How do discretionary trusts repay the loan

[eggnog]

I was just thinking about this today. How does a discretionary trust repay its loan back?

Say you have a DT with a corporate trustee. The Corp trustee gets a loan to purchase through the DT. The DT uses the loan to buy a property. This means the loan is with the Corp Trustee but the title is with the DT. Is my understanding so far correct?

Now if the DT wants to reduce its loan can it use some of it's incoming rent income to repay the loan?
Does this mean the Corp trustee needs to be a beneficiary? What happens if they are not a beneficiary?
Does the DT have to pay top marginal tax rate first then the left overs used to reduce the loan?
Is there another way for the DT to reduce the loan?

Or maybe I don't understand things correctly in which case I would greatly appreciate being set straight

 

[D.T.]

Whoa. So many misconceptions in your question.

Learn more about the role of the trustee and beneficiaries and your question will have a much more simple answer.

 

[coastymike]

feel free to download a book Terry and I put together discussing the role of the trustee and the other "players". Might make things clearer.

Can be downloaded from www.propertytaxsolutions.com.au

 

[eggnog]

hehehehe, thanks for setting me straight

 

[Paul@PFI]

The Trustee (Co) merely manages the Trust. The Trustee borrows but the loan is really a trust liability. The Trustees name appears of all documents etc but reality is just think of The Trust. Trusts aren't a legal entity so they can enter into contracts etc. They must have the Trustee do this on behalf of the Trust.

The reality is the Title will be in the name of XYZ Pty Ltd as only a real person can own title. ie Trusts and SMSFs cant technically own anything. Same with loan. Normally the bank will seek a guarantee also from the Directors AND take a charge over the property.

The trust receives rent. Pays expenses. pays the loan. In time the loan is repaid. The trust then has a debt free property. Reality is its all done by the Trustee Co.

When you think it through you will understand why its a bad choice to have human trustees. They could be personally liable for a debt, poor judgement etc. Yet the trust owns the assets and they cant (usually) just deal with trust property as if is theirs. Fiduciary obligations etc....

 

[eggnog]

Thanks for that Paul.

Did you mean 'Trusts aren't a legal entity so they cannot enter into contracts'?

When you say 'pay the loan' do they do this out of pre-tax or post-tax dollars? if post-tax then how are they taxed?


I'll get around to reading Mike's and Terry's e-book once I have some free time

I'm finding this subject very interesting. I'm currently studying accounting

The Trustee (Co) merely manages the Trust. The Trustee borrows but the loan is really a trust liability. The Trustees name appears of all documents etc but reality is just think of The Trust. Trusts aren't a legal entity so they can enter into contracts etc. They must have the Trustee do this on behalf of the Trust.

The reality is the Title will be in the name of XYZ Pty Ltd as only a real person can own title. ie Trusts and SMSFs cant technically own anything. Same with loan. Normally the bank will seek a guarantee also from the Directors AND take a charge over the property.

The trust receives rent. Pays expenses. pays the loan. In time the loan is repaid. The trust then has a debt free property. Reality is its all done by the Trustee Co.

When you think it through you will understand why its a bad choice to have human trustees. They could be personally liable for a debt, poor judgement etc. Yet the trust owns the assets and they cant (usually) just deal with trust property as if is theirs. Fiduciary obligations etc....

 

[Paul@PFI]

The trust is not a legal entity. The Trustee is. The trust is a legal relationship.
Only a entity can complete a contract. (Human or Company)

Many trusts don't pay tax so I guess its always pre-tax. Some can pay tax or may have to. (eg non-resident beneficiaries) The trust income flows to beneficiaries. They are then taxed.

Many types of trusts. eg deceased estate, discretionary, unit, will, bare trust, implied trust, hybrid forms of trusts etc Unit trusts can be fixed and non fixed. Class trusts++++

That's a VERY simple explanation. Terry and Mike's book goes further but retains simplicity but recommended reading is http://www.taxinstitute.com.au/publ...res-guide/trust-structures-guide-10th-edition

 

[Terry_w]

A trust is just X holding property for Y. It is a relationship between X and Y with some obligations over property held by X.

Title to any property is in X's name. X borrows money, lends money, mortgages property, enters contracts and is the person sued over these issues.

X does a tax return for the trust but usally all the money flows out to Y who is the one that pays the tax.

X = Trustee
Y = beneficiaries.