Do I need I a Trust!

[DebtEquity]

Hi to all the Accountants here!

I have a general question regarding using Trusts to hold properties, Shares etc.

I am a PAYG employee married with family etc.

I have spoken to some investors who have bought alot of properties in their own names and have not used Trusts to hold them. But i have also read that alot of people are purchasing in HDT or DT's to hold proeprty etc.

My question is do i really need to set up a Trust and what are the advantages or disadvatages if i don't set one up now or in the future.

I want to build a property portfolio also with shares etc for my future retirement, but i don't not work in any profession where i can be legally sued i don't think anyway.

What do other investors think?

thanks

 

[peterjohnson64]

There are lots of issues to be considered before setting up a trust or not setting up a trust. As you have said, the main benefit of a trust is asset protection. It also allows you to transfer assets between generations without using your will.

Some of the important issues are:

1. You dont get the land tax threshold. This could end up costing you an extra $3000 per annum in land tax. A pretty expensive insurance policy for asset protection.

2. The cost of establishing the trust can be high. Expect as much as $3k for a hybrid trust with a corporate trustee.

3. You need to structure the trust right to make sure you can claim deductions personally and not fall foul of part 4A.

4. With the new super fund borrowing rules it would seem that this is a much better way to negative gear property. Get tax deductions for capital costs and pay no capital gains if you hold the property until you are 60.

one of my businesses, www.cst.com.au specialises in setting up these structures for accountants (we don't retail so I can't sell anything to any members here). We see very few HDT's used any more. They were the flavour of the month a couple of years back but the ATO don't really seem to like them.

Discretionary Trusts are perfect where you have your own business and can stream income from your business to the Trust therefore giving you full negative gearing with the ability to stream the capital gains in the future. Of course, you are still streaming the capital gains that you probably wont need to do in a super fund.

 

[DebtEquity]

Hi Peter thanks for the reply.

My main concern is to pass on my properties etc to future family. But also want to buy capital growth properties which will be negatively geared, so i want to offset the losses against earned income etc.

Can you explain how a SMSF can help and will be more beneficial than a HDT?

should i be just purchasing in my own name and then set up a Testamentary Trust instead?

 

[Rixter]

DE,

Look into possibly setting up 3rd generational & bloodline trusts.

Your benificiaries dont have to pay CGT or stamp duty on their inheritences.

If your kids go through a divorce their ex-partners cant get their hands on what your kids inherited from you.

Hope this helps

 

[DebtEquity]

Thanks for that information Rick.

Do you know of any good lawyers in Perth who understand these Trusts?

 

[peterjohnson64]

Hi Rick,

Just a couple of observations,

1. There is no stamp duty or CGT payable when you transfer a property over to your kids as a result of your will. Same if you leave it to a testamentary trust. CGT is payable when the kids sell the property just as it is if a trust sells the property. The advantage of a discretionary trust here is that you can stream that capital gain.

2. I have seen instances where the family court will direct that the assets of a trust are actually assets of a particular person for family law purposes. For example, if I am an appointor of a trust and also the sole director of the trustee company I effectively control the assets of that trust. Even if I am joint appointor with, say, my brother and we are joint directors of the trustee they could then say that half the trust assets are mine.

Unfortunatley I can't quote names because they were clients but a quick search of family law cases would show enough examples.

 

[peterjohnson64]

Thanks for that information Rick.

Do you know of any good lawyers in Perth who understand these Trusts?

Contact Paul Trainer on (08) 9328 4280

 

[alexlee]

1. There is no stamp duty or CGT payable when you transfer a property over to your kids as a result of your will. Same if you leave it to a testamentary trust. CGT is payable when the kids sell the property just as it is if a trust sells the property. The advantage of a discretionary trust here is that you can stream that capital gain.

My understanding is that if you inherit a property and sell it within 2 years, you get to use the market value of the property as at the time of inheritance as your cost base?

Also, why do you even need to stream when it's a discretionary trust? If the assets are held in the trust, just give the shares in the $2 trustee comapny to your kids, and move the control over to them. There is no sale of the property.

2. I have seen instances where the family court will direct that the assets of a trust are actually assets of a particular person for family law purposes. For example, if I am an appointor of a trust and also the sole director of the trustee company I effectively control the assets of that trust. Even if I am joint appointor with, say, my brother and we are joint directors of the trustee they could then say that half the trust assets are mine.

Why was the family court involved in this, though? If it was a divorce that would be different, but in the simpler case of someone dying and passing ownership of the trustee company to children, why would the family court get involved?
Alex

 

[Rixter]

Thanks for that information Rick.

Do you know of any good lawyers in Perth who understand these Trusts?

DE,

Contact Details & further info can be found here.

Hope this helps.

 

[peterjohnson64]

Hi Alex,

Your understanding of the two year rule relates to the Estate selling the property before it is actually transfered out to the kids.

I was referring to streaming a capital out of the trust gain AFTER selling the property and comenting that it is a better situation in a trust than simply leaving the asset to an individual who can't stream a gain.

Lastly, I was making an abservation about Rixter's comments that by setting up a bloodline trust the kids ex spouses couldn't access the assets of the trust in a divorce. I was merely saying that in many cases they can. And do.

 

[Rixter]

Lastly, I was making an abservation about Rixter's comments that by setting up a bloodline trust the kids ex spouses couldn't access the assets of the trust in a divorce. I was merely saying that in many cases they can. And do.

And in many cases they can't and dont. Everyones case and circumstances are different.

No generalised blanket statements can therefore be made.

Hope this helps

 

[peterjohnson64]

One thing to point out in Brett's example Rixter is that Jenny actually gifted the block of land to her kids whilst she was still alive. This therefore triggered all those capital gains events. If she merely kept it in her name and transfered it over to the kids as part of her will then there would have been no CGT or stamp duty. The example is very well worded but an extremely unlikely scenario.

And as for social security - all dad had to do was to transfer the proeprty straight to the kids and it wouldn't have been her asset anyway.

Of course, how many people do you know that don't hold real estate in joint names? Is any property you hold with your spouse in joint names or as tennants in common? I would also assume that this would have been the case in a real life example here and that the assets wouldn't have formed part of the estate anyway.

The real beneficiaries of any testamentary trust (Brett merely uses his own trade mark of 3 generation) are minor beneficiaries. But again here he advises to put superannuation in to this trust. So minor beneficiaries now pay tax yet if they received it as a superannuation pension it is tax free until they are 25.

People need to be very careful when reading thes articles because they only look at one particlar area. Everyone has their own particular circumstances and they all need to be addressed.

 

[alexlee]

Your understanding of the two year rule relates to the Estate selling the property before it is actually transfered out to the kids.

If that's the case, wouldn't it make much more sense for the estate to sell the property TO the kids (if they want to keep it) for market value, and then just distribute the proceeds back to the kids? The kids get a chunk of cash AND a fully deductible mortgage (if they use it as an IP).
Alex

 

[peterjohnson64]

Yes mate if that was best for the circumstances of the kids. I.e. the house was worth say $400k and the kids between them had say $400k in mortgages then they could boww the $400k to purcahse the house off the estate. The estate could then distribute the $400k to the kids and they could use it to pay off their mortgages. This would then incur stamp duty and potentially CGT unless it was the parents principal residence.

And further, if it was their principal residence then they could also be locking in the higher cost base that you spoke about.

In practice however, the house would normally be sold and the money distributed. When siblings hold investments together they usually end in grief because someone will end up wanting to sell at a time that the other isn't in a position to buy.

 

[Rixter]

The example is very well worded but an extremely unlikely scenario.

Everyone has their own particular circumstances and they all need to be addressed.

Exactly my point - its just one example of infinite possibilities revolving around ones individual circumstances and case. As for it being extremely unlikely, well thats just a matter opinion and not fact.

Some more info here.

And here

Hope this helps.