Buying via a trust

[Mitch1]

Hi Paul, thank you for your feedback...and yes I have spoken to a couple of people on here about different strategies concerning this.

We made the error of purchasing the property in my name when we thought it would be quite a small scale investment, took a chance and fought for demo and now looking at 13 units so needed to look at things from asset protection, kids, etc as everything will go into it. This is why I am procrastinating on a decision.

Options were various, layering trusts overseas with loans inside the trust while property outside it etc. and went through the various tax implications with accountant under advice from folks here before the legal route.

I have finally decided to 'sell' the property to the trust and suck up the stamp duty, so went very carefully through the unit trusts, D.trust, SMSF etc and ruled all out bar D trust.

Now my questions for our next meet are wether or not to sell it using the margin scheme as I can make that happen at this point. Cannot sell until after June 21st for the 50% CGT but while I have read up on this, I still cannot say I fully understand the margin scheme or building via the company who is set up as trustee leaving the 'land' etc in the D trust and the tax implications of this, or even if it is worth me considering, (we plan to hold all of them ) when I sort this bit out then I check the legal side of it and hope to hell I am going the right way about it

I really am trying to get the right advice the right way this time and have my 'ducks in a row' to avoid more errors or treading on toes! This is why I would encourage lone wolf to get the professional advice... I am learning as I go, just not fast enough! But learning from mistakes is also healthy costly but invaluable!

 

[neK]

How does lending working with a trust?

Say I want to buy an IP in a trust and its $500k.

I have 20% in an unused untouched equity loan.
Can i lend the trust that 20% and have the trust pay me interest and I in turn pay the bank interest.

Then what about the 80%. How do i approach the bank to get 80% for the trust?

 

[LoneWolf]

How does lending working with a trust?

Say I want to buy an IP in a trust and its $500k.

I have 20% in an unused untouched equity loan.
Can i lend the trust that 20% and have the trust pay me interest and I in turn pay the bank interest.

Then what about the 80%. How do i approach the bank to get 80% for the trust?

Trust buys land, and you will become the guarantor
Ultimately, is it you who's borrowing the money
That's how I understand it so far

Our experts probably can explain it better than me

 

[alexlee]

Trust buys land, and you will become the guarantor

Maybe. If the trust as enough serviceability on its own a guarantor may not be required.

Ultimately, is it you who's borrowing the money

No, that's not correct.

If Joe Blogs borrows money and their parents guarantee the loan, it's NOT the same as the parents borrowing the money. The loan is still in the name of Joe Blogs but the parents appear as guarantors. 'Who borrows the money' is important when it comes to interest deductibility, etc.

LW, a trust isn't just you by another name. It's not you wearing a mask pretending to be someone else. It's a different entity, able to act independently of you. Putting it another way, the trust doesn't have to be controlled by you, and you can lose control of the trust.

 

[LoneWolf]

Maybe. If the trust as enough serviceability on its own a guarantor may not be required.



No, that's not correct.

If Joe Blogs borrows money and their parents guarantee the loan, it's NOT the same as the parents borrowing the money. The loan is still in the name of Joe Blogs but the parents appear as guarantors.

LW, a trust isn't just you by another name. It's a different entity, able to act independently of you.

Ok, trust borrow the money, and you are the guarantor?

 

[Mitch1]

How does lending working with a trust?

Say I want to buy an IP in a trust and its $500k.

I have 20% in an unused untouched equity loan.
Can i lend the trust that 20% and have the trust pay me interest and I in turn pay the bank interest.

Then what about the 80%. How do i approach the bank to get 80% for the trust?

NeK, if you are setting up a trust for this IP and it has currently no value then you cannot 'loan' the trust the 20% as there is no means for this entity to 'pay' it back to you with interest. Is my understanding.
(It would also make no sense I would think, that the trust is using a loan it is committing to pay back to you as security for yet another loan within the trust)

You would have to 'gift' the trust the 20% and use that in the trust to borrow the 80% for the Ip, and buy IP in trust name.

 

[alexlee]

NeK, if you are setting up a trust for this IP and it has currently no value then you cannot 'loan' the trust the 20% as there is no means for this entity to 'pay' it back to you with interest. Is my understanding.

Not true at all. You lend the trust $10k. The trust gets the 10k cash. The trust then has assets of $10k.

(It would also make no sense I would think, that the trust is using a loan it is committing to pay back to you as security for yet another loan within the trust)

No, your loan is NOT being used as security for the 80% mortgage. It's the property that's being used as security.

You would have to 'gift' the trust the 20% and use that in the trust to borrow the 80% for the Ip, and buy IP in trust name.

Wrong. If you're taking the money from a LOC and then gift it, your interest becomes non-deductible.

 

[Terry_w]

NeK, if you are setting up a trust for this IP and it has currently no value then you cannot 'loan' the trust the 20% as there is no means for this entity to 'pay' it back to you with interest. Is my understanding.
(It would also make no sense I would think, that the trust is using a loan it is committing to pay back to you as security for yet another loan within the trust)

You would have to 'gift' the trust the 20% and use that in the trust to borrow the 80% for the Ip, and buy IP in trust name.

You can loan the trust money, with interet or without. Just because a trust has negative equity doesn't mean it is insolvent.

Whether you loan or gift will depend on a few things, mainly where you are getting the money from the lend the trust.

If you have idle cash laying around then gifting may be a good thing. But if you have a LOC set up and will be borrowing say $100k at 5% - if you gift this $100k you cannot claim the interest. If you lend the trust then the trust may be able to claim the interest it pays you and you can use this income to offset the interest you pay to the bank.

 

[neK]

So regarding the 80% loan, who's name is on the loan?

Is it the trust?

 

[Mitch1]

?and there lies the reason why i am going back to the accountant!! sorry guys

 

[Terry_w]

So regarding the 80% loan, who's name is on the loan?

Is it the trust?

A trust isn't a legal person so it cannot borrow. It would be the Company Pty Ltd as trustee for the XXX trust usually.

 

[neK]

Would i be right in assuming the company borrows the money then on lends it to the trust?

The trust then pays the company interest and the company pays the bank interest?

 

[Terry_w]

Would i be right in assuming the company borrows the money then on lends it to the trust?

The trust then pays the company interest and the company pays the bank interest?

Nope. .....

 

[neK]

So how would it work? (when is your book ready for purchase btw?)

 

[Terry_w]

So how would it work? (when is your book ready for purchase btw?)

The company would borrow (in its capacity as trustee) - book still a while off yet.

Think of it as similar to mum with child . Mum borrows for the benefit of the trust. The trust is just the relationship between mum and child.

 

[LoneWolf]

So how would it work? (when is your book ready for purchase btw?)

Nek, if you are serious about considering buying via trust mate, I would suggest you have a chat to either your accountant or legal representative, perhaps have a chat to your accountant, as they would probably have a better idea of your overall financial circumstance

 

[Cheech]

How does lending working with a trust?

Say I want to buy an IP in a trust and its $500k.

I have 20% in an unused untouched equity loan.
Can i lend the trust that 20% and have the trust pay me interest and I in turn pay the bank interest.

Then what about the 80%. How do i approach the bank to get 80% for the trust?

I am actually going through all this at the moment. This is what I have set up.

• DT with a corporate trustee I am the director of.
• Just purchased a property as abc pty ltd as trustee for The abc Trust
• Set up a loan agreement between Cheech and abc pty ltd as trustee for The abc Trust for the 20%. This is just a simple loan agreement as it is a loan effectively from me to me. I did however set it up with clauses covering repayment, interest, fees etc, and what happens in account of death as the trust still needs to pay back any lending to me.
• Taken out a loan. The applicant name is abc pty ltd (IOR and ATF The abc Trust). Cheech is the applicant as Guarantor and abc pty ltd ATF The abc Trust is recorded as the Borrower.

 

[Paul@PFI]

Careful with a loan to the trust...You can have a loan agreement etc but in 10 years time when you go to pull the loan back and the ATO ask they may well query the written agreement
- How was it a loan when there was no interest, no repayments etc
- Prove the original source of funds

ATO love to refuse the explanation of "it was a loan" and argue its a return of capital instead. If someone lends $$ I recommend copy of the evidence of the transfer and the agreement be retained. Its not uncommon in these arrangements that in time the loan accounts gets cluttered with other credits and debits and soon its like the trust is a bank facility...For someone else. Many family trusts end up this way - Someone sells a house and deposits part of the proceeds to the trust then pulls it back later or buys a car using the trust money. Maybe the $$ credited from a private house sale then gets loaned to another trust and so on. In time its a complete mess. Money going everywhere except on the P&L statement. Hey why should it ?? None of its Trust income right ?

The ATO can just look at the trust and suggest the deposit was ordinary income and find ommitted income. Then look at that other trust and find $$ credited and do same there. The onus is on the taxpayer to prove it wrong and its very hard once the trust gets tainted like this.

Keep good records of all "loan" trasnsactions. Few accountants do this and its a huge risk for audit.