hybrid discretionary trust

[Darren Ski]

Guys guys guys
This looks scary from where I am sitting

The basic explanation is

A Hybrid trust is the combination of discretionary and unit features

The lenders don’t understand the Hybrid trust and therefore you will have more difficulty with getting finance if you have a Hybrid trust.

All trusts can have +ve and –ve geared property in them

A trust can not distribute a loss they are stuck in there

There is a way of taking advantage of that –ve gearing in that particular trust and that is to make it a beneficiary of second trust that is +ve ( eg a trust that you operate a business through ) i.e. distribute the $ to the –ve trust first before you distribute to yourself so that you taxable income drops

And for those of you who work for wages sorry the above don’t work for you unless you balance your trust with some +ve geared property to balance it all

My advice is stay away from unit trusts because it does not offer as much protection as a discretionary trust Why? Because the beneficiaries own a fixed unit of that trust and if one beneficiary gets themselves in trouble and they go bankrupt or something similar than the court will go for that unit of the trust

Good luck it is very important to get the structure right

Darren


The world stands aside for those who know where they are going

 

[alpina]

heard a lot of positives about hybrid discretionary trusts. are there any negatives of having one vs having the properties in your own name?

julie

 

[Darren Ski]

Well lets look at it this way

You go to a party you drink a little bit too much say 0.06 you have an accident on the way home and you collect a SL500 Merc about $300k worth

The insurance douse not cover anything because you were drunk you acted criminally, as soon as it can be proven that you acted criminally that’s it the insurance company walks away and believe me driving under the influence is a criminal offence

SO who pays for the expenses YOU do the whole enchilada this and if you don’t have the cash than any assets you have will be seized and sold

This is where the trust comes in, you do not own the properties the trust does you have control of the properties but you don’t own them

1 of many benefits of a trust

Darren

 

[alpina]

thanks darrin,

asset protection was the only advantage that i was sure of and yes i understand that a trust does it better than landlord insurance, etc.

what other advantages are there? say nobody sues us, how will a trust put more $$$ in our pockets?

julie

 

[bubbleroo]

Hi Darren,
I agree that if you have it right from the beginning then all will be smooth running to end (fingers crossed).

Since hybrid is a combination of unit & discretionary trust, could you clarify whether the term Hybrid Discretionary trust is the same as Hybrid trust, in terms of structure.

ta

 

[NickM]

Originally posted by Darren Ski


The lenders don’t understand the Hybrid trust and therefore you will have more difficulty with getting finance if you have a Hybrid trust.

A trust can not distribute a loss they are stuck in there

Most of the discussions on this forum are centred around Hybrid Discretionary Trusts. Commonly abbrieviated to Hybrid Trusts.

As for financing, i have seen many clients obtain finance with such a structure. My experience is that providing you can get the loan individually, you should be able to get it through a trust.

Maybe Rolf may wish to add comment here.

A Hybrid trust will not run at a loss therefore profits will be distributed to the income unit holder and the interest will be claimed in the personal tax return of the individual.

Unit trusts are also useful providing the gearing is set up correctly. A unit trust will allow you to possibly transfer a property into a SMSF at a later date without incurring stamp duty.

Owning units individually in a unit trust is generally not advisable.

Julie, A Hybrid Trust will allow capital gains to be distributed to discretionary beneficiaries. If a property is held long term, the refinancing priinciple may also apply, thus allowing you to claim interest twice on the same property.

The main downside to a Hybrid is that you do not recive a land tax threshhold in NSW.

Hope this clarifies the issues raised.


NickM

 

[bubbleroo]

Thanks Nick,
When you are only new to these sort of issues, it's important to be clear before proceed.
Been losing sleeps over this !

cheers

 

[Terryw]

Hi Nick

Could you please confirm if the refinancing principle is possible with a Discretionary Trust.

Thanks

Terryw

 

[Darren Ski]

Hi Nick

Can you please tell me the difference in a nut shell between the Hybrid Trust the Discretionary Trust and the Unit Trust

Thanks in advance

 

[NickM]

Terry
The refinancing principle is not possible with a normal discretionary trust.

Darren,

Not so easy.
I see you are fairly new to the forum, (welcome aboard)
and i strongly suggest you search some other threads on trusts as this topic has been covered extensively.

I would also recommend that you contact Dale GG and purchase his book Trust Magic as that will also answer many of your questions in a language that most people can understand.

I also have some info on my website that you may find useful.

Nick

 

[alpina]

Originally posted by NickM
The main downside to a Hybrid is that you do not recive a land tax threshhold in NSW.

NickM

what does this mean exactly? we pay land tax from dollar 1? If so, isnt that a major negative?

julie

 

[Kevmeister]

Originally posted by NickM
Owning units individually in a unit trust is generally not advisable.

NickM:

I presume you are referring to an "ordinary" unit trust, not a Hybrid Discretionary Trust which is partly a unit trust?

Using Darren's example of crashing into the Mercedes, how does holding units in a Hybrid Discretionary Trust protect you in that situation?

 

[NickM]

Julie
You are correct, it can add quite a cost to the maintenance of the structure and should be factored into your calculations.

If people have more than 1 IP in SYdney they generally use up the threshold fairly quickly, however i argue that the long term benefits will outweigh the land tax costs.

Kev,
Yes, i was referring to a unit trust.

In a hybrid Disc trust you will purchase income units only. Therefore they are only worth face value ($1 each) which will generally be equal to the loan taken.

NickM

 

[Kevmeister]

Sorry to be pedantic, Nick...

Because I hold units in a trust that have equivalent value to the loan I obtained to purchase them, are you saying they are effectively worthless to a creditor?

Could a creditor somehow take the asset (the units) and leave the liability with me (the loan), so I'm paying off a loan from which I derive no benefit?

And, finally, I belive the intent of the Hybrid Disc Trust is that some point in the future (say, when the need for negative gearing has abated), then the trust reverts to a discretionary trust. What happens to the units?

 

[NickM]

Kev, not pedantic by any means.

If the creditor obtains your units they will receive a right to income only.

They can apply to redeem the units, but if you (as a controller) is the trustee then you may refuse the redemption.

The trustee may sell the property and distibute capital gains to discretionary beneficiaries.

So if you work through it, if you had a creditor that went all the way they may own some special income units in your trust which in reality would not be of any value to them.

In Practice it is unlikely a creditor would want to hold units in a trust controlled by yourself.

Could a creditor somehow take the asset (the units) and leave the liability with me (the loan), so I'm paying off a loan from which I derive no benefit

In Practice - Yes they could, however the trustee can still sell the property, and the Bank would invoke the guarantee thus repaying the loan. - capital gains would be discretionary so the creditor would own units in a trust that owned nothing.

In the normal course of events you would redeem your units in the Hybrid. If no units are issued then it becomes a discretionary trust

NickM

 

[alpina]

in regards to land tax, given that there is no threshold under a trust setup, how is it calculated/taxed? don't suppose land tax is tax deductible for income producing assets?

julie

 

[NickM]

Julie
Land tax in NSW applies at the rate of 1.7% on the unimproved land value.

This is regarded as an expense and is tax deductible.

Cheers
NickM

 

[Kevmeister]

Hi Nick,

I make reference to the following article I was reading the other day concerning trusts:

http://www.taxlawyers.com.au/Publications/New/Trustacc1.htm

Under the section "What happens if the family trust goes broke" is the following comment:

Personal assets owned by the Trustee outside the trust are generally not available for discharging any business liabilities. A director generally goes down with the company. However, the Trustee, Appointor and Beneficiary generally don’t go down with a Family Trust

I'm still trying to understand the mechanics of Asset Protection afforded by a discretionary trust. The above advice suggests to me that even if I am an individual trustee controlling the assets of a trust, and say a tenant injures themselves in a property owned by the trust, the trustee cannot be attacked for assets outside of those controlled by the trust. If this is correct (no idea), then why have a corporate trustee?

The other question this raises for me is whether there is a specific difference between a trust going broke for one reason versus another. In particular, does the above quote only apply in the case of the trust "just running out of money" or does it also apply if the trust/trustee was sued and therefore had to pay damages (which it did not have - essentially forcing it to be broke)?

Under the section "Who can be the Trustee of a family trust" is the comment:

If the Ralph amendments ever get through it will continue to be the case that it is generally a waste of money to have a company as a Trustee.

If a corporate Trustee supposedly increases the protection afforded to assets within the trust, any idea why would this article consider it to be a "waste of money".

Two more questions:

1. Assuming I started with Hybrid Disc Trust with an individual Trustee, what kinds of charges does one face later if one desires to change to a corporate trustee, apart from the obvious one of creating the trustee company in the first place.

2. What costs does a trust incur when it changes trustees, particularly in regard to the value of the assets held by the trust (ie. I think I remember that stamp-duty is not charged again, is it?) Do property titles have to be physically changed, etc?

 

[bundy1964]

Hi Kev

I think if you are a non corporate trustee you can lose your personal assets held outside of the trust.

In SA there is a $10 stamp duty payable for each property when the trustee changes. The title would have to be changed so there would be legal fees as well.

If the s**t did hit the fan and you was sued you sack the trustee and apoint another.....imho a lot easier with a corporate trustee than with an individual.

bundy

 

[NickM]

Kev
Interesting comments.

A trustee is personally liable for the debts & transactions they undertake on behalf of the trust. If the trustee is sued then their liability is not limited by the extent of the trusts assests.

Therefore if the trustee is an individual their personal assets are also at risk.

The trustee should also make it clear that they are entering into contracts in their capacity as trustee only and not on their own behalf.

EG Inserting a clause after their name such as "as trustee only but not otherwise"

Be careful about just changing trustees if legal issues arise. It may not be effective. Action may still be taken against the former trustee and that former trustee still carries a right to be indemnified out of trust assets.

The cost to change a trustee is minor. New company cost + Minutes / resolutions. (see Trust Magic P185)

NIckM