Lending money to a family trust

[kmranu]

I am new to trust structures and would like your assistance on this.

Recently I have set up a family trust and I am the trustee. I'd like to get a LOC from the home loan, which is also under my name, and lend that to the trust. Can someone please explain how this process work, including interest deductibility? Do I need a loan agreement between the lender "me" and the trustee "me"? If so, how do I get one (e.g. through an accountant or lawyer)?

Thank you.

 

[DaleGG]

Hi

As a rule, you cannot claim interest on monies loaned to a family trust unless their is a loan agreement where the trust pays you a commercial rate of interest on the money that you loaned to the trust.

Yes, a solicitor is the only person who can prepare legal agreements.

Dale

 

[NigelW]

I am new to trust structures and would like your assistance on this.

Recently I have set up a family trust and I am the trustee. I'd like to get a LOC from the home loan, which is also under my name, and lend that to the trust. Can someone please explain how this process work, including interest deductibility? Do I need a loan agreement between the lender "me" and the trustee "me"? If so, how do I get one (e.g. through an accountant or lawyer)?

Thank you.

Bear in mind also that the loan is an "asset" in your books and a liability in the trust's books. One consequence of this is that if you were to be bankrupted, the loan would form part of your bankrupt estate and your bankrupcty administrator could (subject to the terms of the loan agreement) demand repayment of the loan from the trust.

Loans between trusts and their principal beneficiaries compromise asset protection to the value of the loan. I.e they're a potential wealth hazard. Having said that, they're very commonly used.

Get some good advice.
Cheers
N.

 

[GreatPig]

As a rule, you cannot claim interest on monies loaned to a family trust unless their is a loan agreement where the trust pays you a commercial rate of interest on the money that you loaned to the trust.

If you borrowed money in your own name and lent it to a family trust, would the interest rate paid by the trust have to be at least as high as the rate being paid to the lender to qualify?

In other words, would it not be possible to use this method for negative gearing in your own name with a non-hybrid discretionary trust?

GP

 

[perfect]

are any of the people in this forum who lend money to their own trust have a legal agreement to pay commercial rate interest so they can claim the interest as deduction?

wonder if its worth it

 

[DaleGG]

Hi GP

The interest rate must be commercial, otherwise, the tax office will disallow any claims. No chance for negative gearing here...

Dale

 

[GreatPig]

The interest rate must be commercial

Thanks.

I find it interesting though that they require commercial rates of interest on loans, but don't seem to care about the deliberate non-commercial reality of income from units.

GP

 

[TryHard]

As a rule, you cannot claim interest on monies loaned to a family trust unless their is a loan agreement where the trust pays you a commercial rate of interest on the money that you loaned to the trust.

Yes, a solicitor is the only person who can prepare legal agreements.

Dale

Oops Dale sorry this raises one more Trust for Dummies question. I have a HDT set up through you of course ! , and have used the template from the Trust Magic book to record loans from me to the Trust for a non-property purchase (shares in NavraInvest managed fund).

So say its $100K I loaned the Trust and I'm charging the trust the prevailing 6.67% interest or whatever it is, is that ok without a lawyer-prepared contract, (Its recorded as a resolution in the Minutes from a Trust meeting) and is that interest tax deductible (I guess the trust gets to claim the interest proportion, which reduces its earnings, rather than myself as the individual?

Conversely for property purchases I have purchased units in the Trust, claiming the interest as a deduction on my personal income.

Cheers !
TryHard

 

[MasterInvestor]

Hi

As a rule, you cannot claim interest on monies loaned to a family trust unless their is a loan agreement where the trust pays you a commercial rate of interest on the money that you loaned to the trust.

Yes, a solicitor is the only person who can prepare legal agreements.

Dale

Hi Dale

I done similar myself and have a few agreements between myself and myself as trustee for my trust. I just modified an existing loan agreement that I had. ie it wasn't prepared by a solicitor (but the original document was). Could the ATO declare this to be invalid and disallow the deductions?

And, I have now heard that the loan agreement has to be stamped at the office of state revenue. Would this be correct?

Thanks again.

 

[NigelW]

Hi Dale

I done similar myself and have a few agreements between myself and myself as trustee for my trust. I just modified an existing loan agreement that I had. ie it wasn't prepared by a solicitor (but the original document was). Could the ATO declare this to be invalid and disallow the deductions?

And, I have now heard that the loan agreement has to be stamped at the office of state revenue. Would this be correct?

Thanks again.

Hi Master

Please get some legal and tax advice.

This raises an interesting issue...how can you contract with yourself ie loan money to yourself, albeit in different capacities? Short answer is that you can't contract with yourself, but you can contract with yourself and others... (go figure)

Another reason to use a company trustee - what happens if your wife retires as trustee and that just leaves you. Arguably any further loan agreements will be a nullity and thus no deductions...

Good luck
N.