Do not buy using a trust/company??

W

WebBoard

Guest
From: W W


I was just reading the investors club news section when I came across an article by Kevin Young suggesting people shouldn't buy property using a trust or company. The reason being that when you want to withdraw the extra equity after capital growth it will be taxable-when it is distributed to the individual.

What do people think? How would Steve Navra's cashbond work if you had bought the property in a company name?


Here is an excerpt from http://www.investclub.com.au/new/frames.html:
"Don't trust a trust" - Kevin Young -25/01/02

Probably one of the most common questions I am asked around Australasia is, “Why do you not recommend buying property in a Trust or a Company as my Accountant/Solicitor advises?”

I recommend never buying a rising asset in a Company or a Trust. When you try to tap into this increased appreciation, you do not want to pay tax. If you purchase in your personal names it is simply borrowing and not regarded as income.
However, had you bought this as a rising asset in a Company or Trust, then that entity borrows the money first and then distributes to you second. This distribution means you have to declare it as part of your taxable income!

Therefore, never put rising assets in a Company or a Trust. You will just make your Solicitor and Accountant rich maintaining the records and filing Government returns.

But what about their claim that Trusts or Companies protect you from creditors? You have to weigh this vague possibility up against the certainty of losing between 30% to 50% of your wealth to tax! I would rather take the slight risk of a creditor attack and mitigate this by, in a worse case scenario, taking up suitable insurance. This may be1% or 2% of your wealth verses losing the certainty of 30% to 50% of your wealth to tax.

Another real concern of mine is - political meddling. Once your assets are in a Company or Trust they are at the mercy of Government meddling. Who knows what penalties or taxes will be imposed on Companies and Trusts by future Governments!!
 
Last edited by a moderator:
Reply: 1
From: Paul Zagoridis


Kevin's long-held dislike of trusts is well known.

The more I think about it I think it is right -- for Kevin. It is also the right thing to do if you end up only owning 1 or 2 IP's.

I find the additional flexibility offered by structuring preferrable. Under current and proposed tax regimes there are a few tax benefits.

But you are right, never structure yourself just for tax benefits. But isn't that what Kevin is recommending? Forget the greater flexibility and protection of trusts/companies, pay less tax (allegedly) by owning it all privately.

Have a look at the range of expenses a trust/company can deduct that an individual cannot.

Plus a trust distribution of capital does not have to be treated as taxable income by a beneficiary. Dale will be able to elaborate on that better.

Will it make my accountant and lawyer more money to structure? Yes. But I begin with the end in mind, and I intend to build a significant portfolio that will not have the succession problems like Kevin's.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
Last edited by a moderator:
Reply: 2
From: Michael Yardney


Passive Income
While I am not licensed to give tax or legal advice, all I can say is that almost all of our clients who have grown substantial property portfolios hold their properties in trusts with corporate trustees.
We are continually getting the most up to date legal and accounting advice and we hold all our properties in trusts.
Now when you first start off investing, setting up a company and trust may seem expensive and there are ongoing compliance costs, but if you are going to become truly wealthy through property and you are planning to hold multiple properties in your portfolio, it may be a good idea to start off in the right direction.
Apart from protecting your assets from creditors, discretionary trusts have the benefits of flexibility in distribution of trust income so you may distribute it to the family member with the lowest taxable income or even to a company which pays a lower tax rates than many individuals.
While there are tax benefits to using a trust there are capital gains problems if you intend selling an asset held in a trust (but most of us never sell our properties do we!)
You also mention the government meddling, but over the years they have altered personal tax rates more than they have amended company and trust tax rates.
I’m sure some of the accountants will be able to give a more succinct explanation.

Michael Yardney
Metropole Properties
 
Last edited by a moderator:
Reply: 2.1
From: Steve Navra


Hi

The cashbond remains a separate entity to the property so would in most cases be held in the individuals name - and used in joint security with the trust / company for serviceability purposes.

This alleviates any distribution issues that might arise if the income passed through the trust or the company.

I agree with Michael regarding the use of corporate structure to hold assets.

Note however, as mentioned by Michael that there is a capital gain implication - and I have on occasion sold properties for strategic reasons. (An area goes into decline for some unforeseen reason.)

Lastly, and perhaps Rolf can comment further, but many banks play hardball with incorporated assets.

Regards,

Steve
 
Last edited by a moderator:
Reply: 3
From: GoAnna !


My (basic) understanding of the Investor Club strategy is to continually borrow against the equity in your ips to create a passive income. Borrowing is a core part of the strategy so any impact trusts may have on loans drawn for personal use would have a significant impact upon this strategy.

It is important to look at your structure in relations to your OWN strategy and to take a long term and broad view. Tax is only one element of a plan and tax on borrowings narrower still.

Also I am wondering what is stopping you from borrowing as an individual against a security held by a trust? Dale?


GoAnna !
"Obstacles are those frightful things you see when you take your eyes off your goal."
-Henry Ford
 
Last edited by a moderator:
Reply: 2.1.1
From: Dale Gatherum-Goss


G'day!

As a client of mine often says: "why ask the sparrow how the eagle soars"

Everyone's circumstances are different; as are our needs. However, it remains a fact that most of the serious wealth in the western world is owned through trusts.

Why ask someone like Kevin Young in what structure to own your assets. He is neither informed enough, nor qualified to answer the question properly.

Harumph!!!

Dale
 
Last edited by a moderator:
Reply: 3.1
From: Dale Gatherum-Goss


Hi Goanna!

You wrote: "Also I am wondering what is stopping you from borrowing as an individual against a security held by a trust? Dale?"

Until recently, it was something that was commonly enough done. However, a recent court case (within the last couple of years) found that the nexus between the borrowing and the income were not necessarily there and so the court rejected the idea.

I believe that the courts were right based on the circumstances in front of them, however, that does not kill the idea forever, it just means being clever and using the law to your advantage in a way that will have been left open.

Have fun

Dale
 
Last edited by a moderator:
Reply: 2.1.2
From: Rolf Latham


Hiya Steve

ONLY if you let them ! A company/trust entity asset can be as free as a personally held asset if you insist.

The main killer if you do go down is the famous "all monies clause". Some people around here can tell you how much fun that is.

I like some prefer to manage risk - I have seen the effects of people being taken out due to carnivorous litigation which should never have floated in the first place.

Its like my best mate says "We dont have a justice system" - "we have a legal process" and that scares the hell out of me.

Not being a protection specialist,but having been involved in some Boiler Plate Protection Mechanisms the usage of trusts will at the very least buy you time, especially if you have a diff trust for diff lenders of your portfolio and/or you kill the "all monies clause" in your mortgage contract.

So to close this novel, from a borrowing point of view P/L and trust assets are a little more costly to set up and maintain and some lenders wont touch them, inexperienced brokers generally dont like them (not realising that the trust also hels to protect their stake). P/L and trust assets need not be any more tied up than personal assets.

My non-professional oipnion only - If its financially viable to go company/trust and you have a business and/or anything that may expose you why the hell wouldnt you manage that risk, and get some tax management benefits (hopefully) at the same time.

Ta

Rolf

PS
Like Serious Illnes and Car Accidents, litigation is likely to only affect 1 in x. Its when you have seen enough clients that there are a few of those 1 in xs that you know personally that your thinking changes dramatically.
 
Last edited by a moderator:
Reply: 2.1.2.1
From: Duncan M


Hi Rolf,

Can you expand on two points please?

1. What is the "All Monies" Clause?

2. Is it common for borrowers to modify mortgage contracts and to be
successful in having these modifications accepted by the lender?


Regards,

Duncan.
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 3.1.1
From: Gordon Austin


I must admit that I have raised the question of using the capital appreciation of property for lifestyle purposes in retirement (and perhaps before this) here previously and no one has given an answer to this yet. Hopefully the solicitor I am seeing shortly will provide some answers.

The responses typically focus on living off the rents and claiming some lifestyle items throught the company. The major wealth of property is tied up in capital appreciation, not just the rents. Im our situation we want to use most of the capital appreciation in our property portfolio (realised and unrealised) prior to natural death. If the capital appreciation (especially unrealised through refinancing etc) is taxed then the whole plan just isn't going to work too well.

There are certainly a lot of benefits derived from using trusts and companies and I'm sure all will become clear once I have seen the experts. I'm not sure but I think the super and high gearing themselves can be used as a protective strategy to some degree. Perhaps a combination of strategies may provide an overall solution to our particular circumstances. Obviously there are no perfect solution but risk management (although crucial) is only one part of the equation. Anyhow I thought I would raise this issue again hoping for some more views and opinions which I can query the solicitor about.

Gordon
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 3.1.1.1
From: The Wife


I am the original mix blender that says, each to their own!


But geeze, I have a real personal issue with high leverage without a debtless back up system.

Did that make sense?

I will leverage high in some areas, but I am balanced by paid out debt on other houses.

I like to pay out debt. Its mine , I want it, I want it now.
I do some incredibly difficult strategies and deals to pay out debt on particular property, compared to if I just sit and let it appreciate as I am told it will all come to the same thing in the end.
However I dont want to wait till the end to feel the goodness, I want whats mine and I want it now, and this is what I am prepared to do for it.

Different strokes for different folks.

Balance grasshopper I keep telling myself.

Do I use trusts? oh yeah!, its my way of saying "GET AWAY FROM MY STUFF!"

TW
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 3.1.1.2
From: Dirk Diggler


Good post guys. Kevin Youngs advice is ok for Investor club clients who will only buy 1 or 2 properties because they cannot buy more as they have payed to much for the property anyway.
 
Last edited by a moderator:
Reply: 2.1.2.1.1
From: Rolf Latham


Hi Dunc

It is a clause that effectively gives the lender access to all money and or property that they hold for you.

So effectively you could be cross collateralised without actually being so.

Most lenders will NOT let you strike this clause but it is negotiable for all but start up companies. I regard it as mandatory to have it removed for eg if you are doing a wraps.

We have been succesful in modyfing contracts where the risk of the lender has not been materially altered, like where they are mortgage insured. Most recently where we have done 4 wrap deals with the one lender for some QLD properties, you can actually be in breach of the property sales act blah blah blah if you wrap with an all monies clause tying the properties together.

Ta

Rolf
 
Last edited by a moderator:
Reply: 3.1.1.1.1
From: Always Learning


On 4/4/02 9:00:00 AM, The Wife wrote:
>I am the original mix blender
>that says, each to their own!
>
>
>But geeze, I have a real
>personal issue with high
>leverage without a debtless
>back up system.
<p>
"But geeze", ...a "debtless backup system", is that a $100 note printing machine stored in your garage? Can you point me in the direction of how I would fabricate such a financial structure?
<p>
>
>Did that make sense?
<p>
A debtless backup system...(sarcastically)So stupid of me, why didn't I think of that?
Naturally it makes sense, but HOW?

<p>
>
>I will leverage high in some
>areas, but I am balanced by
>paid out debt on other houses.
>
>I like to pay out debt. Its
>mine , I want it, I want it
>now.
<p>
I've got some debt's I would like to pay
<p>
>I do some incredibly difficult
>strategies and deals to pay
>out debt on particular
>property, compared to if I
<p>

Dear The_Wife

You have my absolute and undivided attention, compared the the alternative: paying down debt from the efforts of 20 years of "earned income", I would jump thru flaming hoops blindfolded, wearing a G-string (not a pretty sight) to understand the details of that statement!....Throw me a bone here?

<p>
>just sit and let it appreciate
>as I am told it will all come
>to the same thing in the end.
>However I dont want to wait
>till the end to feel the
>goodness, I want whats mine
>and I want it now, and this is
>what I am prepared to do for
>it.
<p>

"feel the goodness", my goodness I have a lot to learn!

<p>
>
>Different strokes for
>different folks.
>
>Balance grasshopper I keep
>telling myself.
>
>Do I use trusts? oh yeah!, its
>my way of saying "GET AWAY
>FROM MY STUFF!"
>
>TW
 
Last edited by a moderator:
Reply: 3.1.1.1.1.1
From: Robert Forward


Hi AL

Part of the strategy to lower you debt ratio is to "trade properties".

Lets give an example. I buy at $80k (for simplicity this includes purchasing costs). And this is purchased through a company or trust structure.

3 months, 6 months, 12 months down the track or what ever time frame you sell the property for $160k, and yes this happens... after selling costs you have $75k profit. Of this $75k you put 50% of it onto another properties mortgage, preferably a Blue Chip property, to lower the debt ratio on it. Thus making your Blue Chip properties debt positively geared.

The other 50% is then used in purchasing more trading properties, so this amount can then buy you another 2 properties to trade. It's simple really.

Yes you will have to pay tax on the profits, but only after all of your expenses and if it's through a company then it's at company tax rates. But talk with your accountant about all that.

Cheers
Robert

Property Inspection Reports @
http://www.creativefinance.com.au


The Sydney "Freestylers" Group Leader.
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1.1
From: Brett Burt


Kevin Young has a private company , you see it on the cheques i.e Lisson
Pty Ltd ATF Young Family Trust. He uses a trust himself. Go figure.
----- Original Message -----
From: "propertyforum Listmanager" <listmanager@bne003w.webcentral.com.au>
To: <Recipients of 'propertyforum' suppressed>
Sent: Wednesday, April 03, 2002 10:53 PM
Subject: Do not buy using a trust/company??


> From: "Paul Zagoridis" <paulz@bigpond.net.au>
>
> Kevin's long-held dislike of trusts is well known.
>
> The more I think about it I think it is right -- for Kevin. It is also the
right thing to do if you end up only owning 1 or 2 IP's.
>
> I find the additional flexibility offered by structuring preferrable.
Under current and proposed tax regimes there are a few tax benefits.
>
> But you are right, never structure yourself just for tax benefits. But
isn't that what Kevin is recommending? Forget the greater flexibility and
protection of trusts/companies, pay less tax (allegedly) by owning it all
privately.
>
> Have a look at the range of expenses a trust/company can deduct that an
individual cannot.
>
> Plus a trust distribution of capital does not have to be treated as
taxable income by a beneficiary. Dale will be able to elaborate on that
better.
>
> Will it make my accountant and lawyer more money to structure? Yes. But I
begin with the end in mind, and I intend to build a significant portfolio
that will not have the succession problems like Kevin's.
>
> Paul Zag
> Dreamspinner
> The Oz Film Biz site is archived at...
> http://wealthesteem.dyndns.org/
>
>
>
> To reply: mailto:propertyforum.29974@bne003w.webcentral.com.au
> To start a new topic: mailto:propertyforum@bne003w.webcentral.com.au
> To login: http://bne003w.webcentral.com.au:80/~wb013
>
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 3.1.1.1.1.2
From: The Wife


On 4/4/02 9:00:00 AM, The Wife wrote: >I am the original mix blender >that says, each to their own! > > >But geeze, I have a real >personal issue with high >leverage without a debtless >back up system.


"But geeze", ...a "debtless backup system", is that a $100 note printing machine stored in your garage? Can you point me in the direction of how I would fabricate such a financial structure?


***Heaps of people have discussed things like positive cashflow negating negative cashflow and stuff like that, aren’t you listening AL? maybe you are running about trying to replicate others structures, and not seeing what best works for you?, I see most people who find a success structure have taken a wee piece of everyone else’s and a lot of their own ideas, and made a structure that works for them.***


> >Did that make sense?


A debtless backup system...(sarcastically)So stupid of me, why didn't I think of that?
Naturally it makes sense, but HOW?


*** Perhaps your so colored by sarcasm you cant see the light :eek:) ***



> >I will leverage high in some >areas, but I am balanced by >paid out debt on other houses. > >I like to pay out debt. Its >mine , I want it, I want it >now.
I've got some debt's I would like to pay


** so pay them, what’s stopping you?***



>I do some incredibly difficult >strategies and deals to pay >out debt on particular >property, compared to if I


Dear The_Wife

You have my absolute and undivided attention, compared the the alternative: paying down debt from the efforts of 20 years of "earned income", I would jump thru flaming hoops blindfolded, wearing a G-string (not a pretty sight) to understand the details of that statement!....Throw me a bone here?


*** I went backwards to go forwards, I gave up full time employment to be a full time property investor, I also had a husband who continued to work and produce income, today we both don’t have to work, but the key words are, I went backwards to go forwards, are you prepared to do that, are you prepared to go without, or are you only prepared to make a goose of yourself? Most people say “I cant go backwards, I have to much debt.” Of course going backwards meant the types of property I had to buy were different because we had less income, how did I get around this? That’s a whole other story, see Robs reply***


>just sit and let it appreciate >as I am told it will all come >to the same thing in the end. >However I dont want to wait >till the end to feel the >goodness, I want whats mine >and I want it now, and this is >what I am prepared to do for >it.


"feel the goodness", my goodness I have a lot to learn!


*** Do you AL? me to, I am learning everyday, but I know what I want and have pretty good focus, I am able to zoom in on my desired focus, this I find is a problem with a lot of people. I have been told by some it’s not healthy to be so “obsessed”, and I do agree I have more obsession than focus, but obsession makes me happy, I desire to be happy a lot, goodness does this make me selfish to? Oh well. ***


> >Different strokes for >different folks. > >Balance grasshopper I keep >telling myself. > >Do I use trusts? oh yeah!, its >my way of saying "GET AWAY >FROM MY STUFF!" > >TW


Cheers, TW


~Do what you wanna do , be what you wanna be, the only person stopping you is you~
 
Last edited by a moderator:
Reply: 3.1.1.1.1.2.1
From: Always Learning


Dear Everyone

<p>

My plan is actually a "mixed bag" plan, purchase a pot of negatives with high CG potentials and positives with (lower) CG potential. (a common plan, my original plan, is actually very common, I can see it discussed in many posts).

<p>

How can do it? well I have 2 main options.

<p>

Option 1.
<p>
I live in Tokyo Japan, positive geared properties are easy to find in fact almost all properties are positive geared, you would have to really try hard to find negative geared property. Thus if I have finance at 2% and a gross return of 12~15% (its very possible) from this I think I could extract a net 5~7% cash flow. Now I could pair such a purchase with something negative in Aust such as "Steve Navra" style medium price + 30% IP in Sydney's North. Simple plan



The Problem The problem is finance. In Australia, no problems, fill in lots of forms, Rolf in 3 days got me a great deal with a LOC. In Japan, finance is much more difficult, I am having real trouble with any type of IP finance. Whenever anyone complains about Aussie banks, ignore them, IMO Aussie banks are top of the heap (whilst still remaining typical "bankers"). Japanese banks however, are the worst of the worst, I might as well ask the bank manager for approval to bite his neck and suck out all his blood, as be approved for an IP loan! Currently one idea is to trick'em and say I want a PPOR loan and then just rent it out to a "foreign" family, nobody would notice, but this "trick" has illegal and tax implications.
<p>
Another way out is to purchase outright something small (1BedRoom * 4 apartment) (AUD$300K) in Japan using my Aussie LOC, effectively I am paying 6% interest (aussie interest)but it will still be positive. Maybe once I have one property, I could then get a cross-collateralized loan in Japan for more IP. However this wipes out much of my equity to purchase back in Australia. As Jim Rohn says, "It doesn't matter where you start, so long as they let you on the ladder"
Maybe this for me is "going backwards" to move forwards?
<p>
Option 2
<p>
Same as Option 1, except purchase some positive geared in Hobart or somewhere like that.

<p>

I like Option 1. the best, but Option 2 looks the most likely. However I am just "warming" up now, making plans, organizing. Just because I got 3 "No's" doesn't mean I have covered all finance options in Japan. It is the worst time in Japanese history (since WWII) for property, if you have the cash...then make a trip! Its a different world, but if it puts cash in your pocket...
<p>
 
Last edited by a moderator:
Top