Family Trust query

[JD86]

Hi guys

I have recently read a little about family trusts. how they are used as asset protection and how you can borrow more because you are guarantor for the loans for the trust so you can borrow more

this sounds great, and is an avenue id like to pursue

however, i am building a house and the mortgage is in my name, eventually this house will be an IP but for a year or so will be my PPOR

so i wont be able to guarantor much because of my high personal debt

can i transfer my PPOR into a trusts name?

also, how do i go about setting up a family trust? speak to my accountant i imagine? anyone know what costs are involved?

i have just recently read about trusts so if any aspects iv said are wrong please correct me

thanks

 

[Perp]

Hi guys

I have recently read a little about family trusts. how they are used as asset protection and how you can borrow more because you are guarantor for the loans for the trust so you can borrow more

I know Steve McKnight has, in the past, pushed the "you don't have to declare Trust loans as a personal debt" barrow, but general consensus now seems to be that this would usually be viewed as mortgage fraud. There are some lenders who are willing to look at your investment finances and private finances entirely separately, even when there are guarantees in place across boundaries, but it's usually dependent on each entity being "self-sufficient", ie if your investments are negatively geared, it's going to impact on your personal servicability.

can i transfer my PPOR into a trusts name?

also, how do i go about setting up a family trust?

Yes, you can transfer PPOR into a Trust, but it'd normally incur stamp duty again, and thus is not usually worthwhile, unless you're in a particularly litigious situation, or anticipate such strong future positive cashflow that the tax benefits of the transfer outweigh the costs.

Yes, an accountant sets up a discretionary (or family) Trust. You need to decide whether an individual trustee is sufficient, or whether you need a corporate trustee. Set-up costs perhaps $1-2K. Ongoing costs $500-$1K per year.

 

[JD86]

thanks ozperp, it was in Steve McKnights new book from 0 to 130 properties in 3.5 year the revised edition, that i read this information

i intend to purchase positively geared properties

i want to get this stuff sorted out as i am young (23) building my first house, and plan on buying IP's in the near future

are you saying that trusts are good for asset protection, however not so good for getting more loans and going guarantor as that is mortgage fraud?

thanks again

 

[Perp]

are you saying that trusts are good for asset protection, however not so good for getting more loans and going guarantor as that is mortgage fraud?

I'm saying that Steve McKnight's position that "if they don't ask, you don't tell", and failing to disclose that you're guarantor of a Trust, would usually be viewed as mortgage fraud.

His idea seems to be that you buy in Trust 2, using your personal servicability and going guarantor, without telling the lender that you're already a guarantor for Trust 1. Then when applying for a loan for Trust 3, don't mention Trusts 1 and 2, etc. This is almost certainly mortgage fraud. It's all about whether you've been honest and open with the lender or not. My impression is that Steve's view of the requirement of disclosure is not consistent with accepted practise, and would be viewed as fraud.

There are some lenders, however, who are willing to "ignore" other Trusts, even if you're guarantor, provided they're self-sufficient, and this will substantially extend your serviceability. That's OK, because it's the lender's policy to view each Trust separately (provided they're self-sufficient), and you've told them everything that the lender wants to know about. But most lenders don't have this policy, and withholding the information about the guarantees in this case would be fraudulent.

Perhaps one of the brokers can chime in and explain this more clearly.

 

[JD86]

thanks a lot ozperp, my knowledge is very minimal, and just trying to get the details correct, i dont want to be commiting fraud haha

 

[Perp]

thanks a lot ozperp, my knowledge is very minimal, and just trying to get the details correct, i dont want to be commiting fraud haha

I know you don't; I'm not assuming any bad faith. Way back, after reading McKnight's book, I posed a similar question. I had no intention to defraud, either, but was excited by the possibilities raised by Steve's ideas. As is often the case, "if it sounds too good to be true..."

 

[regrow]

There are some lenders, however, who are willing to "ignore" other Trusts, even if you're guarantor.

Perhaps one of the brokers can chime in and explain this more clearly.

WBC is one of these lenders.

Regrow

 

[Casserole Dish]

ozperp, when you say they banks might ignore the other Trusts do you mean the other properties/mortgages you have? Sorry I'm lost with the family trust thing.

My sister-in-law (who went to the Steve Mc seminar) told me what I should be doing is setting up a family trust and have husband as Director (so it works like a company) and buy properties in the trust. The questions I would need answered though are, how much to set up and run? Wouldn't you need some equity to start with (just like a normal mortgage)? So what are the real benefits? If it was so easy etc why isn't everyone doing it? Are they?

Questions, questions!

 

[Ausprop]

just bear in mind that trust assets/debts etc are nothing to do with you personally, similar to a company - the company is separate to you. Too many people (and indded I had to lecture macquarie bank the other day) just amble along treating all and sundry as their own personal assets.

what a bank may or may not be interested in is what debts have you personally garaunteed?

 

[Ausprop]

My sister-in-law (who went to the Steve Mc seminar) told me what I should be doing is setting up a family trust and have husband as Director (so it works like a company) and buy properties in the trust. The questions I would need answered though are, how much to set up and run? Wouldn't you need some equity to start with (just like a normal mortgage)? So what are the real benefits? If it was so easy etc why isn't everyone doing it? Are they?

it's hard to get a loan for a trust with a corporate trustee, so a sort of compromise is a personal trustee.

benefits are asset protection and tax planning.

it's easy and everyone is doing it.

 

[Casserole Dish]

Ok so my husband would be the personal trustee yes? And this would make it easier to organise our wills I gather?

I'm stumped that if everyone is doing it, why hasn't our accountant mentioned it before? So do I see an accountant (a new one ) or our solicitor to set it up?

 

[JD86]

ozperp mentioned rough costs in his first respose 'Set-up costs perhaps $1-2K. Ongoing costs $500-$1K per year'

i will be setting up a trust fund and buying future IPs in one, however I guess the house im building, which will eventually be an IP, will always be stuck in my name unless I pay stamp duty to transfer it to a trust

or does anyone know another way?

and just to confirm, having trusts and not declaring to banks is definately mortgage fraud? will they allow bigger loans to a trust than single person knowing that the trust is quarantor to other loans or both are even if the bank knows

 

[Casserole Dish]

Yeh, sorry for butting in on your thread, JD86.

I've spent some time reading up on the whole trust thing and can now see why our accountant never mentioned it. I don't think it's going to work for us at this stage or the near future.

I'll still read this thread with interest though, so hopefully someone will answer you about the disclosure to the bank query.

 

[Pat]

HI, Trusts are the preferred structure for growing businesses and those with growing property portfolios but the reason that you would use a corporate trustee over an individual trustee is for asset protection. Trusts have innumerable tax advantages both for Capital Gains Tax and for Income Tax

As OzPerp has said moving properties from one name to any other name incurs stamp duty in most states, except the transfer of a property between spouses names where stamp duty is exempt in most states.

Hope this helps

 

[skater]

If considering a Trust, then do a LOT of homework first. There are benefits of having a Trust, but there are also drawbacks. You need to have your eyes open before entering into a Trust blindly. You will incur additional fees if holding property in a Trust, so it may/may not be what you are looking for.

For instance, in NSW, Land Tax is payable for all properties held in a Discretionary Trust, whereas you have a threshold or over $350k for property held in your own name. You will also have additional accounting fees and beware putting something that is negatively geared into the Trust as you will be paying expenses in after tax $$ until the Trust has enough earnings to pay you back.

WBC do look at personal finances separately to Trust finances, and they don't have to self-sufficient either. This was news to me, but was confirmed by my Broker for the latest finance request.

 

[BrownDog]

beware putting something that is negatively geared into the Trust as you will be paying expenses in after tax $$ until the Trust has enough earnings to pay you back.

Not to side track things too much - but on this note, does anyone know if there is a time period for which a trust can continue to run at a loss?

As I see it, the trust can't distribute a loss, but is it ok for a trust to run at a loss for say 10 years? and at the end of that 10 years are there tax advantages for the 10 years it ran at a loss? If your don't get any negative gearing benefit for the 1st 10 years, you'd hope that once the trust starts to run at a profit, there would be some tax advantage for the 10 years of pain.

 

[Pat]

Yes Brown Dog, you can start claiming those ten years of losses once the trust makes a profit

 

[BrownDog]

Yes Brown Dog, you can start claiming those ten years of losses once the trust makes a profit

Thanks Pat.

 

[Terryw]

When a trust borrows it is the trustee that is the borrower and the person or people behind the trust the guarantors.

Later on when you go for a new loan in a new trust or as an individual the bank will ask for a list of assets and liabilities. The trust assets are not your assets so they shouldn't be listed, but the liabilities area is a bit of a grey area. Technically they are not the individuals liability, but because you have guaranteed the loan they could be.

Some banks actually ask if you have guaranteed any other loans. Others don't ask so I guess you are not deceiving them if you do not declare. However they are likely to see any recent loans you have applied for as a guarantor on your credit file - for up to 5 years. They are then likely to ask for an explanation.