Set up a Trust?

[Adlante]

Hello fellow members.

I have just had my finance approved for my second IP. I have heard and read allot about people saying that you should get the structure of your assests set up correctly from day 1. And also that you should very rarely buy an investment in your own name.
I am a very keen young property investor and wish to aquire at least 10 properties, so getting the structure set up correctly from the start is a concern to me as pointed out by many people in books. It also saves you money down the track from converting the properties from my name into a trust setup, for asset protection.

I am 22, single, purchasing buy and hold neg geared property in my name only. I am not in a job that is exposed to litigation. But you can get sued for anything now'a days. Hence the reason for asset protection for the future.

Deciding whether to buy as a trust is a bit of unknown territory for me, and I think if I go talk to an accountant they would say that they would love to set up a trust for me, more money for them of course.

One thing I have read discussing the "Traps with purchasing" is that when a company or a trust borrows against the equity, the tax office treat this as a dispersed income from the trust or company and you have to pay tax on it. That doesnt sound very advantageous, but is this what you give up in return for asset protection?

Any advice or further information, even books I can read (other than "How to legally reduce your tax" By Ed Chan & Tony Melvin) would be greatly appreaciated. Also I dont take any information as specific legal advice.
Thanks in advance

 

[tubs]

Hi

Remember, your negative gearing losses will be brought forward every year, so you can't claim your losses straight away. However, you can offset your profits (once it goes positive) against the losses contained in the trust later on.

Not sure about the tax thing you mentioned. I dont think a trust would borrow and GIVE you the money. Its more likely to LEND it to you.

Tubs

 

[Beach Bum]

Make sure you get proper advice from more than one professional.
There are long term ramifications to whichever entinty you may use for your investments, both positive & negative.
A lawyer will give you the legal aspects, and an accountant the financial & taxation side.
Unfortunately it's also like asking a barber if you need a hair cut, so do you own research also. Talking to people with many years experience may also help.

all the best

ps Lawyers do believe in the boogieman

 

[lowb]

im in a similar situation as adlante

have you read trust magic?
im going to read it and see what it says

but in the long term, if you are thinking of having 10
it won't hurt to buy 2-3 in your own name i would think

 

[Adlante]

Thanks for the replies.
No lowb I havnt read trust majic, is that by Dale Gatherum-Goss? He is a member here right? Ill have a look into it....let me know how you go with it...

 

[Adlante]

lowb

Hi lowb, have a read of the latest API mag. There is a good little articale about buying in a trust, and how it affects your cash flow, on page 74, in the TAX Myths Busted section.
Cheers

 

[juggernaut]

hi adlante. be sure to read Trust Magic as suggested by others. Also do a search on hybrid discretionary trusts within this forum. there is a goldmine of info here.

cheers

 

[plgwa]

Read my thread

http://www.somersoft.com/forums/showthread.php?t=27348

I've spent hundreds of hours and thousands of dollars trying to set myself up without success.

I've had accountants contradict each other and brokers do the same. One person will say "Yes we can do that" and the next will say no.

I think you'll need to decide between the benifits of a trust (which are clear) and cashflow.

Unfortunately when we start out, our properties are all negatively geared and cashflow is critical.

I bought my first property when I was 24. I'm 36 now and have accumulated a $3M+ portfolio.

However I'm still in the starting out stage where cashflow is important and I need the negative gearing benefit to help me fund existing and new properties.

Good Luck

 

[Mr. Fabulous]

Hey people,

My suggestion is to speak to a few accountants/lawyers - those who understand property investing and trust structures (this is absolutely vital) and get your advice from them. There are people on this forum who will give you a balanced, honest opinion and who are more interested in helping you over the long term than making a quick buck.

Talk to them first and determine thereafter what you feel is the best choice for you.

Mark

 

[alexlee]

I am a very keen young property investor and wish to aquire at least 10 properties, so getting the structure set up correctly from the start is a concern to me as pointed out by many people in books. It also saves you money down the track from converting the properties from my name into a trust setup, for asset protection.

I am 22, single, purchasing buy and hold neg geared property in my name only. I am not in a job that is exposed to litigation. But you can get sued for anything now'a days. Hence the reason for asset protection for the future.

Adlante, may I ask whether you have any first hand experience (or first hand stories) of litigation? I just wonder sometimes whether we're overblowing the risk of litigation. This isn't the US, after all.
Alex

 

[Adlante]

Adlante, may I ask whether you have any first hand experience (or first hand stories) of litigation? I just wonder sometimes whether we're overblowing the risk of litigation. This isn't the US, after all.
Alex

No Alexlee I havnt heard of any stories first hand. And yes you are probably right, maybe it has been blown out of proportion. I guess its just another type of insurance.
I did hear an example however which made me think about it. " Say your accidently doing 10km/ph over the speed limit and happen to hit a pedestrian, seriously injuring them. You can be sued." and its those kinda things that made me think about it a bit more....

 

[alexlee]

I did hear an example however which made me think about it. " Say your accidently doing 10km/ph over the speed limit and happen to hit a pedestrian, seriously injuring them. You can be sued." and its those kinda things that made me think about it a bit more....

Does anyone have first-hand experience of this sort of thing? Or case law? I certainly haven't read any articles about famous people in this situation in Australia (and you'd think something like this would make the news if it was a celeb). How much of this is just scare-mongering by lawyers and accountants looking to sell you trusts?

Put it this way, what seems more likely to me is your kids sueing to have you declared incompetent to run the trusts assets, than you getting sued in a civil suit for negligent driving or something.
Alex

 

[redwing]

Hi lowb, have a read of the latest API mag. There is a good little articale about buying in a trust, and how it affects your cash flow, on page 74, in the TAX Myths Busted section.
Cheers

I dont think it mentioned HDT's though did it

RedWing

 

[lowb]

in API (august 2006), it says the disadvantage of trusts is cashflow

im only starting to read trust magic so im not exactly sure yet.
however, hybrid trust and trusts seem to be two different things as well.

if i were you, i would buy it and then restructure my portfolio later.

it wouldnt hurt to have say, 2 IPs owned by you, and 5 IPs owned through a trust?

 

[Mry]

Does anyone have first-hand experience of this sort of thing? Or case law?

In 10 years of accounting, I have seen about 30 claims brought against richer clients and their businesses. Mad employees, failing businesses, fraud, product problems etc are more likely than the problem you referred to.

Asset protection can be a bit of a beat up at times, but the problem is you'll never know if it is worth it until you get served. It is difficult to objectively criticize asset protection unless you've actually been threatened and gone through the whole process of reviewing what is up for grabs to the person suing you.

But while HDTs provide a degree of protection, lets not forget splitting income and capital gains later on.

Adlante has a very low low risk of getting sued and probably not many people he/she can distribute to so a trust may not hold that much value, but things could change later on.

Aldante will have to weigh up which is more important -

cashflow benefits (from not paying for a trust or tax returns for that trust)
tax consequeces (paying CG in own name, a positive tax returns from the property)
less paperwork

OR

asset protection
the possibility of distributing +ve gearing returns and CGs to present and future family members
land tax benefits

 

[lowb]

I have finished reading 'trust magic'.

Very impressive!

There are many advantages of a trust for you in particular, Adlante,

1. Hybrid trusts allow you to negative gear
2. You can spend pre-tax dollars on a large group of items (instead of after-tax!)
3. If you have a family, you can distribute equity or cashflow to them at a lower rate (or no rate if you have children)

The disadvantages are that you have to start it
1. ~$2000-$3000 to start a trust
2. ~$300 per year to run it
3. paperwork
4. legal and accounting fees (tax deductible)

You have to estimate the amount you will save...

I am in a similar position...
Have first IP, want to buy second IP through trust

My questions are
a) Are the initial costs $2000-$3000 mandatory, are there ways to reduce this?
b) Are trusts less useful for a single person who is not married, who has not got children, has no companies (there is no one who pays less tax to distribute the income to)

Cheers

 

[Qlds007]

Hi there

Wow $2000 - $3000 set up fees not sure where you are going but this day and age you wouldn't even pay that with having a Corporate Trustee.

Thing you are talking to the wrong people.

 

[lowb]

Thanks for the reply, Qld

I got the $2000-3000 quote from trust magic.

In that case,
a) how much does it cost to make a trust?
b) when you make a trust, do you have to define it as a hybrid trust or do you make a trust and use it as a hybrid trust?

 

[Adlante]

Thanks for the Info Lowb, looks like I might have to go out and buy trust majic. I'll also keep watching this thread...! Cheers

 

[ILoveProperty]

Thanks for the reply, Qld

In that case,
a) how much does it cost to make a trust?
b) when you make a trust, do you have to define it as a hybrid trust or do you make a trust and use it as a hybrid trust?

I have limited knowledge but:
a) As an example, I recently set up a trust with Corporate Trustee for $1300.
b) As I understand it the trust is defined within the Trust Deed, you must submit the deed when creating the trust.