Convince me a trust is worthwhile

[Glebe]

Hi everyone,

I've read Dale's book "Trust Magic" and sometimes I laughed out loud with glee at some of the "magic" that can be created with trusts. After reading the book I'm convinced trusts are a great thing. For some, that is.

From what I gather, the big winners from trusts are people who:

* have kids to disperse the gains to

* have a partner that is in a difference tax bracket to disperse gains or losses to as applicable

* those who are in professions that have exposure to being sued.

My wife and I don't plan on having kids, earn and should continue to earn similar amounts of money, and are simple employees that don't have any realistic chance of being sued.

So I don't see too much to gain from having a trust, but I do see the maintenance costs.

If I'm missing something I'd love to know, coz we're both 27 so we have alot of investing ahead of us.

Thanks,

Glebe.

 

[Aceyducey]

My wife and I don't plan on having kids, earn and should continue to earn similar amounts of money, and are simple employees that don't have any realistic chance of being sued.

Glebe,

Prove to me that none of these circumstances will change in the next 40 years & I'll accept your argument.....children sometimes happen unintentionally, people get sacked or promoted, sick or injured & unable to work.

If you drive a car & hit someone you can be sued. If you hit someone with your fist you can be sued. If you detain a burglar, you can be sued. If someone follows your advice & gets burnt you can be sued. Work isn't the only, or even the primary, source of these types of claims.

Your present situation is no guarantee as to the future. Use a structure that minimises your risks.

The cost of a Trust is significantly less than that of a lawyer to defend you, or that of an adverse payout.

Cheers,

Aceyducey

 

[DaleGG]

HI

The concept of a trust is still grossly misunderstood. The simple truth is that it is an entity that holds assets for your future benefit and that of your family.... the fact that the trust has remarkable tax advantages associated with it compared to other structures is just that, an advantage.

Do you personally need one?

Only you can answer that based on your own thoughts and feelings and the research that you have done to date and will do into the future.

A trust provides you with:

* asset protection which cannot be disregarded in this day and age.
* flexibility so that you stay in control of your circumstances when those very same circumstances change - whether those changes were caused by you, or, whether those changes were imposed on you.

Unfortunately, most people consider a trust with today's situation and income staus in mind. They do not look ahead 10, 20, 30 or even 50 years from now and think about the wealth that they are creating, or, the income that they will produce from these investments.

Let's face it, if we adopt Jan Somer's basic strategy and bought average homes, in average suburbs and rented them to average people and (I digree from Jan now) we bought one every 3 years you will have 12 properties by official retirement ages. That is a rental come at say $200 per week, per property or $124,800 pa in today's money.

It is also a portfolio of say $2.4m in today's values.

Do you really want that in your own names? Do you really want the issues that will come from owning so many properties in our own name?

Of course, you may only want to buy 1 or 2 properties....and in which case, NO! a trust is probably not a good option for you.

Most of us start to invest because we'd like to be wealthier than we are today and to be wealthy we must do what the rich and wealthy people do and I can assure you that the rich and wealthy use trusts.

I'm sorry for the ramble...it's early and I haven't had enough coffee yet...

Good luck with your research and your investing

Dale

 

[Glebe]

Acey, Dale,

Thanks for your replies. It's certainly food for though, I think I needed to be put in my place. I am certainly a believer in the power of trusts, and I see myself creating one some day. I'm just undecided as to when is the right time to do it.

We're not too far away from upgrading our PPOR. I think we will buy it in our names, but when we pay down the mortgage and take out a line of credit to purchase managed funds, we'll buy the managed funds under the trust structure.

Thanks again.

 

[Rolf Latham]

Hi Glebe

Why Trust ?

Because life is what happens to you while you are making other plans.

For many of my clients a trust based structure is a future proofing "thing", they use them not for what is but for "what ifs"

ta

rolf

 

[Glebe]

Don't worry Rolf, a trust won't get in the way of me living my life.

 

[Jacque]

Great answer, Dale, as usual
I really like the way an accountant like yourself can explain things so well, so that the rest of us mere mortals can actually understand in plain english!
Keep it up- I always enjoy your posts!

 

[TryHard]

Trust a trust

Glebe

When I was your age, in fact up till last year, I would have sworn blind I would never use a trust, but I set one up in line with advice to plan with the end in mind. Since we set up the trust and with the benefit of Dale's advice/setup and Rolf's ability to access funds , plus time learning the Steve Navra methods, we found a trust is a very necessary and worthwhile vehicle. We found some investments that make sense and are easy to manage in the structure once you get the basics right. Compared to projected wealth in 20 years the annual maintenance cost is a no-brainer.

BTW I'm now 37 and we're expecting our first child. At 27 (and till I was 36) I was sure that would NEVER EVER happen ! We both used to earn very similar amounts at 27, but since then have gone from one or the other earning twice the partner's salary, and I even had the good fortune to be unemployed for a short and joyous time And you've never been SUED !? You haven't lived !

Comprehensive insurance for your car is an unnecessary overhead too, till the traffic conditions change and something unexpected happens.

"Trust Yourself" when you're ready
TryHard

 

[Andrew_A]

Do what the rich people do

I'm in a position where a trust is certainly not worthwile in the short/medium term, but likely to be very valuable in the longer term.

I think it's smart to copy the methods rich people use when dealing with money, and they seem to love trusts.

There will always be clouds to be found for any silver lining, I read a thread on PI recently where a person was worried about trusts "only" lasting 80 years.

WaySolid

 

[kierank]

Correct me if I am wrong.

If you buy IPs in your own name, when you die, your estate has to pay CGT as the owner has changed (even if you pass the IPs onto your loved ones).

If you buys IPs in a Trust, when you die, the IPs are still owned by the Trust - no CGT. Your loved ones will still be the beneficieries.

I realise this is not YOUR problem but why would one want to pass a CGT problem onto your loved-ones!!!!

 

[NigelW]

Correct me if I am wrong.

If you buy IPs in your own name, when you die, your estate has to pay CGT as the owner has changed (even if you pass the IPs onto your loved ones).

If you buys IPs in a Trust, when you die, the IPs are still owned by the Trust - no CGT. Your loved ones will still be the beneficieries.

I realise this is not YOUR problem but why would one want to pass a CGT problem onto your loved-ones!!!!

You're wrong. But not entirely

Death is not a CGT event - there's a division 128 (from memory) which switches CGT off for your estate's transmission of your assets per your will. BUT the beneficiary will acquire the IP with a cost base equal to the market value at the date of your death. The beneficiary will only pay cgt if they then sell the IP. Note for PPOR of deceased there's a 2 year window to sell CGT free.

N.

 

[kierank]

NigelW,

Thanks for the correction in such a nice way - I will continue learning.

 

[Glebe]

TryHard,

Thanks for your post - you sound like me just 10 years older, wiser and wealthier

I'm convinced trusts are worthwhile. Unfortunately due to the stage of my life, I don't think it's appropriate for this financial year and possibly the next. Gotta get a house and pay down the mortgage first so I can actually afford some investments to throw into the trust. I feel priviliged to know what I know at my age, 6 months ago I knew nothing about trusts. I sound like a "gonna" don't I? I'm not though, I'm very dedicated.

 

[Puppeteer]

Glebe,

I'm in a similar situation, being unmarried and without offspring, but I've worked out that a HDT is the perfect solution for me at the moment. The reason is the flexibility.

I don't know what the future holds and the trust allows me the flexibility to move with it. As a worst case scenario it costs me $2500 for setup costs and a few hundred each year to maintain it, to be in the same situation that I'd be in without the trust.

However, a child or a wife will likely change the balance very quickly. I already have 3 properties, and wish that I'd put them in the trust. Two of them were bough at PPOR (which is the reason that I had them in personal names) but as luck would have it, I will probably be overseas in the next few years, so my PPOR will become and IP and things aren't really optimized for that.

The biggest advantage for me is being able to alter the ownership sturcture without stamp duty or capital gains implications, though there are other reasons also.

 

[Kristine..]

Hi Glebe

Well, have you been convinced that a trust or other corporate structure is worthwhile?

No?

Well, after nearly 30 years in real estate and other associated businesses no one has yet convinced me that a trust or corporate structure for property investment is worthwhile, either.

Now that I am also in the money business, I am even less convinced that there is any benefit at all and the cost and loss of opportunity which incorporation represents simply reinforces my opinion.

One of my favourite books is 'A Hitchhiker's Guide to the Galaxy'.

One of my favourite phrases in the book refers to 'Universal Paranoia - everyone has it'.

So, if it isn't the CIA under the bed it's the Russians or the Tenants or the Customers or the Tax Office.

It must get pretty crowded under some beds, let me tell you!

I am always puzzled by the 'less tax' reason touted by so many. Why concern yourself about paying tax or no tax - get on with making money and the tax issues will resolve themselves. Paying 'too much' tax? Buy another property and that will take care of that even if just for a while.

Has anyone actually sat down and calculated that (under the new tax scales) you have to individually earn something like $88,000 net taxable income per annum before your marginal tax rate exceeds 30%?

Has anyone really calculated loss of opportunity due to the extra hard costs involved with buying property through a corporate structure - loss of land tax threshold, loss of negative gearing, loss of access to mutal benefit or building society funds, where you have to be member to borrow and only natural persons can be members?

Has anyone ever calculated the extra costs which most lenders require when the applicant is not a natural person?

Not to mention all those extra Tax and ASIC returns!

Has anyone realised yet that the courts can set aside trust structures or deem them transparent should the situation warrant that action?

And would you really want your crippled tenant impoverished and unable to work for the rest of their life because they crashed through the stairs you said you'd fix but didn't, and your insurance cover on the building had lapsed because you forgot to pay the premium?

We owe our tenants a duty of care. If any harm comes to them because of an action or lack of action of ours they deserve to be compensated for it.

And as far as inheritance goes, well we are neither the Myer family nor Tiny Tim's family and the children will and are already, making their own way in life. Saddling them with financial involvement in their parent's debts is not, to my way of thinking, helping them at all.

So, Glebe, think long and hard before starting something you may later regret. Life is complicated enough without loading yourself with more financial and legal obligations.

And besides, I just love seeing those rates notices with my name on them. I have a Company for business and am proud of that, but in so far as property is concerned I remain convinced that there is more benefit in continuing to buy 'naturally' than there ever would be through an incorporated structure.

But

What would I know? Goodbye and thanks for the Fish!

DON'T PANIC

Kristine

 

[gazza]

I am also yet to be convinced either way of the value of trusts. I have spoken to a number of people on this forum who are financially independent and living off their property investments, all of who do not use trusts. If it's good enough for those who have already achieved what I am aspiring to, it
should be good enough for me.

 

[geoffw]

I have spoken to a number of people on this forum who are financially independent and living off their property investments, all of who do not use trusts.

OTOH, probably one the the wealthiest (ex)members of the forum has divested himself of any of his properties which were not in the trust.

Kristine, I think one of the points with asset protection is that you can do everything right, and still be liable to be sued in this litigation crazy society. I could polish the floors, and get sued by a tenant because I did not use a non slip polish. Too many people regard litigation as an easy way to get money- a safer bet than the lottery.

I had one tenant who was a smoker, whose unit was an absolute disgusting rat's nest. But if he'd set his bed alight, it would have got into his hoard of cardboard, newspapers and old clothes very quickly. But he would have probably sought to blame me. The fire blanket would have been no good- he wouldn't have been able to get through the narrow corridor between his piles of stuff quickly enough.

And for tax. The flock of bats is $30K pa +ve now. Depreciation might account for $10K of that. When I bought them, they were perhaps $10K +ve, with $25K depreciation. I am the higher income earner by far. If I had bought them in my name, I would have benefitted by $7.5K the first year, but be losing $10K pa after that. The trust allows me to distribute profit to my wife if that's appropriate. Now, two years after purchase, the trust is saving me about $4K pa, with expenses of about $1.2K. The income is rising, and the depreciation is dropping, so the numbers are getting better.

I've paid more than my share of taxes in the past, and I'm paying a resonable amount now. But I don't see anything wrong in keeping lmy servicibility figures to the maximum- without them, I can't buy more properties just to get more depreiciation.

 

[Peter 14.7]

Good Thread Glebe

Shows it aint all cut and dried. Personally I am just getting one but being a small business man the asset protection factor is huge for me.

Another factor is estate planning. Trusts survive beneficies death and therefore can be a good way to ensure all your, or others, good work is not spent in a plurge by those who would inherit.

I only have neice and nephew and I believe at 21 they will probably go and buy a flash car rather than a house if I kicked the bucket.

WIth a trust I can help them without giving them cart blanche to stuff up their future. Also the same for aged parents prone to shifty operators.

Peter 147

 

[Kristine..]

Peter

Keep in mind that if you 'entail' your estate without income to service it you may be bequeathing a giant albatross to hang permanently around the necks of those whom you seek to benefit.

You may die, and your right to the loan funds dies with you.

Never mind the 'assets' of the trust

What about the debts?

Will your beneficiaries thank you for the debts?

Have you also got plenty of Life Insurance to pay out the mortgages when you die?

And if the beneficiaries are not then allowed to deal with the assets of the trust as they see fit they might then have to apply to the courts to dissolve the trust purely for self preservation as relief from the debts.

From my perspective, sure, if I die now, everything can and will need to be sold to satisfy the debts. What my beneficiaries do, a year or two down the track after they have dealt with my estate, applied for probate, paid all the expenses etc well, good luck to them!

Let them take a world cruise on the QEII, and I wish them well.

My investments are for me in my lifetime. I hope to live long enough to enjoy the fruits of my labour, to provide for myself should my old age be long and perhaps I ultimately need extended nursing care as my mother did.

I would also like to think there will be enought to pay the undertaker and any final costs.

Just think twice and twice again before you bestow unasked for and unwanted problems on someone else.

Cheers

Kristine

 

[GreatPig]

Kristine,

Why concern yourself about paying tax or no tax - get on with making money and the tax issues will resolve themselves.

I beg to differ. If you hold your assets in the incorrect structure, you could be paying a lot more tax than you should have to and not be able to change it without paying a heap more tax again. I think it is most important to start with the correct structure.

I have been caught with this problem myself, where I held shares in what was ultimately not the best structure and have had to pay tens of thousands more dollars in tax than I would have had to with a better arrangement. Once I realised I had it wrong, I couldn't easily change it as I would have been hit with a major amount of CGT.

And most of your examples of negatives relate only to corporations, not trusts. I think there would be very few people recommending companies as the best structure for holding appreciating assets.

GP