Convince me a trust is worthwhile

[geoffw]

One other point is that trusts and companies allow you to do thinks, for which you can claim tax, which you cannot do as individuals. That could be worth many thousands of dollars.

Dale has given examples of gifts to family members and professionals on your team (presumably accountants ) and trips to buy property- even with junior members of your family.

If you already had a company, you could do some of these things already- but an individual does not have that option (well, a trip to but property is a capital expense which you can claim when you sell).

So if you were to drive, on behalf of your trust to investigate buying a property, you can claim an certain amount per km (depending on the car engine size) and an allowance for each night you stay in that location. In Canberra, the amount ATO allow you to claim is around $200 per night- it's a little higher in Sydney and Canberra.

The $500 you claim for that trip may not be that much in the scheme of things. But what you can save over a year can make a big difference.

My old accountant was not allowing me to claim for seminars for instance- the trust probably would be allowed to claim for them (I'll be checking that out with Dale).

 

[Kristine..]

Hi

I'd like to commence this reply with a comment:

Threads such as these are very important learning exercises.

Glebe has asked for convincing reasons regarding the establishment of a trust.

Glebe is seeking concrete, factual information presumable to enable him/her to make an informed decision.

Sure, we could all say 'seek professional, expert opinion and advice' but an integral part of this forum is that people can state their opinions as well as contribute anecdotes from their own experience plus general hearsay, speculation, reports of other people's success or failure with various methods or structures, etc.

There is a huge amount of waffle spoken regarding corporate structures. I make no distinction in that description between a Company and a Trust as they are both corporate structures.

There may be and are tax and legal differences between, say, a Limited Liability company, a Proprietory Limited company, a Trust and between the various types and styles of trusts, and of course where a Trust has a natural person acting as Trustee and where a Company is acting as a Trustee.

So the hypothesis I present and the questions I ask are not 'negative' in the aggressive sense, but are factual in that if someone posts an opinion it is important that the opinion not be taken as fact unless it is a comment based on a legal requirement.

In my line of work I am constantly coming across people who have or are intending to 'set up a Trust' and yet seem to have a very murky idea of what a Trust actually is and why it may relate to their circumstances at all.

Frankly, I have not come across any good reasons to establish a Trust and so far nothing in this thread has given me any reason to change my mind.

I have already covered my stance on 'asset protection' and my attitude towards compensation if anyone is ever injured by my negligence.

However, a tenant cannot wake up one morning and think they will lodge a claim against the landlord just because it seems like a good idea.

'Suing' someone is a long process and obviously the litigant must show 'good cause' and have official leave to lodge the claim.

'Suing' also goes beyond making a claim which can be referred to insurance. Although the insurance may very well ultimately settle the claim, 'suing' implies compensation for real and future loss, not just restitution because a tree fell on their car parked in the driveway.

The courts are not frivolous and look sternly on frivolous or vexatious claims.

And if someone is determined to sue you, they will, regardless of whether you are Chairman of the Board or on Centrelink payments.

Regarding the tax and distribution of income, I have had applicants refused loans because their distribution of income worked against them in demonstrating their income to service the proposed debt. You can't make a silk purse out of a sow's ear and if someone is showing negligible income they can't realistically expect that a lender will accept that they can afford more borrowings.

Granted, income paid directly into an incorporated body can be distributed to the share holders or beneficiaries of that body according to decisions made by the office bearers of the body, and perhaps someone would care to clarify how often the ratio of benefit can be changed.

If the ratio of distribution of benefit (profit) can be changed annually then yes I would agree that that is indeed a wondrous thing!

If the ratio cannot be changed to adjust profit benefit in line with the personal income of the beneficiaries in each tax year then there really is no greater benefit than if investments were just made by the natural persons.

To the best of my knowledge trusts and companies cannot distribute operating losses so negative gearing against personal income does not apply.

As a capital loss is an asset I would presume that a trust or company could distribute the capital loss? If it can only hold loss against future profitable capital actions of the trust - this may never happen, and the loss may never be redeemed.

However, I must admit that the concept of 'retained earnings' did briefly appeal to me.

But then I considered the reasons why we claim depreciation now rather than leave it as a capital margin, or claim the GST now rather than leave it as an input tax, and it's all about money now rather than money later. That magic chestnut, 'cash flow'.

So retained earnings may be OK if they are simply held over until the next tax year, otherwise in the context of investment (as distinct from a trading company) the benefit is minimised and the tax must still be paid when the profit is distributed.

Remember, I have nothing to do with selling trust or company structures. There is no benefit or detriment to me what structure anyone else uses. But I genuinely don't believe it is enough to claim that trusts, companies or whatever are a 'must have' for investors and that they are a panacea for all investment ills.

I appreciate that the upsurge in 'Family Trusts' has been largely influenced by the changes to Family Law and particularly how this affects the rural community.

In recent years changes to Builders Warranty Insurance has seen families dissolving the expensive trusts they set up and transferred assets into as the warranty insurance companies want exposed assets to underwrite the insurance they issue to builders.

No, none of us have a crystal ball. Is our marriage going to be a statistic and be one of the 30% which do not go with us to the grave? What of our children's inheritance should we remarry? etc etc

All these questions ebb and flow during the course of our lives. There is no easy answer, no quick fix.

However, once an asset is in a trust it is not cheap nor easy to get it out again.

So Glebe has asked to be convinced.

Like any human situation, this is not a black and white situation, the shades of grey are both complex and constantly moving. We can only act within our current situation, try and anticipate the future, and hope for the best.

Perhaps some other contributors could post of their experiences with trusts but more importantly why they established the trust in the first place and has it lived up to expectations.

Otherwise, Glebe, you can only do what seems like a good idea at the time!!

Cheers

Kristine

 

[Andrew_A]

Hdt?

Hi

To the best of my knowledge trusts and companies cannot distribute operating losses so negative gearing against personal income does not apply.

As a capital loss is an asset I would presume that a trust or company could distribute the capital loss? If it can only hold loss against future profitable capital actions of the trust - this may never happen, and the loss may never be redeemed.

Cheers

Kristine

Hi Kristine,

Isn't a HDT able to distribute a capital loss? Allowing for -ve gearing benifits. I understand that a normal DT will only allow you to carry a loss forwards.

WaySolid

 

[Kristine..]

Hi WaySolid

A capital loss is not negative gearing.

A capital loss is what happens when an asset is sold unless, of course, that produces a capital profit.

Negative gearing is where ongoing operating costs of the investment are shared.

If the ongoing expense cannot be allocated, then in effect all expenses actually cost 30% more (they would have cost 30% less if written back against personal income [effective Tax rate average $88,000 personal income per annum $0.30]).

Kristine

 

[Andrew_A]

Thanks

Thanks Kristine,

I wasn't aware of that. I'm another one of the people considering a trust at the moment I find that when I answer a question about them, more questions appear.

Since I'm viewing a trust as a long term buy/hold structure for property, I hope to never have a capital loss from a property sale, though I could see a situation whereby share investments would easily qualify for a loss. Though I hope that I would have profits soon to offset any loss. Is the capital loss scenario a major concern?

WaySolid

 

[NigelW]

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 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 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

Your post made me laugh Kristine - Love the HHGTTG!

But seriously:

1. not too hard for many people (particularly in Syd & Melb) to reach the income threshold you've mentioned.

2. yes courts have some power to set aside structures but (family court aside) it's not as easy as you think if there's no funny business (fraud, defeating creditors etc) going on.

3. why do you have a company for your business if all this stuff about asset protection and limited liability is all a bunch of hooey? Why don't you just run as a sole trader and let every disgruntled client with no case and a bad attitude have full access to all the investments you've worked so hard to build? You don't need a company to build a brand you just need a business name surely????

4. You seem to assume that courts always get it right and that a fair compensation amount is always paid. Judges are, of course, infallible...

5. Using trusts and other structures has nothing to do with avoiding your legal responsibilities to tenants. Structures are a bit like insurance - they help ensure you don't pay more than is necessary. Nor do they mean you can let your insurance lapse. Adequate insurance is an integral part of protecting your ASSets. Sure trusts etc cost more to establish - but then insurance premiums always seem expensive until you have to make a big claim - then you thank your lucky stars you've paid out those premiums!

I understand the emotional satisfaction you're getting from the rates notices but geez is that really worth it? Can't you get warm fuzzies by just reading the valuation numbers instead

Cheers
N.

 

[Kristine..]

Hi Nigel

Good. I'm glad to read your responses (and glad to hear you had a laugh while replying). Debate has to be informed and if I'm not - well, the purpose of my elaborate posts is primarily to encourage specific and detailed response.

The views of the correspondent are not necessarily the views of the management, etc.

Part of the reason for establishing a Pty Ltd was to be able to employ myself and to extend the opportunity of WorkCover to myself. As an employee of my own company - and assuming I was to draw regular wages, I would have access to cheap, extensive workplace accident cover, the same as my other employees. The Pty Ltd was established while working on Myrtle Cottage.


Truthfully, establishing that Company has added to my administrative burden considerably, however, as a broker I have found some lenders want the brokers to be incorporated and one aggregator insisted on Pty Ltd and would not take ‘Trading As’ as sufficient.

Their purpose was to safeguard themselves, not the broker, from any implication of a master & servant relationship. They insisted on an exclusive contract agreement, yet wanted the brokers to be 'independent operators' and separate legal identities.

Playing legal games with the weakest link in the chain, the individual actually working down the mines.

Anyway, Nigel, I have a genetic fault in that I actually care about people. It worries me when I see simple situations turned into complex and expensive situations because someone has read or heard something, but they are not fully informed as to the long term implications of their actions today.

Sure, that could also include the individual who buys one investment property, ends up with twenty, and perhaps would have benefited from some other way of doing things.

But for each one of those, there is a dozen people who set up trusts and companies and find that they have saddled themselves with something quite inappropriate for their needs.

I'm sure I would write a lot more business if I simply nodded when a prospective customer said 'I will be buying this property in a ....' but I always ask 'Have you discussed your plans with a Licensed Financial Planner? Have you discussed your intentions with your Accountant? And if you don't have an Accountant (H & R Block does not qualify as "Your Accountant") - it's worth spending $120 per hour and having a proper, technical discussion with properly qualified professionals. What about your Solicitor? Have you made a Will? What about Estate Planning?

These discussions are not 'If I were you I would do this' but are about the customer's current and anticipated future circumstances.

Single, married, divorced? PAYG or in business? Any plans to change these circumstances? etc etc

Will the serviceability of this loan rely on the negative gearing aspects of the investment? Do you intend to invest regularly? What about your principal place of residence? Have you thought about the Land Tax implications?

And finally, what about discussing the implications of these structures with their Bank or Mortgage Broker?

Nigel, you know better than I do, that all these processes and functions intertwine and make up the whole.

Tax, legal implications, 'asset protection', distribution of benefit, distribution of liability, ability to access finance, the list goes on.

I am under a strict 'No Advice' burden. Even when it comes to choosing a loan, I cannot say 'If I were you I would choose Nifty Finance Happy Loan'. I cannot offer advice under any circumstances. But by golly do I ask questions!


Glebe has invited comment on the reasons to establish a Trust.

If Glebe decides to do that or not do that, hopefully it will be the result of informed research and with a full understanding of the ongoing implications of doing so.

Nigel and others, please correct any factual errors in any of my posts. At my age I have been shot down in flames so often that my wings are a tatty, singed mess. However, like the phoenix I keep rising from the ashes with yet more questions so please, keep firing away!!

Regards

Kristine

 

[NigelW]

Hi Nigel

Good. I'm glad to read your responses (and glad to hear you had a laugh while replying). Debate has to be informed and if I'm not - well, the purpose of my elaborate posts is primarily to encourage specific and detailed response.

The views of the correspondent are not necessarily the views of the management, etc.

Part of the reason for establishing a Pty Ltd was to be able to employ myself and to extend the opportunity of WorkCover to myself. As an employee of my own company - and assuming I was to draw regular wages, I would have access to cheap, extensive workplace accident cover, the same as my other employees. The Pty Ltd was established while working on Myrtle Cottage.


Truthfully, establishing that Company has added to my administrative burden considerably, however, as a broker I have found some lenders want the brokers to be incorporated and one aggregator insisted on Pty Ltd and would not take ‘Trading As’ as sufficient.

Their purpose was to safeguard themselves, not the broker, from any implication of a master & servant relationship. They insisted on an exclusive contract agreement, yet wanted the brokers to be 'independent operators' and separate legal identities.

Playing legal games with the weakest link in the chain, the individual actually working down the mines.

Anyway, Nigel, I have a genetic fault in that I actually care about people. It worries me when I see simple situations turned into complex and expensive situations because someone has read or heard something, but they are not fully informed as to the long term implications of their actions today.

Sure, that could also include the individual who buys one investment property, ends up with twenty, and perhaps would have benefited from some other way of doing things.

But for each one of those, there is a dozen people who set up trusts and companies and find that they have saddled themselves with something quite inappropriate for their needs.

I'm sure I would write a lot more business if I simply nodded when a prospective customer said 'I will be buying this property in a ....' but I always ask 'Have you discussed your plans with a Licensed Financial Planner? Have you discussed your intentions with your Accountant? And if you don't have an Accountant (H & R Block does not qualify as "Your Accountant") - it's worth spending $120 per hour and having a proper, technical discussion with properly qualified professionals. What about your Solicitor? Have you made a Will? What about Estate Planning?

These discussions are not 'If I were you I would do this' but are about the customer's current and anticipated future circumstances.

Single, married, divorced? PAYG or in business? Any plans to change these circumstances? etc etc

Will the serviceability of this loan rely on the negative gearing aspects of the investment? Do you intend to invest regularly? What about your principal place of residence? Have you thought about the Land Tax implications?

And finally, what about discussing the implications of these structures with their Bank or Mortgage Broker?

Nigel, you know better than I do, that all these processes and functions intertwine and make up the whole.

Tax, legal implications, 'asset protection', distribution of benefit, distribution of liability, ability to access finance, the list goes on.

I am under a strict 'No Advice' burden. Even when it comes to choosing a loan, I cannot say 'If I were you I would choose Nifty Finance Happy Loan'. I cannot offer advice under any circumstances. But by golly do I ask questions!


Glebe has invited comment on the reasons to establish a Trust.

If Glebe decides to do that or not do that, hopefully it will be the result of informed research and with a full understanding of the ongoing implications of doing so.

Nigel and others, please correct any factual errors in any of my posts. At my age I have been shot down in flames so often that my wings are a tatty, singed mess. However, like the phoenix I keep rising from the ashes with yet more questions so please, keep firing away!!

Regards

Kristine

Kristine - I would never shoot you down in flames - I have too much respect for your experience! (gee that sounds sucky doesn't it! ) My post was just some gentle prodding only!

At the end of the day there's nothing wrong with holding assets in your own name, as long as the realistic risks are understood and it's an informed decision - as you point out - to accept those risks.

I understand the added admin hassle believe me! To diverge for a moment, that's one reason why I generally think younger investors should concentrate on investing their accessable funds and steer clear of SMSF until they're well established in investing outside super...

arise immortal and soar again...

 

[GreatPig]

Kristine,

A couple of points...

If the ratio of distribution of benefit (profit) can be changed annually then yes I would agree that that is indeed a wondrous thing!

It's my understanding that with a discretionary trust the trustee can distribute any percentage of the total distribution to any beneficiary each year. That's why it's "discretionary". Only companies and unit trusts are stuck with percentages based on share or unit holdings.

And even with companies there is some flexibility using different classes of shares.

To the best of my knowledge trusts and companies cannot distribute operating losses so negative gearing against personal income does not apply.

With a hybrid or unit trust (again by my understanding), investment income can be offset against interest on personal borrowings, with any shortfall being deductible against other personal income. This is assuming that the personal borrowings were for investment purposes (in this case buying trust units).

Thus negative gearing is possible, where excess interest is offset against other personal income.

I don't know of any way to distribute capital losses though. But even with an individual, I don't believe it's possible to offset capital losses against other income.

GP

 

[Puppeteer]

It's because the future is so uncertain that I finally decided on a trust as a structure to hold my properties in.

A HDT was the structure that provided the most flexibility to me for the future. I can't tell you what my marital status will be in 5 years, I can't tell you if and when I'll have children. I can't tell you what my wage will be in 5 years, or where I'll be working, or for whom.

The HDT was the only structure that allowed me the flexibility to adjust to any and all of these changes (plus alot of others). It's true that there is some extra administration, but if you run your investment property portfolio as a business anyway, then the extra burden really is minimal. One extra tax return for your account to prepare, and some annual reporting to ASIC.

If you don't run accounts for your property, then there is much more that needs to change, and you probably aren't maximizing the potential of your portfolio anyway.

For me the annual costs are a small price to pay for the added flexibility that a trust provides me. As a worst case scenario, nothing changes. I still get to claim my interest as a deduction, I still get the income from the rent, and still get to depreciate the property. I pay a small fee each year to ensure, that should something change in my life, that my investments can change to suit.

I agree that trusts aren't for everyone, and that you need professional advice from someone that knows your situation and can explain to you what effect a particular structure will have on your particular situation before embarking on them.

If you get it wrong, then they can be expensive and complicated to set right.

 

[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.

It's funny how circumstances change.

* My wife became a contractor, increasing her chance to be sued.

* She now earns nearly twice as much as me.

* I'm quitting work in a few months to try my hand at full time investing and importing.

Thankfully we decided to create a trust and have all our investments in it. Wife has taken out the margin loan (tax deductible), brother in law ($0 income) gets most of the distributions. Tax effective and secure.

 

[Terryw]

Good on you Glebe. This is a good real life example of how things change.

Kristine I wonder if you have changed your views on trusts over the last 2 years?

I cannot think of why anyone would not consider a trust. A discretionary trust costs from around $270 to setup. Running costs are minimal. If a personal trustee, then there is no ASIC rules or costs to meet. etc.

The only disadvantage is no land tax threshold.

And if you are worried about your duty of care to people if you are at fault, it would be better if you had a choice of who and how much to compensate rather than getting sued.

Also having no assets can deter people suing you. When they do their checks before commencing legal action, if they can see you have nothing, then they are less likely to go down the road of costly legal action.\

Terryw

 

[alexlee]

I can understand how a trust protects the individual from getting sued. However, in property related law suits where the property is owned by a trust, wouldn't the tenant (say) just sue the trust? What protects the TRUST'S assets from law suits?

I've read about some investors who use multiple trusts (presumably with different corporate trustees)?

What is the difference between using an individual trustee vs a corporate trustee other than control of the trustee?
Alex

 

[GreatPig]

Alex,

What protects the TRUST'S assets from law suits?

By my understanding, nothing if the trust is sued. That's why people do use multiple trusts.

What is the difference between using an individual trustee vs a corporate trustee other than control of the trustee?

Again by my understanding, when the trust is sued it's actually the trustee being sued. With a corporate trustee, it's the company being sued, not the directors personally. I gather there are only certain situations where directors can become responsible for a company's debts, thus the individuals are more protected.

GP

 

[redwing]

Missed this thread from some time ago..Interesting read !

Redwing

 

[D.T.]

Hi,

Again by my understanding, when the trust is sued it's actually the trustee being sued. With a corporate trustee, it's the company being sued, not the directors personally. I gather there are only certain situations where directors can become responsible for a company's debts, thus the individuals are more protected.

Theres quite an interesting article on Invested relating to the extent the directors of a trustee pty ltd are liable. Im not sure if you have access or not, but if you do, might be worth having a look at. Or alternatively it might be floating around somersoft somewhere too, I havent looked.

Cheers,

 

[Jacque]

It is available on InvestEd and was authored by the very smart Nigel W
You won't find it floating around on SS. Sorry