Can LOC in personal name be used by Trust?

[RazzaDazzla]

PPOR has been revalued and their's a bit of equity we can borrow in the form of a LOC.

We have a Discretionary Trust and would like to use the money from the LOC for investments (property/shares).

Just wanted to check, even though the LOC will be in our personal name, if the money is used by the trust for purchasing assets; then from a tax and accounting point of view, can it be seen that the LOC interest and repayments is being paid by the trust?

 

[StuartW]

Best to get the LOC in the name of the trust (using your home as security).

You can on-lend the money (from you personally into the trust) but you should have a one-pager loan agreement to document this. Be aware that this will reduce the asset protection the trust provides as the Trust will owe you money (the loan) which is an asset in your name. If you get sued the creditors can call on your assets.

That's why its best to put the loan in the trusts name - many banks will allow this.

 

[jonmardell]

best to get the loan in the trust name, st george portfolio could be an option.

 

[RazzaDazzla]

Thanks for the replies.

That makes perfect sense re. we can borrow the money as individuals and then loan the cash to the trust. But then as individuals we have an asset of the loan to the trust and this loan amount would be at risk should we get sued as individuals.

Apart from no asset protection on the loan amount; is their any other reasons we should have the trust borrow in it's name using our PPOR as security VS us borrowing as individuals and lending money to Trust?

We have already started the ball rolling and just need to sign on the dotted line to get a LOC (6.9%) in our personal name. We initially seeked a loan for the trust using the PPOR as security, but this was a little out of scope for our average Joe bank (bankwest).

Or we would we be much better off wrapping our PPOR mortgage, Trust Mortgage (IP) and our wanted LOC into one package through a refinancing deal with a Mortgage Broker?

Slightly off topic, but how are loans from individuals to trusts handled come tax time?

Our trust already has one IP. We had to loan deposit and closing costs to the trust as the trust started with a measly $500 from our settlor. Should we draw up a one page loan letter between us as individuals and the trust?

Re. interest rates, do we as individuals need to charge the trust market interest rates? Or can it be an interest free loan? As individuals we would prefer to keep our personal taxable income minimal.

With that in mind (I assume this is a no no) can we as individuals borrow a LOC from the bank at %7 and lend it to the trust at 5%? This loss of 2% we experience as individuals could offset other gains such as dividend payments from shares?

I realise these are questions for my Accountant and mortgage broker, but I just want to be fully aware of my options before investigating further.

Thanks.

 

[Terryw]

Thanks for the replies.

That makes perfect sense re. we can borrow the money as individuals and then loan the cash to the trust. But then as individuals we have an asset of the loan to the trust and this loan amount would be at risk should we get sued as individuals.

Apart from no asset protection on the loan amount; is their any other reasons we should have the trust borrow in it's name using our PPOR as security VS us borrowing as individuals and lending money to Trust?

We have already started the ball rolling and just need to sign on the dotted line to get a LOC (6.9%) in our personal name. We initially seeked a loan for the trust using the PPOR as security, but this was a little out of scope for our average Joe bank (bankwest).

Or we would we be much better off wrapping our PPOR mortgage, Trust Mortgage (IP) and our wanted LOC into one package through a refinancing deal with a Mortgage Broker?

Slightly off topic, but how are loans from individuals to trusts handled come tax time?

Our trust already has one IP. We had to loan deposit and closing costs to the trust as the trust started with a measly $500 from our settlor. Should we draw up a one page loan letter between us as individuals and the trust?

Re. interest rates, do we as individuals need to charge the trust market interest rates? Or can it be an interest free loan? As individuals we would prefer to keep our personal taxable income minimal.

With that in mind (I assume this is a no no) can we as individuals borrow a LOC from the bank at %7 and lend it to the trust at 5%? This loss of 2% we experience as individuals could offset other gains such as dividend payments from shares?

I realise these are questions for my Accountant and mortgage broker, but I just want to be fully aware of my options before investigating further.

Thanks.

I agree with Stuart that having the trust take out the loan will result in greater asset protection. But not total asset protection as the transaction could possibly be voided, especially if the purpose of doing it this way was 'asset protection'.

If you are lending to a trust (or anyone) you should really have a written loan agreement in place. This makes it look all official and will help if there are disputes down the track. Remember the trust assets don't belong to you, even though you may control them at the moment, and you or the trustee must act in the best interests of the beneficiaries including properly documenting all transactions etc.

You could lend money to the trust interest free if you wished, but if you are wanting to borrow from a LOC then on lend the money then you must consider tax deductibility issues. Borrowing money at 7% and lending it out at 5% (or Nil) doesn't make commercial sense and the ATO wouldn't allow a full deduction.

And these are legal and tax questions so you should be asking a lawyer or accountant and not a mortgage broker.

 

[Tillie]

Does anyone has a sample text for a simple but legal loan agreement between individual and trust? Or internet site where you can find one?