Hello,
I am considering using a discretionary trust for our next IP.
I have some questions I would like to ask the forum. I have been grappling with some issues regarding to the practicalities of running a discretionary trust and would appreciate any real life examples.
I’m thinking of having a vanilla DT with a corporate trustee and potentially having a company as a beneficiary as well as the family members. A property I am looking at is CF+ and is suitable for the DT as the sole investment.
My questions relate to distributions of income, and how to retain cash in the trust.
1 Let’s say the trust is set up and buys a $1,000,000 property that in the first year returns $100,000 in rent and the only expense is $80,000 interest on an IO loan. The trust’s income for the year is $20,000 and this needs to be distributed to the beneficiaries. Does the $20,000 have to be physically paid out or are there ways for this money to remain in the trust?
2 Let’s say that instead of an IO loan, the trust had a P&I loan and repaid $10,000 of principal (on top of the $80,000 interest). The income is still $20,000 and needs to be distributed but in this scenario there is $10,000 less cash available. How do people get around this?
3 Let’s say the property does well and is sold after a couple of years for $2,000,000 (capital gain = $1,000,000). After repaying the loan there is $1,000,000 in the bank account. This needs to be distributed to the beneficiaries. Let’s say there are 3 beneficiaries; husband, the wife and a corporate beneficiary. Is it unwise to distribute any capital gains to the corporate beneficiary as it wont be entitled to the 50% discount? What are the strategies of distributing the capital gain? Is it possible to keep the cash in the trust for the next investment?
Thanks,
SYD
I am considering using a discretionary trust for our next IP.
I have some questions I would like to ask the forum. I have been grappling with some issues regarding to the practicalities of running a discretionary trust and would appreciate any real life examples.
I’m thinking of having a vanilla DT with a corporate trustee and potentially having a company as a beneficiary as well as the family members. A property I am looking at is CF+ and is suitable for the DT as the sole investment.
My questions relate to distributions of income, and how to retain cash in the trust.
1 Let’s say the trust is set up and buys a $1,000,000 property that in the first year returns $100,000 in rent and the only expense is $80,000 interest on an IO loan. The trust’s income for the year is $20,000 and this needs to be distributed to the beneficiaries. Does the $20,000 have to be physically paid out or are there ways for this money to remain in the trust?
2 Let’s say that instead of an IO loan, the trust had a P&I loan and repaid $10,000 of principal (on top of the $80,000 interest). The income is still $20,000 and needs to be distributed but in this scenario there is $10,000 less cash available. How do people get around this?
3 Let’s say the property does well and is sold after a couple of years for $2,000,000 (capital gain = $1,000,000). After repaying the loan there is $1,000,000 in the bank account. This needs to be distributed to the beneficiaries. Let’s say there are 3 beneficiaries; husband, the wife and a corporate beneficiary. Is it unwise to distribute any capital gains to the corporate beneficiary as it wont be entitled to the 50% discount? What are the strategies of distributing the capital gain? Is it possible to keep the cash in the trust for the next investment?
Thanks,
SYD