Purchase in Discretionary Trust

[Ms Jade]

I already have a HDT (currently has no properties), but due to limitations on borrowings I have set up a new standard discretionary trust as well. They have the same corporate trustee. I've been quite slack & haven't got around to opening a bank account for the trust as I wasn't planning to purchase for a couple of months at least. Of course, a property has now come up that I'm interested in. I think I know the answer to this question but I'll ask it anyway: Is there any way to sign the contract with the trustee as purchaser but pay the deposit myself? Or must the cheque be drawn from the trust's account?

I have a feeling this place will sell straight away - as in by the weekend so I wanted to make a straightforward offer to secure it, rather than say "I can't pay the deposit for a week" or whatever. How can the trust buy the property? Suggestions appreciated - thanks!

 

[alexlee]

You can pay on the trust's behalf. Just retain the paperwork and record it as a loan to the trust from yourself.

More concerned about the common trustee thing, though.

 

[Aaron_C]

Yes you can pay on the trust/company's behalf. Just make sure you put 'and/or nominee' after your name on the contract of sale

 

[Ms Jade]

^ That was quick! And good news - thanks, guys.

Alexlee, is your concern because of the difficulty in apportioning assets between the trusts so that if someone "goes' the trustee then both trusts are exposed? I did it this way for simplicity & speed as the company already existed. I guess the corp trustee should be replaced from one of the trusts before holding assets in the HDT?

Just occurred to me that the trustee co will be in the odd position of having 2 ABNs as well?

 

[Aaron_C]

Yes that's right Ms Jade (about the 2 ABNs). The whole purpose of a corporate trustee is to 'quarantine' all the trust money into the one entity for ease of accounting. Having two trusts on the one company defeats this whole purpose

 

[alexlee]

Alexlee, is your concern because of the difficulty in apportioning assets between the trusts so that if someone "goes' the trustee then both trusts are exposed? I did it this way for simplicity & speed as the company already existed. I guess the corp trustee should be replaced from one of the trusts before holding assets in the HDT?

Just occurred to me that the trustee co will be in the odd position of having 2 ABNs as well?

The name of the trust doesn't appear on title documents, only the trustee's name appears. To me, that makes ownership confusing. I don't undersetand the speed thing considering it takes next to no time to set up a new $2 company.

Also, there are succession concerns. Say you have two trusts and two kids. With different corporate trustees, it would be very simple to just give each child ownership and control of one trustee company. With a common trustee, it's just more work in the end.

If it was me I would have a separate corporate trustee for every trust.

 

[Terryw]

Yes that's right Ms Jade (about the 2 ABNs). The whole purpose of a corporate trustee is to 'quarantine' all the trust money into the one entity for ease of accounting. Having two trusts on the one company defeats this whole purpose

The purpose of a corporate trustee is:
1. To limit liability,
2. To clearly separate trust assets from personal assets.

Having one trustee for several trusts is not such a bad thing. The trustee wouldn't be trading, or shouldn't be. But if the trustee is sued as trustee for one trust then the other trusts assets would generally not be at risk.

Remember the trustee is just the legal owner of the property of the trust, not the beneficial owner.

 

[Aaron_C]

Having one trustee for several trusts is not such a bad thing. The trustee wouldn't be trading, or shouldn't be. But if the trustee is sued as trustee for one trust then the other trusts assets would generally not be at risk.

Remember the trustee is just the legal owner of the property of the trust, not the beneficial owner.

But why create potential confusion which can be alleviated by simply paying $436 to ASIC for a new company registration?

 

[Terryw]

Yes, for the sake of $400 odd bucks I agree.

 

[Ms Jade]

^Thanks, Terry. The trustee company is not trading but the DT will be. I will definitely create a new trustee co for the HDT but at the moment it has no assets & I'm not using it.

 

[Ms Jade]

The name of the trust doesn't appear on title documents, only the trustee's name appears. To me, that makes ownership confusing.

I can see your point but legally speaking it shouldn't be confusing. Even though the trustee's name is on the title you have to advise the SRO within 30 days of settlement if the property is held in trust. That trust is recorded as the beneficial owner.

Just musing, but in theory - if you have a common trustee and different trusts perhaps you don't need to decide at the time of purchase which trust it will be held in. Imagine that you set up a HDT, for example, purchase a property with just the trustee on the contract, and then discover that you can't get finance (How do you think I came up with this story?). You could then apply for finance through a DT or UT.
Questions:
Does the trust have to be in existence before signing the contract?
Does the company/individual who signs the contract have to be elected as the trustee before signing the contract?

If the answer to both questions is "no," I wish I'd come up with the idea in 2005.

 

[Terryw]

^Thanks, Terry. The trustee company is not trading but the DT will be. I will definitely create a new trustee co for the HDT but at the moment it has no assets & I'm not using it.

Hi Ms Jade

If the trust is trading then you should use a separate trustee company.

BTW, you may find that your HDT is just a discretionary trust with the ability to issue units. If no units are issued then it may operate as a normal discretionary trust.

 

[Terryw]

I can see your point but legally speaking it shouldn't be confusing. Even though the trustee's name is on the title you have to advise the SRO within 30 days of settlement if the property is held in trust. That trust is recorded as the beneficial owner.

Just musing, but in theory - if you have a common trustee and different trusts perhaps you don't need to decide at the time of purchase which trust it will be held in. Imagine that you set up a HDT, for example, purchase a property with just the trustee on the contract, and then discover that you can't get finance (How do you think I came up with this story?). You could then apply for finance through a DT or UT.
Questions:
Does the trust have to be in existence before signing the contract?
Does the company/individual who signs the contract have to be elected as the trustee before signing the contract?

If the answer to both questions is "no," I wish I'd come up with the idea in 2005.

I forget how it works down in VIC, I have purchase property there in a trust, but I think the SRO just records the trustee as a trustee. I don't think they record the trust name or file a copy of the deed etc.

When you make a purchase, you are supposed to be making it as trustee for the entity at the time of entering the contract. It wouldn't be proper for you to sign a contract in a trustee's name and then later change the trust. Technically you would be transferring it from one trust to another - stamp duty!. The Trustee is also supposed to do a resolution before buying trust property etc. But on a practical level, I think it probably does happen.

 

[Aaron_C]

I forget how it works down in VIC, I have purchase property there in a trust, but I think the SRO just records the trustee as a trustee. I don't think they record the trust name or file a copy of the deed etc.

When you make a purchase, you are supposed to be making it as trustee for the entity at the time of entering the contract. It wouldn't be proper for you to sign a contract in a trustee's name and then later change the trust. Technically you would be transferring it from one trust to another - stamp duty!. The Trustee is also supposed to do a resolution before buying trust property etc. But on a practical level, I think it probably does happen.

When you make a purchase of real estate, you can just put your name and/or nominee. That way you can set up the legal structure on the side, then novate the contract before settlement. There's nothing wrong with that.

And the SRO does keep a record of both who the legal owner is (the trustee) and the beneficial owner (the beneficaries) for the purposes of assessing land tax through trusts....but this only applies to fixed/unit trusts, not discretionary trusts.

 

[Terryw]

Just be careful when using and/nominee. Get legal advice before doing so otherwise there could be stamp duty problems.

Also, there is no legal requirement to name the trust on the contract. The trustee is the legal owner so their name would be sufficient. However many people put ZZ as trustee for XX to make sure there is no dispute.

 

[Aaron_C]

Also, there is no legal requirement to name the trust on the contract. The trustee is the legal owner so their name would be sufficient. However many people put ZZ as trustee for XX to make sure there is no dispute.

Yep there's no need because only the SRO needs to know whether the company is acting as a trustee or as a normal company.

 

[Ms Jade]

And the SRO does keep a record of both who the legal owner is (the trustee) and the beneficial owner (the beneficaries) for the purposes of assessing land tax through trusts....but this only applies to fixed/unit trusts, not discretionary trusts.

Really? There's no mention of an exemption for DTs on the SRO website:

Requirements to Notify the Commissioner
A person who acquires Victorian land as a trustee of a trust must lodge the Notice of Trust Acquisition of an interest in land form with us within one month of acquiring the land. This is in addition to the general obligation to lodge a Notice of Acquisition.

A person who disposes of Victorian land as a trustee of a trust must lodge the Notice of Trust Disposition of an interest in land form with us within one month of disposing the land.

A person who was a personal representative of a deceased estate that includes land in Victoria must lodge a written notice with the Commissioner within one month after the administration of that estate is complete.

From 1 January 2010, if a trustee fails to notify the Commissioner of the acquisition or disposal of trust land or any other events as required under section 46K of the Act, a penalty tax will be imposed on the additional amount of tax that the taxpayer would have been assessed.

 

[Ms Jade]

I forget how it works down in VIC, I have purchase property there in a trust, but I think the SRO just records the trustee as a trustee. I don't think they record the trust name or file a copy of the deed etc.

They don't need the deed but they do record the trust's name because you need to lodge a "Notice of Trust Acquisition of an Interest in Land" form after settlement.

 

[Ms Jade]

Just be careful when using and/nominee. Get legal advice before doing so otherwise there could be stamp duty problems.

Really? Are there restrictions based on your relationship? For example, if i use my own name + nominee clause and then decide I want the title in a company name, do I need to be a director of that company?

 

[Aaron_C]

Really? There's no mention of an exemption for DTs on the SRO website:

One of the main reasons to use trusts to purchase land is to split up the land tax bill among several different entities. Because there is no fixed component or entitlement in a discretionary trust, DTs do not get this tax saving.