HDT & loan repayments

[Jen]

If I buy a property in my HDT and do the usual thing of borrowing in my own name, buy units in the trust and then have the HDT buy the property, is it OK for the bank to take the interest loan out of the trusts account? Or does it have to come from my personal account?
If it is OK to have it come out of the trust's account, what should I document on my minutes about the situation.

I am really hoping that it is OK for the bank to take the interest repayments out of the trusts bank account because I've just realised that is what has been happening in my situation for the past 18 months. :o

[DaleGG]

Hi Jen

In a perfect world...the bank would deduct the interest from your own personal account and not he trust's bank account. The reality, however, is that some people do have the bank deduct the repayment from the trust account.

This latter option is not ideal, but, if it is that way all that I can suggest is a minute acknowledging that it is not perfect, but, has been done this way for expediency purposes.

I would also rectify the situation when you get the opportunity.

Dale

[babushka]

We have an interest only loan for the IP in the HDT and the bank takes money (the monthly interest amount) out of our LOC. The rent goes into the trust account, every 3 months or so we write a cheque from the trust account to repay the LOC and document this as a distribution of income to the unitholder (a bit less paperwork - as there are fewer minutes to do).

[DavidMc]

Is that how most people do this?

Would it also be OK to set up a monthly scheduled funds transfer from the Trusts bank account into my personal account? (whilst leaving a float of perhaps a few months rent in the account just so it doesn’t reach zero).

What’s the best way to create this float – should I loan it to the trust?

Can I just confirm that it’s not possible for the rent to go straight into my personal account and must be ‘funnelled’ through the Trusts bank account?

[DaleGG]

Hi

Everything is possible. Whether it is appropriate or not is another question....mmmmm....sounds like messages from my youth....

The trust owns the property, so, it should receive the rent.
I do not like monthly transfers myself, but, I guess there is no reason why ypu cannot do it this way. I prefer something like a quarterly transfer from the trust to the individual.

Dale

Is that how most people do this?

Would it also be OK to set up a monthly scheduled funds transfer from the Trusts bank account into my personal account? (whilst leaving a float of perhaps a few months rent in the account just so it doesn’t reach zero).

What’s the best way to create this float – should I loan it to the trust?

Can I just confirm that it’s not possible for the rent to go straight into my personal account and must be ‘funnelled’ through the Trusts bank account?

[babushka]

Since the trust owns the property, the rent income must go to the trust account (I think, maybe someone wants to correct me on this).

If you set up periodic (say monthly) transfers from the trust account to your personal account (to repay your loan to the bank), then I think it may be OK. But, I am not sure if you have to document the transfers in one minute or a minute for each transfer. Dale GG may be able to clarify this for us.

We document each transfer as a separate minute, this is why we only do one transfer every few months. And, when we do the minute for the transfer it is not a loan to the trust, but a distribution from the trust to the unitholder (the one who borrows the money to buy the units in the trust). Again, Dale GG can confirm if we have done this correctly.

Also, by transferring the money from the trust account to personal account (to repay the bank loan) only every few months we make sure that there is always enough money in the trust account for other things such as paying rates, insurance, water etc.

In terms of repaying the bank loan, I don't think it matters if the money is from the trust (as a distribution) or our own money (bonus, or tax refund) - you can still claim the interest expense as a tax deduction because the money was borrowed to purchase units in the trust. That's my understanding - it could be wrong?

[babushka]

I was a bit slow in typing and Dale GG has already answered the questions. Thanks, Dale.

[Jen]

Thanks everyone for your answers. It is great to be able to talk to people who understand these issues.

I am still a bit confused because now that I have been getting the trust to pay the loan for 18 months (yes, I do feel dumb but it is all just a learning curve & better than doing nothing)... anyway, I am still not sure what to put in my minutes as it is OK to say we originally did it for expediency sake but why did we leave it there for 18 months?

Also, if I begin paying the loan from another account and the trust gives me a distribution every quarter, how do I know that come tax time I haven't messed things up more by not distributing in the most tax-effective way? Or do I just distribute enough income to keep afloat? :confused:

[babushka]

As I understand it, the minutes of the trust document (or record) the intention and action taken by the trustee and are kept in-house for record purposes. So, I cannot see why you cannot just do the minutes for those payments made over the last 18 months and date them as when the transfers were made (maybe it is not strictly legal? someone else can correct me on this.) There is no need to explain why the transfers have been made in a particular way.

I think doing the transfer every few months will allow you to keep enough cash in the trust account to cover other expenses associated with having the IP. The trust does not distribute net cash flow but net profit after all expenses (whether they are cash or non-cash such as depreciation) to the unitholder otherwise the trust will pay the top marginal tax rate. Of course, it cannot distribute the net loss to the unitholder, the loss stays in the trust and is offset against profit in the future - before the profit (if any) is distributed.