Help understand trusts before I seek advice

O

onion33

I like to get a basic understanding of things before I speak with the financial advisor (that way I understand the terms, lingo etc). I have done some basic reading on trusts. Hoping you can help me

Situation:
- We would like to build a decent portfolio. We already have IP1 negatively geared and in our names. Looking to buy IP2 soon, also negatively geared.
- My husband works for the family business. He is currently an employee but will eventually take over the company (prob within 5-10 years).
- When I last spoke to my financial advisor, he said trusts would be too expensive for what we're currently doing (could be right or wrong).

Questions:
- Would we benefit from setting up a trust structure now?
- If so, what type?
- Does the fact that my husband will own a company, factor into this discussion or is it totally irrelevant?

Thank you very much in advance.
 
onion33 said:
I like to get a basic understanding of things before I speak with the financial advisor (that way I understand the terms, lingo etc). I have done some basic reading on trusts. Hoping you can help me

Situation:
- We would like to build a decent portfolio. We already have IP1 negatively geared and in our names. Looking to buy IP2 soon, also negatively geared.
- My husband works for the family business. He is currently an employee but will eventually take over the company (prob within 5-10 years).
- When I last spoke to my financial advisor, he said trusts would be too expensive for what we're currently doing (could be right or wrong).

Questions:
- Would we benefit from setting up a trust structure now?
- If so, what type?
- Does the fact that my husband will own a company, factor into this discussion or is it totally irrelevant?

Thank you very much in advance.
Click to expand...

Firstly, a financial advisor wouldn't be able to assist. Only lawyers can give advice on trusts and tax agents on the tax aspects. Financial advisers are not qualified or licensed to advise.

A trust is a relationship between A and B, not a structure.

1. maybe. This is impossible to answer - actually yes you would benefit, but how and at what expense should be the real questions
2. depends
3. Yes. But Does he own a company? or is he director? Above you imply he doesn't own.

This could be relevant in terms of asset protection, estate planning and tax.
 
Like you, I am still trying to get my head around trusts but from what you have posted, you have time to delve into it and get more understanding before jumping in. Before doing that, speak to lawyer/accountant for a broader picture. Your financial advisor is probably right today but he is looking at your current position and if your goal is to purchase several IP's deciding on a structure to adopt for future planning would be a sound idea! Particularly if your hubby is going to own a company.

You currently have a neg gear Ip right now, so probably do not need to be overly concerned with asset protection. You are looking at IP 2 also being neg geared so same situation. You likely do not need asset protection just yet but you do need to consider it when equity builds up and more importantly, when your hubby takes over the company as he is likely to be a higher risk due to personal guarantees/liability etc. Anything in his name/joint names could be taken into account. Also, purchasing as tenants in common vs joint tenancy can make a difference, I believe joint tenancy is better but still learning on this!

Trusts are good for asset protection and distribution from a tax point of view. The type of trust and also wills (bloodline etc) to back them up and meet your needs should probably be looked into now and legal advice before you 'jump' will help you navigate the endless scenarios that you need to account for both now and down the track.

While debt in itself works well for asset protection and drawing on possible equity for the next investment is effective short term, if the ultimate goal is probably to pay down debt to realise the 'nest egg' for retirement years. Knowing now, how to structure this (is buying IP 2 in a trust viable now - bearing in mind your reduced options with neg gearing/losses) there are I believe other possible ways around this. Buying in your name (if you are not or likely to be high risk) lending/gifting equity from assets outside the trust to keep them in debt to a trust structure for other IP investments etc. But it is a 'minefield' in my opinion, as you have to take into account the lending structure, x coll. Keeping personal expenses away from it etc. You can sell IP's outside trust to boost future IP's within trust further down the track to fully utilise a trusts advantages, if you choose a trust structure.

Everyone has a different situation so getting advice now/soon on your future plans would be good. Clear as mud eh!
 
D.T. said:
What draws you to it or makes you want to consider it?
Click to expand...

- To have the correct structure early on.
- Everyone I know who is big in property investment has a form of trust.
- I've read about discretionary trusts. The biggest drawback being that losses are locked away until there are profits to offset them. The biggest positive being you can distribute profits to your children, therefore saving tax.
 
Terry_w said:
Firstly, a financial advisor wouldn't be able to assist. Only lawyers can give advice on trusts and tax agents on the tax aspects. Financial advisers are not qualified or licensed to advise.
Click to expand...
My financial guy would put me in touch with the appropriate lawyers.

Terry_w said:
3. Yes. But Does he own a company? or is he director? Above you imply he doesn't own.
Click to expand...

He would become the director of the company.
 
onion33 said:
- The biggest positive being you can distribute profits to your children, therefore saving tax.
Click to expand...

I can't recall where i got it from, but I think it's illegal (?) or something to set up a trust where the primary purpose is for tax minimisation. Could be wrong though (won't be first time!)

The Y-man
 
The Y-man said:
Other drawbacks:
- getting financing
- land tax much higher

The Y-man
Click to expand...

Financings is generally no harder, in fact it can be easier.

Land tax will depend on the state and the overall picture.

Person A with no investment property would get a $412,000 threshold in NSW but a trust wouldn't. So a trust will cost more in this instance if it owns property in NSW v the person owning.

But

Person B may have a few properties already and has used up the threshold so a trust will pay land tax but B would also pay the same in land tax anyway, so no land tax disadvantage.

And in QLD a trust can actually save land tax but getting its own separate threshold.
 
onion33 said:
- To have the correct structure early on.
- Everyone I know who is big in property investment has a form of trust.
- I've read about discretionary trusts. The biggest drawback being that losses are locked away until there are profits to offset them. The biggest positive being you can distribute profits to your children, therefore saving tax.
Click to expand...

Not much of a drawback if you are self employed as income can be diverted tot he trust to offset the loss.
 
And there are circumstances where a property investor may be PROHIBITED from buying property but it can buy it if a trust is used.

A basic example can be a SMSF....It cannot buy residential property (or any part of it) from a member, a relative of a member or any associates...You have no idea how many people who own an IP later ask if their cashed up SMSF can buy the property. At market value, tenanted etc...Doesn't matter. Its is not restricted it is prohibited.

If they had used a trust to acquire it in the first place perhaps the SMSF could buy some, or all of it. Maybe even without duty And contrary to most opinions a SMSF can buy some of an IP and the co-owners can be negative geared.
 
Marty McDonald said:
How is it easier to finance with a trust Terry? You must be using different lenders to me lol
Click to expand...

Generally it is the same process as an individual applying, but having the trust allows for flexibility by changing the person who guarantees the loan.

e.g. Dad is director of trustee company. Trust buys a property. Heaps of equity builds up.

Dad suffers a credit default, and the trust cannot get finance. Replace dad with another family member and that person guarantees loan.

or

Serviceability is shot. Add uncle Arthur as director and use his income to service.
 
So. I spoke to advisor. Even though the company structure would most likely protect, the dircetor can still be sued. Therefore, next loan will be in my name with husband as guarantor.
 
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