Recommendations for Family Trust, and cost?

[coastymike]

Terry

Agreed. Could even have a unit trust with the units being held by a discretionary trust and advantages would have been

1. ability to stream income and capital gains.
2. ability to transfer the units to superannuation.
3. ability to use the refinancing principle.
4. with careful planning the ability to obtain the land tax exemption in NSW.

disadvantage would have been the setup costs and ongoing costs but in your scenario would have been insignificant compared to the other benefits.

 

[geoffw]

I found a discretionary trust for a quite positively geared property worked well. Income could be distributed as circumstances changed. So that when our income positions were reversed we weren't disadvantaged tax wise. When the property was sold at an excellent profit the tax was also minimised.

I would recommend Trust Magic by former Somersoft member Dale Gatherum Goss as an excellent view of what a trust can achieve.

 

[Belu]

James from House of Wealth set up my family trusts, great work everytime

www.houseofwealth.com.au

 

[Terry_w]

Terry

Agreed. Could even have a unit trust with the units being held by a discretionary trust and advantages would have been

1. ability to stream income and capital gains.
2. ability to transfer the units to superannuation.
3. ability to use the refinancing principle.
4. with careful planning the ability to obtain the land tax exemption in NSW.

disadvantage would have been the setup costs and ongoing costs but in your scenario would have been insignificant compared to the other benefits.

The fixed unit trust owning property would have to be one of the most flexible ways to move forward because of the ease of transferring units of the trust to or from Individual/Discretionary Trust/SMSF. In NSW Stamp duty is due to be abolished on the transfer of units of a unit trust on 01 July 2013 too.

 

[geoffw]

James from House of Wealth set up my family trusts, great work everytime

www.houseofwealth.com.au

Dale, who wrote the book I recommended, is James' father. The website I mentioned also refers to "Wealth Sabotage"- a CD with some spreadsheets apparently, cowritten by Dale and James. I'd be interested to know what that is like.

 

[RPI]

I had a friend a few years ago who was on a good salary, top tax rate. His wife was a stay at home mum with no income. He was looking to purchase a property in the booming WA market. I advised him to look at setting up a discretionary trust. But he wanted to claim losses from negative gearing.

He bought in his own name and then the property doubled in value within 12 months. So he sold making about $250,000 in profit. All of this went up top of his other income (after 50% discount etc) and he paid about 1/4 in tax while his wife still had $0 annual income.

If he had used a trust he could have distributed the lot to his wife and reduced the tax payable by a considerable amount.

What he said.

Unless you have no spouse or other relatives and can predict:
- whether or not you will make a capital gain
- what your income will be in future
-be sure that no beneficiary will not be working at a time you wish to sell
etc etc
then I am a big fan of discretionary trusts for resi property. If you want to save money and don't care/ don't need the asset protection side of things then you could use a personal trustee (legal advice recommended on that though)

Have seen too many examples like terry's above, buy in high income earners name to negative gear and end up loosing out big time due to CGT. Not expecting capital growth in resi for the next few years but who knows.

 

[Fiona O]

What about an smsf?

As an accounting professional I also question the logic to a trust. There are just no negative gearing advantages, in fact they are disadvantages. Have you thought about an smsf?

 

[alexlee]

As an accounting professional I also question the logic to a trust. There are just no negative gearing advantages, in fact they are disadvantages. Have you thought about an smsf?

How is a SMSF better? All the disadvantages of a discretionary trust, AND severe limitations to gearing and age restrictions. For a young person who would benefit most from leverage and most restricted by the age limits, a SMSF is worse.

 

[Rolf Latham]

As an accounting professional I also question the logic to a trust. There are just no negative gearing advantages, in fact they are disadvantages. Have you thought about an smsf?

SMSF ??????????

really, how does that get around the neg gearing issues ?

t
arolf

 

[Fiona O]

It depends on your age, your goals and the balance you have in super. For someone 40 plus with lots of super, it is a very real option. It is much more difficult for a young person as they do not have sufficient in super and our current government isn't making it any easier!
I tend to only recommend trusts to people with asset protection issues. Even then, there are some options to use to avoid trusts.
The advantages of distributing income to kids from trusts are gone. Income splitting is generally easy to achieve by watching ownership percentages at purchase ie the high income earner might own 99% of the property and hence get the negative gearing deductions.
So the only real advantage from a tax perspective I see is the ability to dictate where the capital gain goes on eventual sale. The huge disadvantage is the lack of access to tax deductions on the negative gearing.
So I am just wondering why you do want a trust???

 

[Fiona O]

Rolf, most smsf tend to have an investment strategy that is diversified. Gearing in a smsf for maximum benefits I think should be no more than 50%. This way you make a small loss on the rental but of course you have income on your other investments so the loss is offset against them. Assuming your other investments pay franked dividends, you have potential refunds in the fund there also.
It is a strategy for those over 40 who are starting to put some real cash on super and are not comfortable with more traditional super investments such as shares and managed funds.
In retirement once the property is paid off, it provides a very steady income stream and tax free once in full pension mode.

 

[Rolf Latham]

The huge disadvantage is the lack of access to tax deductions on the negative gearing.

3 solutions to that

1. buy property that isnt neg geared, or mix other + geared assets into the DT
2. Use a UT
3. Use a HDT

ta
rolf

 

[pinkboy]

It depends on your age, your goals and the balance you have in super. For someone 40 plus with lots of super, it is a very real option. It is much more difficult for a young person as they do not have sufficient in super and our current government isn't making it any easier!
I tend to only recommend trusts to people with asset protection issues. Even then, there are some options to use to avoid trusts.
The advantages of distributing income to kids from trusts are gone. Income splitting is generally easy to achieve by watching ownership percentages at purchase ie the high income earner might own 99% of the property and hence get the negative gearing deductions.
So the only real advantage from a tax perspective I see is the ability to dictate where the capital gain goes on eventual sale. The huge disadvantage is the lack of access to tax deductions on the negative gearing.
So I am just wondering why you do want a trust???

These girls have a certain glint in their eyes! I suggest you read up on the OP and work it out for yourself why they are planning the way they are.

pinkboy

 

[devank]

The huge disadvantage is the lack of access to tax deductions on the negative gearing.

Can't those 'costs' accumulated and taken off from the CG?

 

[Rolf Latham]

Rolf, most smsf tend to have an investment strategy that is diversified. Gearing in a smsf for maximum benefits I think should be no more than 50%. This way you make a small loss on the rental but of course you have income on your other investments so the loss is offset against them. Assuming your other investments pay franked dividends, you have potential refunds in the fund there also.
It is a strategy for those over 40 who are starting to put some real cash on super and are not comfortable with more traditional super investments such as shares and managed funds.
In retirement once the property is paid off, it provides a very steady income stream and tax free once in full pension mode.

so before making generalised recommendations, its often wise to find out a little more as to what the OP is trying to achieve.........a SMSF isnt going to help these folk.

I understand you haveonly come onto the forum recently and dont know as much abiut the OP as we all do from various other posts they have contributed.


In general I dont disagree with what you are saying, much of the SMSF stuff we have been placing of late has been in the 70 to 80 Gearing range and is still + cashflow.

ta
rolf

 

[Fiona O]

Mixing positive geared investments in the DT is a good option. This works well for someone running a business in a company, shareholder being the DT. Payed ff divi to the DT to offset the rental loss. Effective was of getting cash from the company.
The same would work for someone passive investing in positive geared assets in the DT.
Tax trap is that you need an overall tax profit to get the best of this structure

 

[coastymike]

Fiona

How do you plan for

1. clients who want to move their residential investment property into super at a later stage ? holding in a unit trust allows this to occur in their own names doesnt.

2. clients who want to transfer their ownership interest to the other party without incurring significant stamp duty on the transfer ? Unit transfers allow this and soon no duty on unit transfer. Individuals have this problem.

3. refinancing principle. unit trust allows this but individual names doesn't.

just three challenges for the individual. wondering how you advise clients who want these options available ?

 

[alexlee]

2. clients who want to transfer their ownership interest to the other party without incurring significant stamp duty on the transfer ? Unit transfers allow this and soon no duty on unit transfer. Individuals have this problem.

I know there's a threshold, but the land rich provision applies to unit trusts, too, right?

 

[geoffw]

Fiona

Sorry, but that sounds to me like a very short sighted attitude. Just ignore what's going to happen to CGT, because that's going to happen sometime in the future. And ignore what happens if the income circumstances change, because that will never happen. And also ignore what happens when rents increase eventually, and the property becomes negatively geared.

In my case, circumstances did change, as I went from PAYG to business owner, and my wife stayed in the workforce. Her PAYG income was then considerably larger than mine. Then we had to sell a property to finance another business- at considerable profit. It was worth tens of thousands of dollars to us to be able to distribute the capital gain. This is after several years of taking advantage of distributing the income from the property as it was strongly positively geared, even after depreciation and expenses.

(Several previous properties had been bought in joint names, which has caused some disadvantage, although partially offset by that one property in a trust, then subsequently businesses in trusts).

There were expenses which a trust could claim which an individual could not- they tended not to be huge, but better in our hands than gov's.

There are also trust structures available which can give negative gearing advantages, although I had had no direct experience of these.

 

[coastymike]

alex

yes the land rich tax provisions apply to unit trusts. in victoria a landholder is land rich if:

- it has land holdings in Victoria with an unencumbered value of $1,000,000 or more; and

- its land holdings in all places, whether within and outside Australia, comprise 60% or more of the unencumbered value of all its property.

If a landholder does not meet either one or both of the above tests, it is not a land rich landholder for the purposes of the provisions.

Unencumbered value means the market value of the item of property, without being reduced by the amount of any charges, mortgages or other encumbrances.

forgot to mention rules changed from 1 july 2012 and now the second part being the 60% is gone so just $1m in unencumbered land.