discretionary powers of the Trustee?

Alternatively, if other investments were managed within the trust and the net result was zero net revenue but x% capital growth how would the ATO view the deductibility of debt?

Final question, does the HDT structure hold up if the Trust only held Equities as investments?

Thanx

CB

[austini]

Hi CB,

I'll have a go at answering your questions and the gurus can correct me if I'm incorrect and/or will probably want to add more.

1. Trust distributions relating to the income generated from a particular asset may be able to be distributed according to the value of the Special Income Units relative to the total value of the asset. EG For a $400K IP you borrow $300K from bank and purchase 300K X $1 units off the HDT and your wife (hopefully low risk party) loans $100K from your personal savings to the HDT. My understanding is that in this instance 3/4 of the income will go to you and 1/4 to your wife. The objective is to minimise the amount of mandatory income being distributed to you as the high income earner so that negative gearing deductions from interest expenses etc are maximised.

But my understanding is that the trust can't use its discretionary powers to distribute income with a direct link to the Special Income Units that have been issued to you.

2. Not sure I fully understand your second question. Does the net income include assets where Special Income Units have been issued? Income pertaining to the Special Income Units is treated separately from other trust income and must be distributed to the unit holder. There was a question raised recently as to what would happen if the asset where special income units had been issued only generated capital gains and no income. In this instance there is a high possiblity that the ATO will dissallow the deduction. Do a search of the forum if you want to find out more.

3. The HDT works the same for equities as it does for IPs. One consideration however is if the imputation credits exceed $5K a Family Election will need to be made to claim these credits upon distribution. This is also the case if you want to carry losses forward which is hopefully less likely with a HDT. This may reduce the number of beneficiaries you can distribute to but in most instances it is not usually a problem. Again this is a messy subject so do a search for previous forum discussion on this matter.

Cheers - Gordon

None of this is financial advice and most of my friends consider me to be crazy and deficient in brain cells due to drinking too much red wine and beer:eek: :p :confused: :D :o

[NigelW]

Hi CB,

I'll have a go at answering your questions and the gurus can correct me if I'm incorrect and/or will probably want to add more.

1. Trust distributions relating to the income generated from a particular asset may be able to be distributed according to the value of the Special Income Units relative to the total value of the asset. EG For a $400K IP you borrow $300K from bank and purchase 300K X $1 units off the HDT and your wife (hopefully low risk party) loans $100K from your personal savings to the HDT. My understanding is that in this instance 3/4 of the income will go to you and 1/4 to your wife. The objective is to minimise the amount of mandatory income being distributed to you as the high income earner so that negative gearing deductions from interest expenses etc are maximised.

But my understanding is that the trust can't use its discretionary powers to distribute income with a direct link to the Special Income Units that have been issued to you.

2. Not sure I fully understand your second question. Does the net income include assets where Special Income Units have been issued? Income pertaining to the Special Income Units is treated separately from other trust income and must be distributed to the unit holder. There was a question raised recently as to what would happen if the asset where special income units had been issued only generated capital gains and no income. In this instance there is a high possiblity that the ATO will dissallow the deduction. Do a search of the forum if you want to find out more.

3. The HDT works the same for equities as it does for IPs. One consideration however is if the imputation credits exceed $5K a Family Election will need to be made to claim these credits upon distribution. This is also the case if you want to carry losses forward which is hopefully less likely with a HDT. This may reduce the number of beneficiaries you can distribute to but in most instances it is not usually a problem. Again this is a messy subject so do a search for previous forum discussion on this matter.

Cheers - Gordon

None of this is financial advice and most of my friends consider me to be crazy and deficient in brain cells due to drinking too much red wine and beer:eek: :p :confused: :D :o

Gordon's on the money...Must get me some of that wine and beer... :D

Only additional comment I'd make are it depends what the terms of your trust deed and the terms of issue of the units say...but the way Gordon has described is generally the way you'd want it to work.

Cheers
N.

[Coach B]

your wife (hopefully low risk party) loans $100K from your personal savings to the HDT.

But my understanding is that the trust can't use its discretionary powers to distribute income with a direct link to the Special Income Units that have been issued to you.

Cheers - Gordon

None of this is financial advice and most of my friends consider me to be crazy and deficient in brain cells due to drinking too much red wine and beer:eek: :p :confused: :D :o

Thanks for the reply's Gordon & Nigel,

Just to clarify a couple of points;

1. I assume you are suggesting that my wife is low risk due to the fact if a claim was made against her the 100k loan would be an available asset. Therefore, having her loan money would be a trade off between pure asset protection and adding an available tax buffer?

2. If certain assets within a HDT have to be isolated from a revenue perspective, I would assume that they may be obliged to contribute towards joint costs of the Trust e.g accounting fees etc. prior to the distribution.

Good idea about the beer. I might have one now myself!!!!

Regards



CB

[austini]

Hi CB,

Crikey I actually got something right for a change. Thanks Nigel. Of course I am only rehashing all the excellent contributions Nigel, NickM and DaleGG have made to this forum over the years. The fact that I have learnt something suggests that there are still a few brain cells left. But I'm so excited now I'm going to have an extra few glasses of red tonite - goodbye brain cells.

In relation to your wife possibly being a low risk party I was only providing an example. By low risk I meant that this would be the case if your wife was in an occupation with minimal business risk or perhaps she purely does house duties. Hence there is much less risk of her being sued compared to say a doctor :eek: Whenever you loan any funds to the trust it will reduce your asset protection. So if you must make loans to he trust then get the lowest risk person to do this. It's up to you and your legal advisor to determine the trade-off between asset protection Vs tax efficiency.

You could of course gift the funds to the HDT if asset protection is the primary concern. I think the distribution of income relating to Special Income units issued should still work as I described in the previous example.

As to your second question I would leave this up to your accountant. They may be able to invoice it so that most if not all the accounting charges are paid by the highest income earning individual as opposed to the trust. However I'm only guessing here and someone else may wish to comment.

Finally our trust guru Nigel raised a very important point. Not all HDT deeds are setup for negative gearing to work as described above. I know that Chris Batten's deeds (avail thru DaleGG and NickM) and Kevin Munro's deeds have been drafted to allow negative gearing to work.

Anyhow all this is giving me a headache and hence I'd better have a drink :D :p :cool:

Cheers - Gordon

[julia]

Re Asset Protection:
If the high income earner owns units in the HDT so that he or she can claim the interest used to purchase them, then don't the units become an asset of the high income earner therefore able to be taken by a creditor? How does your trust deed address this?

Julia Hartman
julia@bantacs.com.au
www.bantacs.com.au

[DaleGG]

Hi

There are a number of issues with regard to the asset protection and the units issued from a hybrid trust.

Yes, the SIU (special income units) are assets of the individual
However, they entitle the unitholder to the NET income of the trust.
The SIU do not entitle the unitholder to the capital or the assets of the trust
The net inocme can be manipulated (legally, of course!) by the trustee agreeing to pay more expenses, such as a wage, allowances, gifts etc under the circumstances so that the net income was reduced or eliminated.

So, even if the SIU were lost to creditors, the underlying assets within the trust are quite safe and the creditor would not necessarily be able to benefit from holding those units.


Also, a good HDT Deed may enable the trust to redeem the units for less than the unitholder paid for them which may mean that the trust reverts to being (effectively anyway) a discretionary trust. Yes, the unit holder now has cash which will be lost, but, that cash might be a John Elliot like figure of $5 per $100 of units. So, again, not much is lost.

I'd also like to explain something that makes me feel comfortable abt recommending the HDT when asset protection is an issue.....

A few years ago, I had bought enough property within my old family trust and wanted another structure in which to keep buying more properties and so I ordered a family trust because of the asset protection issues.

Chris Batten's people at MGS rang and told me that I did not want a family trust and that I really wanted a HDT.

I explained my reasoning to the solicitor and he reiterated that even though he knew that i was concerned by asset protection issues, his advice to me was to use a HDT. I explained that I was making a file note of his advice and that I would use it against him if necessary and he was more than comfortable with the situation and continued to advise me to personally use a HDT.

So, if Chris Batten's people are that comfortable with the asset protection strengths of the HDT, I can sleep at night and relax.

Obviously though, it is up to the individual to do their own due diligence and be comfortable with the strngths or weaknesses, if any, of the situation and what is important to themselves in their own circumstances.


Leading on from these points, We can protect ourselves from creditors, but, we cannot protect ourslves from our spouses or the banks.

Have fun

Dale

[GreatPig]

even if the SIU were lost to creditors, the underlying assets within the trust are quite safe and the creditor would not necessarily be able to benefit from holding those units.
Looking at this from the other direction then, it seems that there's not much protection for the unit holder.

While buying units in your own trust, where you're also the trustee and appointer, shouldn't be a problem, it makes me think you'd want to be very careful about buying units in any private trust where you're not a trustee and appointer (eg. as some sort of joint venture).

GP

[Mry]

Yes, this was an issue I was concerned with.

As far as I could tell from my first read through, HDTs only protected the settlement sum and the value of the property over and above the purchase price. Creditors have a right to the undistributed income of the trust and the units, which isn't 100% protection but better than any other structure. I don't know if you'd be able to do a John Elliot, creditors may force the bankruptancy provisions to reverse the transaction if it wasn't at market value within a certain time frame since you would have been the seller. I'm not a lawyer so I can't really comment on that point.

As for protection from spouses, I was informed by someone (I don't know how valid this is) that if the appointor is a friend of yours, you can get the trustee changed prior to a divorce settlement so that only the undistributed income is up for grabs and not the assets of the trust. Not sure on this point but it might be worth looking at.