Mortgage trusts and serviceability

[Tyla]

Tyla, when was the last time someone sued you? Or even came close? Have you ever wanted to sue someone?
.

Never been sued and never sued someone either but came close once. I want to stay away from courts as much as possible.

 

[Tyla]

Yes, and here is where you're assessing probability as opposed to possibility. If you're an employee, your legal risk is lower. If you are going into business, then the risk of legal liability increases. Yes, it will be more costly to structure later on, but you also have to consider the cost of structuring now (in your example, it affects your serviceability).

Thanks, Alexlee. I guess it's a matter of choosing the right balance between asset protection, serviceability and costs involved.

 

[Peter_Tersteeg]

Never been sued and never sued someone either but came close once. I want to stay away from courts as much as possible.

It really is a bit of rhetorical question. I've also never been sued, but I have had someone come after me. They backed off fairly quickly when they realized I wasn't going to simply roll over.

As indicated, it costs a lot of money to even attempt to sue someone. We do hear about it all the time and it's constantly in the media, but fair to say that Joe Average never appears in the paper either. Some people are like magnets for various things, most simply aren't.

I do use trusts, but the asset protection element is a benefit, not the primary reason. Being self employed I can be a little more creative with my trust structure for cash-flow and tax.

For most people I doubt a trust would bring them a lot of benefit when compared to the cost (especially in the short term). The problem is, there's always a slim chance that you might be the exception to that rule.

Most people don't start investing through trusts. They tend to go down that path later.

 

[Tyla]

So to reduce your level of risk, vet ever contract you enter into carefully. I admit that I boought 10 plus houses in the early days without ever readinng a contract. I entered leases without reading anything other than the rent per week. I lent money to people without written contracts.

I hired solicitors for buying properties, but with small purchases like phone, software, etc, I never read the contract or terms and conditions. I know I should. But I just assume that, if something seriously dodgy is in there, it would affect thousands of people, and there could be class action, etc. Having said that, I'll be careful with property contracts, insurance and repairs, etc, and I'll read your asset protection tips thread again and again. Thanks, Terry.

Its important to understand that your personal situation isnt the same as anyone else. Its dangeorous to assume - My wife always says it makes an a#$e out of you and me. Nothing beats personal advice. But the final decision is yours. You can select or discard advice. Sometimes I have given advice for the client to choose to ignore it. Thats often fine. They know their risks. Its like choosing to be uninsured. Its smart if the property is a dump and there is no debt. Its dumb if its new and there is a huge financial commitment.
- What assets do you have (higher wealth is good grounds for asset protection)
- What are your risks ? (eg a neurosurgeon v's a painter)
- Do you plan to change ownership later ? Might it even be contemplated?
- Do you want to share tax income ?
- Will a high income later bite you ?
- In 20 years might you want your super involved in property ?
- If you were to marry / remarry etc could a change of ownership give any tax benefits ?
- Are you in good health
- Is your income / occupation stable or very volatile?
- Do you have kids who may incur sexually transmitted risk ?? (The greedy GF / BF)

I understand now that asset protection is a very big area and I'll have to get personal advice. But I believe the more views and opinions I receive, the better it will be for decision making.

To answer your questions,
- we own PPOR outright and have an investment property. All in our names
- both of us are employees with stable jobs and income, so the risk is minimal. Both are under 35 and in good health. Have a toddler son so far, and might have one or two more if everything goes well.
- I don't want to have losses locked in trusts at the moment. But I like to have ability to distribute income between my family members, pass the control of properties to children with minimal costs, etc.
- Super is another avenue we would like to take once we hit serviceability threshold outside super.
- Although we are buy, renovate and hold investors at the moment, we may choose to get involved in developments in 10 yr time, etc.

So based on that, would you think we should keep investing in our own names or start planning for discretionary trusts, etc?

Could you also elaborate "If you were to marry / remarry etc could a change of ownership give any tax benefits ?", please? Not planning to remarry etc, but what sort of structure could provide any tax benefits under change of ownership?

Thank you, Paul.

 

[Terry_w]

So based on that, would you think we should keep investing in our own names or start planning for discretionary trusts, etc?

Don't assume asset protection means buying in a trust.

There are many ways to structure things for improved asset protection without buying inn a discretionary trust. Some cost not extra to apply, others cheap to set up.

I've been making a list of asset protecction strategies or things you can do to improve asset protection and I am up to 260+. I keep thinking of things to add all the time and the list continues to grow.

 

[Tyla]

I've been making a list of asset protecction strategies or things you can do to improve asset protection and I am up to 260+. I keep thinking of things to add all the time and the list continues to grow.

I am looking forward to it, Terry.

 

[Terry_w]

I am looking forward to it, Terry.

Its too valuation to show

 

[Paul@PFI]

I Could you also elaborate "If you were to marry / remarry etc could a change of ownership give any tax benefits ?", please? Not planning to remarry etc, but what sort of structure could provide any tax benefits under change of ownership?

Thank you, Paul.

Tyla...A unit trust allows ownership to be changed without changing the legal owner on title. In some states and some property that can mean NO stamp duty to change the underlying ownership % or even bring in a new investor (or exit one). A very common issue with youger taxpayers buying an IP is they buy in a fixed %. Years later their needs change...One not working, one high income, maybe even a large super balance. They inevitably ask about changing title as the neg gearing is now very +ve geared. In some cases (eg super) its prohibited and duty issues and legals make it unviable. If a UT had been considered some of these options may have been OK.

Also there is the refinancing principle in a unit trust that would allow the increased property value to be refinanced and be deductible yet the proceeds from the new increased loan coud repay your PPOR...So it can convert non-deductible debt to deductible....

All it takes in early planning.

 

[Tyla]

Also there is the refinancing principle in a unit trust that would allow the increased property value to be refinanced and be deductible yet the proceeds from the new increased loan coud repay your PPOR...So it can convert non-deductible debt to deductible....

All it takes in early planning.

Paul, I'm totally lost with this one. How could proceeds from UT's refinancing be transferred to PPOR and still deductible? Wouldn't it become "used for private purposes"?

 

[Terry_w]

Paul, I'm totally lost with this one. How could proceeds from UT's refinancing be transferred to PPOR and still deductible? Wouldn't it become "used for private purposes"?

A borrows to buy B's interest in income producing assets. A can claim interest and B can use proceeds to buy lollypops or pay down the PPOR loan.B's use of the funds doesn't change the deductibility of interest.

A and B could be transferring units in trusts, shares in companies or interest in land.

 

[Tyla]

Thanks, Terry and Paul. It makes sense now.