Not clear on way forward

[stargazer]

Hi all

I would like your opinions on some issues that i have on my mind. I have a PPOR and IP. Until recently they were cross collaterised. About two months ago i refinanced the IP and have a loan at (80%LVR).

The PPOR is still with the original lender and is set up with a split LOC. The lender won't do a revaluation unless i pay for it myself. The lender that has my IP has done a valuation at no charge. The PPOR at current loan levels has a 57% LVR. I am considering refinancing it to 80% freeing up more equity for Investment if required.

Recently the following issues are on my mind
Asset protection
Purchasing in a Trust
Setting up a trust
Further purchases not using a trust.


These areas has me unsure of the correct manner to move forward for future purchases and the structure i should be aiming for.

Some investors say using a trust will give you the asset protection and better distributon options down the track and alot more flexibility.

Some have bought many properties and not used a trust.

Some have said proceed with caution setting up a trust there are many ways to set things up.

When i have raised the issue with my accountant the response was negative to seting up a trust as you cant claim losses along the way. I mentioned HDT but he said it makes no difference.

I do intend to purchase Trust Magic and gain a better understanding and attempt to weigh up the pros and cons.

My immediate concern is the refinancing and having a significant LOC sitting there and the risk of litigation should something unforseen occur and not being protected. Thus having this LOC sitting there ready for investment. At the same time not having a LOC ready for investment and not having as much flexibility to negotiate a purchase.

I probably have 10-15years to retirement and all i want is to take the correct steps as has been indicated if you set up incorrectly it is costly to unravel it.

I would appreciate to get opinions of what your thoughts are on this.

I am trying to formulate a plan which is a significant step for me...lol

Regards
BC

 

[Tim]

BC,

good post. I can say from experience that if you keep purchasing property without a trust structure (as I have) that the question/problem never really goes away.

I got Dale's Trust Magic book courtesy of the inter library loan service at my University, to see if it was worth reading - I would say after getting it that it would be a good introduction before reading a couple more books on trusts to really get the hang of them.

Perhaps the questions should be posed to the forum:

1) Do you use a trust structure Yes/No
2) If yes what types?
3) Why yes?
4) Why no?
5) Comments or thoughts on your use of them from experience.

I do recall there being a previous thread/s on why people DO NOT use trusts, so it might be worth trawling that first......

I am in the same boat as you BC, just can't quite seem to get the hang of whether to use trusts or not and have a dozen rentals......

SpongeBob

 

[Aceyducey]

Bonecrusher,

Talk to an accountant who knows what they are doing.

NickM is an trust expert and can give you a much better insight into appropriate structuring.

Personally I've found that Trusts are easy to setup - with the right help - and clean to use and provide us with the asset protection we want.

However transferring properties into a Trust is generally not worth the cost.

Cheers,

Aceyducey

 

[stargazer]

Hi

Acey: is having a trust set up difficult to administer. I believe there is a fair bit of accountability and scrutiny.

Cheers
BC

 

[geoffw]

Acey: is having a trust set up difficult to administer. I believe there is a fair bit of accountability and scrutiny.

It does require a little bit of accounting- but not nearly as much as a Self Managed Super Fund. That's a few hundred once a year.

There is a downside in NSW- trusts get taxed at a higher rate than individuals (for one or two properties).

 

[Corsa]

Dear Bonecrusher

This is an extremely good question "To Trust or not to Trust"

Seriously, I was having this "discussion" with other investors that I respect greatly the other evening.

They were chastising me affectionately for purchasing my properties so far in my own name with the exception of the last purchase which was purchased in a HDT/Company structure. How could I accept such a risk?

The honest answer is I didnt start out buying these properties knowing that there would be more purchases. And currently as a high income earner, I enjoy all the tax benefits associated with negative gearing my properties. All my future purchases will however be in an appropriate structure and everything else I will keep in my own name.

My personal thoughts are, when the scale of your investments reach a level that warrants going down the trust path (ie when you have absorbed the current tax benefits of investing in your own name) then that is time for you to start purchasing in other structures other than your own name. Having children (and or beneficiaries) to make distributions to also helps. A lot of accountants have said to me I dont need a trust as I dont have any beneficiaries! (ie children etc yet).

With your revaluations, I would find out who is on the panel of lenders for your bank and then procure a valuation from one of them and then assuming you like the valauation pass that back onto the bank to proceed forward with the bank. If they are not going to pay for it, why let them control the process? Getting your own valuation will cost around $300 and well worth every cent.

In terms of your retirment planning, Navra's education would help you here I think. If your LVR is 57%, you have lot's of lazy dollars. Ultimately, refinancing to 80% is a sensible strategy to assist with having cashflow when you need it for further investments and/or emergencies. But further down the track you want to identify ways that you can utilise this equity to assist your retirement strategy down the track.

Your concerns regarding asset protection and appropriate structures could be assisted by talking to a good accountant who invests also. I have used NickM from the forum to assist me set-up my trust and company. They will assist you get everything set-up, it took me 2 days to get organised and $2500, and they also provide you with fact sheets to take to your bank etc to assist you explain what you need to do. I think the concepts of trusts are a bit scary to start off with, but once you get one set-up you will get more familiar with how the process works, the terminology, and how the income/expenses are treated etc.

I know this is a lot of detail and probably goes a bit beyond your specific questions at this time, but based on this post and my reading of your other posts, effectively what I am saying is:

1. Identify a plan - Work out what your plan will be over the next 10-15 years to accumulate quality assets to take you into your retirement
2. Suitable finance - ensure that your finance is flexible and adaptable to suit your situation (ie have LOC's in place in addition to part variable loans etc). Partner with banks that understands your big picture and who will provide you with the necessary funding to make your goals a reality
3. Build your team - Work with experts who can assist you answer some of these questions rather than just blocking you at the door each time. Work with accountants who are investors who can assist you understand the pro's & con's of taking either course of action. They do this prior to any money being spent so it will not be a costly step to take increasing your awareness.
4. Retirement planning - work out how your portfolio will assist your retirement goals so that you can retire on a suitable income in a timeframe that suits you.

I love this quote,

"Whether you think that you can, or that you can't, you are usually right."
- Henry Ford (1863-1947)

Ultimately, believe in yourself and your own decision making and then work with people around you to make your goals a reality.

All the best Bonecrusher

Corsa

 

[Les]

G'day Bonecrusher,

R U an ex-wrestler or something? What a name....

I just wanted to share what I've heard from several venerable people. In short, if you are only planning to buy 1 or 2 IP's, then take a chance (if you want) and don't set up a Trust.

But, if you are planning on purchasing several properties over time, then set up your Trust early, and buy within it (or them, as it becomes worthwhile to administer several Trusts as the number of properties grows).

That did it for me. I like those that "eschew obfuscation" and just tell it like it is, in small words. Well, that's what they told me, and I understood it. Fantastic!!

Of course, there are those who NEVER buy within a Trust - and Good luck to them too - in the end, it comes down to YOUR personal SANF. If you wish to maximise protection, AND want to own more than two IP's, then do consider the protection that a Trust can give. But be sure to use someone who KNOWS how to set them up.....

Regards,

 

[Panda]

I set up a HDT and made myself as trustee. Im going to change that to a company as trustee at a later date, which my accountant said should be no problem. Trust Magic is a very good (intro level) book in my opinion. After reading that you will have more raw material (information) for you to make your decsion.

The book has some very good points as to how a trust can be used.

Cheers,
Panda

 

[lizzie]

okay - so what about the question of trust vs company structure.

this is one i am currently pondering. i have 12 properties in two companies (one for developments and one for holds) and know that it would be way to expensive to change these properties over. my acct steered me in the direction of company on the assumption of making profit of around $100k+ per year and therefore having my tax rate capped. i know very little about trusts so can someone briefly outline the advantages of trust over company?

i too must do some more reading ...

lizzie

 

[geoffw]

One of the big advantages of a trust over a company is that a company does not receive a 50% CGT concession when the asset is sold.

For any other points about trusts, I'd suggest that you read DaleGG's Trust Magic - or just search through the forum.

 

[Aceyducey]

Panda,

Just keep in mind that former Trustees of a Trust can be sued as well as current Trustees.

There were some discussions on this way back when about people swapping between disposable corporate Trustees.

Know your risks

Cheers,

Aceyducey

 

[Thetileman]

Hi guys
One question on HDT trusts?
Are all assets held in the HDT still up for grabs if the tenant say falls over, or fains injury does the Public Liability insurance on the property pay for any costs related to the incident? Because after setting up a HDT and all the costs associated with it would be pretty distressing to still lose everything held in that particular Trust.
Your opinions

 

[stargazer]

Hi all

Much appreciate your replies and thoughts.

Tim:

From your reply i take it that TRUST MAGIC will give one an overview but more reading is required.

Yes i find it interesting that some have kept buying and not done the trust thing. I wonder if it is purely from not being aware of the benefits etc at the time when purchasing property.

Acey:

Yes thanks for the guide to Nick i have read some threads and Nick and Dale appear to be the ones. Yes coming into accountants that one rings or meets and they just tear down anything you may have in mind and give you valid reasons is difficult. Unless one knows its hard to indicate differently.

Footlong Geoff..(Are you boasting again)
Why do trusts get taxed at a higher rate in NSW is it the same in other states or different?

Corsa:
Hi thanks for that detailed response always appreciated. Your four points at the end summarises it all well.

Les:
It seems to be horses for courses but the Trust appears to make alot of sense if buying multiple amounts of property. I guess the negative geared property with a trust is the thing that some accountants say you cannot do. My accountant has property etc. so go figure.

Me a wrestler..lol Bonecrusher was a racehorse that had a bit of grit.

Acey: your response to Panda confuses me on being able to be sued then why the trust?

Thanks to all.


Regards BC

 

[geoffw]

Footlong Geoff..(Are you boasting again)
Why do trusts get taxed at a higher rate in NSW is it the same in other states or different?

The footlong refers to my Subway shop.

Trusts do not get a low-tax threshold as individuals do- I suspect it's to avoid the situation in some other states where land tax can be avoided by buying through multiple trusts I think Victoria may be one such state). I don't believe it's the same situation in other states (yet)- that may change if other state governments perceive that they are losing income.

In the ACT, land tax is levied the same for any investment property, individual or trust.

 

[lizzie]

in nsw land tax is calculated on the entire combination of entities you have an interest in. so, for example, if you are the shareholder of multiple companies that buy property, hold a couple in your own name, then have some more property in a trust of which you are trustee, then all the companies, individual properties and trust properties are combined when calculating your personal land tax. that's why in nsw there used to be no point in having multiple companies to try and avoid that land tax threshold.

now there is no threshold at all and a lower overall rate - which, if you have multiple properties, actually saves you money (or at least saves me money, which i like).

 

[stargazer]

Hi all


Sorry Geoff i couldn't help myself.

Regards
BC

 

[stargazer]

Hi all

What happens to current finance arrangements with properties. For example if a trust is set up how are the financials structured and do the existing financial arrangments outside the trust structure have to be changed?


Cheers
BC

 

[marc1]

I spoke to my accountant about setting up a hybrid trust with a company as trustee, and he asked in the order of $3000. When I mentioned that I can purchase such structure from specialised accountants for $1000 all up he said he wouldn't do my tax returns on a trust purchased from the shelf.

Besides the obvious loss of profits from the set up deal, has the accountant a point in mistrusting the off the shelve trust?

 

[Panda]

marc1
The accountant that I am using now is different from the accountant that set up my trust, and there has been no problem with this at all. Your accountant sounds inflexible or may want you to spend your money with him.


I had one of the "supposedly" best accountants in Sydney set up mine and it did not cost $3000 (remember I did not get the corporate trustee component however), and if I was to set up another I would go cheaper as there are cheaper ways of setting it up.

The other thing is the trust deed should be reviewed by your account on a semi regular basis anyway to ensure that it is still all encompassing of your needs. I would be surprised if your accountant knocked a new client back because he had a trust that was not originally set up with him.

I can’t stand it when the people that are supposed to be on your side spin this "if you don’t get it with me I wont deal with you". Maybe I am jumping to conclusions in this instance. But to me these statements are anti relationship building. Maybe there are instances where this is a true statement, but you can tell when they are and when they aren’t.

I'm not completely blind to business and I understand that this is a business transaction. But I think building a relationship is better for all. Then there can be loyalty on both sides and both win in the longer run.




Cheers,
Panda

 

[marc1]

marc1
The accountant that I am using now is different from the accountant that set up my trust, and there has been no problem with this at all. Your accountant sounds inflexible or may want you to spend your money with him.


I had one of the "supposedly" best accountants in Sydney set up mine and it did not cost $3000 (remember I did not get the corporate trustee component however), and if I was to set up another I would go cheaper as there are cheaper ways of setting it up.

The other thing is the trust deed should be reviewed by your account on a semi regular basis anyway to ensure that it is still all encompassing of your needs. I would be surprised if your accountant knocked a new client back because he had a trust that was not originally set up with him.

I can’t stand it when the people that are supposed to be on your side spin this "if you don’t get it with me I wont deal with you". Maybe I am jumping to conclusions in this instance. But to me these statements are anti relationship building. Maybe there are instances where this is a true statement, but you can tell when they are and when they aren’t.

I'm not completely blind to business and I understand that this is a business transaction. But I think building a relationship is better for all. Then there can be loyalty on both sides and both win in the longer run. Cheers,
Panda

Thank you and I agree, in fact I fired that accountant.
However he did saw the seed of mistrust in me, regarding those $1000 trust @ company deals you can purchase from Queensland and from the ACT even over the net. Can the trust deed be changed afterwards to tune it up to changing needs?