First Investment - Hybrid Trust or personal

[paulz]

I'm looking to purchase my first Investment Property and dealing with the options on how to buy it..

Looking for some opinions of

* Hybrid Trusts - pros/cons.. and who has one operational.

* Ownership in my own name

I know I can use a SMSF, but i dont have enough funds in the super to do this as yet...so this will need to wait.

Thanks

 

[Peter_Tersteeg]

I've gotta ask, why do you want to buy in a trust (and specifically a HDT)?

Pros:
* Some tax flexibility. My opinion is that a HDT sacrifices some of this flexibility in order to allow negative gearing.
* Asset protection. Trusts separate you from the asset. If you're likely to be sued, this is a good way to go.
* HDT allows for negative gearing through a trust (most of the other structures own't allow this).

Cons:
* Cost to maintain.
* Fewer financing options (especially with a HDT).

In my experience, most people over-estimate the pros and under-estimate the cons, especially for their first property.

 

[Shahin_Afarin]

Hybrid Trusts are extremely difficult to finance. NAB is the best lender when it comes to policy and LVR for HT's. They lend a maximum of 95% including LMI (i.e. LMI capped to that amount) but turnaround times for these applications are a bit slow. Mainly because they are not common and you need an experienced credit assessor.

 

[Shahin_Afarin]

Why a Hybrid Trust and not another type of Trust?

 

[Aaron_C]

Why a Hybrid Trust and not another type of Trust?

Because he wants his cake and to eat it too.

 

[coastymike]

Why not a unit trust ?

1. can transfer units to an smsf at a later stage (can't do so with a HDT or in your personal name)
2. ability to use the refinancing principle to turn ordinarily non deductible debt to deductible debt (can with a HDT can't in personal)
3. can transfer to another party with minimal stamp duty impacts - can't in personal name.

HDT's have had their day in my opinion. Unit trusts will provide more flexibility and land tax savings.

 

[Terry_w]

Why not a unit trust ?

1. can transfer units to an smsf at a later stage (can't do so with a HDT or in your personal name)
2. ability to use the refinancing principle to turn ordinarily non deductible debt to deductible debt (can with a HDT can't in personal)
3. can transfer to another party with minimal stamp duty impacts - can't in personal name.

HDT's have had their day in my opinion. Unit trusts will provide more flexibility and land tax savings.

I was going to say the same thing.

And
4. Can get the land tax free threshold..

 

[Rolf Latham]

Hybrid Trusts are extremely difficult to finance. .

We like difficult, that way there is less direct lender and broker competition

Its correct that many lenders have excluded them as a policy, interesting though for those that dont have specific exclusions they are still doable. ( specific no nos are ANZ, CBA and ING)

Recent transactions

WBC, Suncorp, Heritage Bank, ABL direct ( old pre Smart Suite product), STG, AMP, NAB ( not homeside), and a smattering of second tiers.

Often one needs to persist, since even NAB can sometimes come back and say "we dont lend to unit trust" well, then you have to go back to trusts 101 to educate the the units in a HDT arent a "transferable asset" in the way a normal unit its in a UT.

Finally, a little depends what day of the week it is, and if you are going retail or broker ( since you can get mixed resulst with both channels with similar underlying policy)

ta

rolf

ta
rolf

 

[Peter_Tersteeg]

HDT's have had their day in my opinion. Unit trusts will provide more flexibility and land tax savings.

I couldn't agree more. Most clients who set up hybrid trusts are now wishing they didn't.

5 years ago we'd write 2-4 hybrid trust loans a month. Now it's half a dozen or so per year and it's almost never new trusts. If you feel it's necessary to use a trust, go with a discressionary or unit trust and get good advice on why that particular choice from a tax lawyer.

 

[RPI]

I agree with Coasty and Terry. I am a fan of discretionary trusts or unit trusts, depending on the circumstance. Personal name can be an issue if there is an income imbalance between the owners at the time of sale (assuming there has been good capital appreciation) and the savings can often outweigh the extra costs of maintaining a trust.

Also, I have put a client through liquidation and bankruptcy recently and he is oh so glad of the discretionary trust structures that was used to buy some resi property and another business. This was done years before there was even a consideration that a future liquidation or bankruptcy was on the cards.

 

[coastymike]

Exactly RPI.

Sometimes these structures are like insurance policies. You pay money out every year to maintain them and hope you don't need the full on benefits of them. But when you do you think "thank christ"

 

[RPI]

On an associated topic of saving money on the way in that can cost you a fortune on the way out, this is a part of an article on a recent case where a buyer saved $3000 by doing a simple version of planning search rather than a full one, and got lumped with the $400k in unpaid infrastructure charges

Montrose Creek Pty Ltd and Manningtree (M&M) purchased a mixed use property from a developer. They opted to save $3000 during the due diligence and purchase phase by obtaining a standard planning and development certificate from Brisbane City Council, rather than a full planning and development certificate.

Sometime after settlement, Council discovered that an amount of over $400,000 in infrastructure contributions remained outstanding for the site. A Show Cause Notice was issued, followed by an Enforcement Notice, on the basis that the failure to pay the outstanding infrastructure contributions was a breach of an approval condition and therefore a development offence.

An obligation to pay the infrastructure charges attaches to the land and binds the owner and any successors in title. M&M’s failure to pay the infrastructure charges was a continuing development offence.
The Planning and Environment Court considered that M&M could have discovered that contributions were outstanding by obtaining a full development certificate instead of a cheaper standard planning and development certificate.
The Court found for Council and ordered M&M pay the outstanding charges and be restrained from using the premises.
We often find that for each $1000 saved by someone by not seeking proper advice during the setup and establishment of a project ends up costing them $10,000 when things go wrong. In M&M’s case it was over $166,000 cost for each $1000.

That is no minor error

 

[coastymike]

Seen it many times before RPI and i'm sure you have as well. People who think they can save a few dollars by doing it themselves or doing a bit of research online and ordering a form online or setting something up themselves. They then tell all their friends how smart they are and how much they saved by not using a professional until the glorious day they are sued, audited, divorced, etc and they find out that the whole thing was done poorly. The savings end up costing an absolute fortune. Unfortunately many people these days think they know best. I'm sure the day will come when people will try their own plastic surgery at home just to save a few bucks and then come out looking like camilla parker bowles.

 

[Terry_w]

I've just seen someone set up their hybrid trust incorrectly. Its going to cost them 5 - 10 times to fix up compared to what it cost to set the trust up initially.

 

[Aaron_C]

I agree DYI trust deed is a stupid thing to do as there is no recourse if it is wrong.

 

[Rolf Latham]

I've just seen someone set up their hybrid trust incorrectly. Its going to cost them 5 - 10 times to fix up compared to what it cost to set the trust up initially.

dont get me started.

At least in legal structuring, asset protection and taxation advice there is some level of "nebulousness" that stops most people from self medicating.

Alas, in finance structuring that Nebula is about as wide as a matchstick, and many folks reckon they can sort it themselves with the aid of their banker.

Many can for sure, but most successful investors and business people dont use ATO employees to guide them in their tax and structure advice.

ta

rolf

 

[tom1000000]

I've just seen someone set up their hybrid trust incorrectly. Its going to cost them 5 - 10 times to fix up compared to what it cost to set the trust up initially.

Terry, would you be generous enough to provide details of the mistake that was made?
Was it the old "The lawyer added the settlement sum to his fees so the settlement wasn't a true donation and invalidated the trust"?

 

[coastymike]

One of many potential errors

1. Individual orders online and makes themselves the settlor not realising that the settlor cannot benefit from the trust.
2. Individual orders online and has an individual as trustee and the same individual holding units creating a merged trust.
3. Individual organises loans themselves and gets the loan documents in the name of the corporate trustee not in the name of the individual negating any negative benefits.
4. individual has a brother who also holds units as a passive investor and no consideration has been given in the deed as to how decisions are to be made. is it by the trustee, voting rights, percentage entitlement.

Could go on and on.

 

[Terry_w]

Terry, would you be generous enough to provide details of the mistake that was made?
Was it the old "The lawyer added the settlement sum to his fees so the settlement wasn't a true donation and invalidated the trust"?

In this particular instance it was No. 3 on Coasty's list.
Person set up hybrid trust using online deed. Didn't realise the loan had to be in his own name to claim the interest himself. 6 months down the track he does his tax return and finds out mistake.

Initially he thinks he can just refinance the loan into his own name. But this wouldn't work because to claim the interest you would need to borrow to buy the income producing units. There are stamp duty and CGT consequences too. If the loan was just changed the ATO would be able to deny the interest deductions altogether.

Also seen one trust set up by a well known law firm. The person behind the trust had his own son as trustee. That meant the son could never benefit from the trust as a beneficiary without triggering adverse tax consequences.

And another guy had his 80 year old mum as trustee. All fine until he wanted the trust to get some more loans.

Another guy had never had his trust deeds stamped at all. He managed to get various finance in place by using the stamp page of one trust and building new trusts around this (also infringing copyright by copying the one deed he did purchase online).

Also at a legal seminar heard a story about some of the bigger end trusts, one having over $1billion in assets, being set up incorrectly, and this one was technically invalid.

 

[mattnz]

Unfortunately they make all of these things ridiculously complex and technical, creating whole industries that shouldn't be required.