CIP Structures

[HiEquity]

Hi all

I've been receiving advice from a number of lawyers and accountants regarding the best structure for potential ownership of CIPs. The only reason I distinguish CIPs is their (to me) higher exposure per deal and registration for GST paid by the tenant. SMSFs and HDTs are excluded from the structuring options on purpose.

Consistently I have been told that a single Discretionary Trust with personal trustee is the best vehicle for holding any number of properties (RIP or CIP) that are positively geared and owned by the one family. This is based on my circumstances as a low risk salary earner so, according to them, it's not worth setting up a corporate trustee and not worth operating more than one trust (even if hypothetically it had a number of assets worth $50m in it). They also all (three of them!) say unit trusts should only be considered in the case of a number of parties purchasing or if the property is negatively geared and likely to remain that way.

And yet I hear of a number of experienced investors using corporate trustee DT/UT structures, with individual vehicles (structures) for every transaction. Can anyone enlighten me of the advantages of such an approach when I will ultimately be personal guarantor for all the loans anyway? If these guys don't know what they're on about, it would also be useful to be pointed in the direction of someone who does...

Cheers!

 

[Joe D]

Consistently I have been told that a single Discretionary Trust with personal trustee is the best vehicle for holding any number of properties (RIP or CIP) that are positively geared and owned by the one family.
Cheers!

Whilst I don't own CIPs, I don't think it is a good idea to have an individual as trustee unless you were planning to limit yourself to just one or two smaller IPs.

If you have multiple properties in individual DTs you could theoretically have a single PTY trustee that would cover each, however, if your tenant is picking up the outgoings (eg. land tax) it may become an issue for the cost of their outgoings because of aggregation of the Trust's holdings.

Also, no advantage that I can see in UT for single entity ownership.

Having read and enjoyed your "once upon a time" journey, I would think you are planning on getting a LOT bigger, so would suggest individual Trust and Pty Trustee for each medium sized CIP.

Cheers and good luck

 

[Piston Broke]

I don't see how the number IPs your going to own make any difference.
And truth be told you probly don't really know yourself how many you will end up with.

What matters is exactly what I'm trying to achieve, and how much I'm willing to pay for it.

If I wanted a segregated investment, then me as personal trustee is out of the question.
I know of nobody who is personally the trustee of a significant amount of assets held in trust.

For educational purposes only, here's the length that some will go to:
from "The Bold Riders" by Trevor Sykes.

And this only what was known...
And yea, it's purposely blurred.

 

[Player]

Hi ya Hi Equity

If going down the road of using trusts, personally I would have a corporate trustee worth two bucks. A non-trading corporate entity will provide a double default protection mechanism if the trustee of the trust's assets is ever chased.

As the appointor, you may sack that corporate trustee and appoint another. A company costs less than $1,000 to establish and $212 per year to ASIC. Peanuts compared to the asset(s) you are protecting in the trust.

Our trusts have non trading corporate trustees and SMSF the same. As far as loan guarantees, yes the bank is gonna come after you in the event of default, however the trust strategy in the pond we play is more to protect other assets from litigation, not defaulting on loans and praying we'll get away with it.

The other benefits of course is the discretion (DFT) to allocate income to whomever beneficiaries the trustee(s) desire. As for GST (in the event that a CIP requires it), it is the trust that registers and lodges BAS not an individual or company as the trustee.

As PB mentions you don't know how many you will end up with and when that bridge comes, you cross it. Personally (and in the event that they are +ve CF as you allude to) I would have one CIP per trust (Discretionary Family Trust). The running costs are trivial compared to SANF and having the protection that is desired and the discretion to allocate profits/income, and/or loan to other trusts/entities to which you or the trust has links and thereby become your own bank.......which bank? Hi Equity Bank sir.

 

[Dazz]

I hear of a number of experienced investors using corporate trustee DT/UT structures, with individual vehicles (structures) for every transaction.

Good morning Hi Equity,


So in the red corner, you have the three above posters who are all experienced and knowledgable investors in their own right all saying the same thing. I am also supportive of this approach, for the same reasons mentioned above. Throw my hat into that ring and make it 4.


.....and in the blue corner, you have 3 lawyers and accountants all saying something that contradicts and is different from what the investors are actually using.

If these guys don't know what they're on about, it would also be useful to be pointed in the direction of someone who does...

At some point you are going to have to make a decision which way to go. Is it going to be the blue way, having paid substantial professional fees to certified and highly qualified professionals, all agreeing with one another and coming to the same conclusion.....or is it going to be the red way, listening to a bunch of dodgy anonymous unqualified dodgy brothers on some free dodgy website on the internet.

 

[WinstonWolfe]

Another advocate of corporate trustees.

And you may want more than one trust to avoid heavy land tax.
Just had a look at WA's
$2m = $ 7710
$3m = $19810
$4m = $33410

 

[HiEquity]

If you have multiple properties in individual DTs you could theoretically have a single PTY trustee that would cover each, however, if your tenant is picking up the outgoings (eg. land tax) it may become an issue for the cost of their outgoings because of aggregation of the Trust's holdings.

Thanks Joe - much appreciated. I've always been surprised the SRO don't "look through" corporate trustee structures in terms of aggregating land tax. But if that's the deal then who am I to argue? Hasn't been a problem to date for us due to the large proportion of PPOR in one State at any one time but can definitely see it potentially becoming a significant problem.

If I wanted a segregated investment, then me as personal trustee is out of the question.
I know of nobody who is personally the trustee of a significant amount of assets held in trust.

Hi PB

Thanks for that - can you define two terms for me though - "segregated" (as in why would I want that? Just land tax?) and "significant"?

Cheers!

however the trust strategy in the pond we play is more to protect other assets from litigation, not defaulting on loans and praying we'll get away with it.

Thanks Player - a very comprehensive post and much appreciated. When you mention "other assets", are you referring just to other property assets or potentially business / share assets? Would you bother holding direct shares in this type of structure for example (assuming a large $MM portfolio?)?

At some point you are going to have to make a decision which way to go. Is it going to be the blue way, having paid substantial professional fees to certified and highly qualified professionals, all agreeing with one another and coming to the same conclusion.....or is it going to be the red way, listening to a bunch of dodgy anonymous unqualified dodgy brothers on some free dodgy website on the internet.

Hi Dazz. I think I'll go with the one that makes the most sense to me. In the red corner my advisors are saying:
- Passive property investment is a very low risk strategy from a legal POV. The main risk is bank foreclosure and there is no way of escaping that. Everything else they see as minor but I'm not really sure these guys are investors, at least at this scale...
- Therefore "she'll be right" and don't worry about the extra admin costs as the risk isn't worth it.
- A single DT can have a corporate trustee appointed at anytime is one so wishes so why do it now?
- On land tax, they say worry about it when the time comes - which may or may not be now. The problem is I won't know which State I'll eventually buy in until I put an offer on the table that gets accepted by someone and first I need a structure to do that so a bit of a catch 22 for me there...

In the blue corner are a number of good and valid arguments along the lines of "you may never need it but it's the most protection you can get and it doesn't really cost much". If I ever do need it I imagine it would be worth a lot more than that...

So methinks I'll just keep on trying to find an advisor who says what I want to hear! I suspect half the problem may be these guys are academic accountants and lawyers who don't really know how it feels to have these sorts of sums at stake. Maybe they have a couple of properties in a DT and figure that's all an "individual investor" will ever need because that's all they have? Dunno - I would have thought these guys would be falling over themselves to sell structures but instead they're saying (for a salaried employee and passive investor) "there's a lot of unnecessary structures out there..."

BTW - on the offer you made before editing your post I believe my account is still in credit!

Another advocate of corporate trustees.

And you may want more than one trust to avoid heavy land tax.
Just had a look at WA's
$2m = $ 7710
$3m = $19810
$4m = $33410

Thanks WW - that sliding scale really kicks in doesn't it! Definitely worth it if it keeps everything on a single holding basis with the SRO.

 

[Player]

Protection and flexibility

..............Thanks Player - a very comprehensive post and much appreciated. When you mention "other assets", are you referring just to other property assets or potentially business / share assets? Would you bother holding direct shares in this type of structure for example (assuming a large $MM portfolio?)?.................

Hi Hi Equity,

bingo....potentially anything else. Business, share portfolios, managed funds, etc.

I wish I could proudly declare that I am The Teflon Man, however not all our assets are of the non-stick variety. I do know of others personally, and I'm sure also a few here, who are fully teflonised.

My intention moving forward to rectify this is as a couple of older pre-CGT IP's that have well and truly served (and continue to be growth cows) their capital growth intention, is that they will be harvested at various times (due to now rotten yield) and those proceeds be placed in a trust, to invest in more ca$hflow assets and/or further into shares.

Personally, if I were to have a decent share portfolio worth into six figures and multiples thereof, I would have a separate trust just for that strategy and possibly for cash term deposits. Anything in the trust is at risk from potential litigants. So therefore, my plan is one property per trust. I would use the same trustee corporate (two dollar) company for say two or three trusts.

The only strucutre that strays from that criterion is our SMSF. It holds three properties, shares and cash, however that is the way it is.

Bottom line to my way of thinking, is that if someone were to start litigation due to the asset of the trust (that holds one property) say because they fell or tried to break and enter and broke their neck, all other properties in different trusts are protected. The property at risk is the one in the said trust (assuming it has no high debt) and also any shares and cash that are very liquid and seen as easy prey to the plaintiff's legal team.

In the event they then go a higher level up to the trustee, as the Appointor, you would sack the current trustee and replace it with another two dollar company, if indeed that is necessary, remembering that the entity is a vacuous two dollar shell.

External (personal) assets, may still be at risk of future litigation from resi tenants or trauma to invited or uninvited guests, however, some protection is a start. Trust tax return costs (epsecially if only one IP is in there) are miniscule when compared to the protection and flexibility of distribution they avail.

Don't want to sound alarmist. And, don't forget we all have public risk insurance also, however adding another layer is prudent to the protection process IMO. Debt is also another protective mechanism however that implies high-ish LVR's for ever and a day and that may not suit everyone and different stages of life and risk appetite.

Having said this, I am not necessarily going to the expense of transferring all personal holdings to trust and trigerring CGT implications and more state revenues by way of land tax. Ideally all would be "non stick" however starting now is better than never starting. A little bit here, a little bit there, also helps spread the land tax love around.

I am not an accountant or lawyer, so the above is caveated as merely my opinion and strategy as it relates to my portolios and my understanding from reading and other investigations.

Good luck mate

 

[SYD]

I am also interested in this topic.

My questions relate to obtaining finance while using trust structures for investment.

I have heard it is more difficult to obtain finance if buying in a trust structure with a corporate trustee (as opposed to using trust but with individual trustees).

Have people using a corporate trustee experienced this and what steps do you take to ensure you obtain finance? Is it necessary set up multiple companies to act as trustee for multiple property purchases?

Thanks,
SYD

 

[Piston Broke]

I'm no lawyer, but I do research this topic and have an opinion.

I've always been surprised the SRO don't "look through" corporate trustee structures in terms of aggregating land tax. But if that's the deal then who am I to argue?

The see the relationships, but they are different legal entities.

can you define two terms for me though - "segregated" (as in why would I want that? Just land tax?) and "significant"?

Separated, individual, trust deed spruikers use the word "hidden", compartmentalised.
>5mil

- Passive property investment is a very low risk strategy from a legal POV. The main risk is bank foreclosure and there is no way of escaping that. Everything else they see as minor but I'm not really sure these guys are investors, at least at this scale...

To an extent yes, there's more chance we die in a car accident than loose all our assets due to vexatious or spurious legal claims, and more chance of losing 50% through divorce (depending on one's situation it can be mitigated too).

- A single DT can have a corporate trustee appointed at anytime is one so wishes so why do it now?

So it has no liability of any kind cause it never took any part in the day to day managing.

I suspect half the problem may be these guys are academic accountants and lawyers who don't really know how it feels to have these sorts of sums at stake. Dunno - I would have thought these guys would be falling over themselves to sell structures but instead they're saying (for a salaried employee and passive investor) "there's a lot of unnecessary structures out there..."

They are also covering their legal A$$ by being very careful what they tell you. Nothing wrong with that.
And I also agree there are many (I'd say) "unwanted structures" out there because people did'nt know what they were getting themselves when they asked a barber if they needed a haircut (and most still have no clue what a trust is lol).

 

[Piston Broke]

I wish I could proudly declare that I am The Teflon Man, however not all our assets are of the non-stick variety. I do know of others personally, and I'm sure also a few here, who are fully teflonised.

That's a pretty tough call, it not that easy, and not cheap.
And It literally takes lots of trust and or a few OS "operations".

Anything in the trust is at risk from potential litigants.

Not necessarily. There's many variables.

Bottom line to my way of thinking, is that if someone were to start litigation due to the asset of the trust (that holds one property) say because they fell or tried to break and enter and broke their neck, all other properties in different trusts are protected. The property at risk is the one in the said trust

Again not necessarily, and it may be the case that even if they are not exposed, you may still incur large expenses which kinda exposes them to that expense. Bankruptcy is the very last resort imo.

In the event they then go a higher level up to the trustee, as the Appointor, you would sack the current trustee and replace it with another two dollar company, if indeed that is necessary, remembering that the entity is a vacuous two dollar shell.

If it was that easy I'd been very wealthy a long time ago, but even in that less legislated environment it just was'nt that easy.

Debt is also another protective mechanism

Maybe for divorce claims, but if judgement is against you and your liable for $$ you'll lose the assets in question, and seriously jeopardize all the other assets that have loans.

I am not an accountant or lawyer, so the above is caveated as merely my opinion and strategy as it relates to my portolios and my understanding from reading and other investigations.

Ditto.

Just to give you an idea, one of my structures looks like this:
CIP
↑
CIP holder pty ltd
↑
PB trustee pty ltd *
↑
PB trust

Does give it give any guarantees? Nope.
The only above average "feature" is that the only company I'm a director of is PB trustee, which means I have nothing to do with the CIP biz other than managing the ownership on behalf of the trust.
And yeah, It's an expensive setup for some, but that's all relative.
Ad just cause I use it don't mean it's any good for anyone else (or even myself).

 

[redwing]

- A single DT can have a corporate trustee appointed at anytime is one so wishes so why do it now?

No good closing the gate after the horse has bolted, the whole purpose is forward planning isn't it?

 

[MikeF]

I am also interested in this topic.

I have heard it is more difficult to obtain finance if buying in a trust structure with a corporate trustee (as opposed to using trust but with individual trustees).

Have people using a corporate trustee experienced this and what steps do you take to ensure you obtain finance? Is it necessary set up multiple companies to act as trustee for multiple property purchases?

Thanks,
SYD

Whether the trustee is an individual or a corporate entity is not a big issue to most lenders as they will normally want to take a personal guarantee from each company director in any case.

As to setting up multiple seperate companies whats the point all you will be doing is increasing your annual compliance costs.

 

[WinstonWolfe]

I'll throw in another serious consideration - succession planning.

Not a good position for your loved ones, when you've given personal guarantees on loans, and you die.

 

[Rolf Latham]

that sliding scale really kicks in doesn't it! Definitely worth it if it keeps everything on a single holding basis with the SRO.

at the ATO they term sliding as "progressive "

Nice use of words

even then its wrong, when was the last time something slid "uphill?

ta
rolf

 

[Peter_Tersteeg]

Consider the case where there's a trust deed, with a individual who is:
the trustee
the appointor
the benificiary

There's actually been cases like this where it's been ruled that in actual fact the trust doesn't exist, it's just a document with some pretty words.

If you don't have a corporate trustee, there's very little point in having a trust. You effectively have zero asset protection from a good lawyer.

 

[Piston Broke]

Consider the case where there's a trust deed, with a individual who is:
the trustee
the appointor
the benificiary

There's actually been cases like this where it's been ruled that in actual fact the trust doesn't exist, it's just a document with some pretty words.

If you don't have a corporate trustee, there's very little point in having a trust. You effectively have zero asset protection from a good lawyer.

Yep.
If you hold it for your own benefit, than there is no trust "arrangement".

 

[JIT]

Can someone elaborate on the DT/UT structure?

Is this having a Unit Trust as a unitholder in a Discretionary Trust, with the property actually owned by the Discretionary trust??

Or the other way round?

What is the advantage of this?

I recall Chris Batten talking about a UT/DT structure for RIPs to allow transfer into a SMSF?

 

[SYD]

Just to give you an idea, one of my structures looks like this:
CIP
↑
CIP holder pty ltd
↑
PB trustee pty ltd *
↑
PB trust

Hi PB,

The way I understand your structure is your CIP is owned by a CIP Holding company. Your trust then holds shares in CIP Holding company.

If this is correct, then I think you would lose the benefit of the CGT discount when you sell CIP as CIP Holding company is not entitled to the discount.

I'm probably missing something.

SYD

 

[SYD]

I'll throw in another serious consideration - succession planning.

Not a good position for your loved ones, when you've given personal guarantees on loans, and you die.

Hi WW,

So is there any difference if you have loans in your personal name when you die?

SYD