Setting up a trust

[Nicholas H]

I have a small amount of money which I plan to put in to shares and am looking at setting up a trust to handle this. I just want to make sure I understand correctly how it works. I am setting up the trust to have a structure to protect the assets, for I would like to go in to business down the track (1 to 5 years from now) and would like to protect the little I do have. I also want to leave as much flexibility as possible. I would like the option of being able to use the money to buy a house which would probably be under my wife’s name.

I am planning to get a trust set up with a shelf company as a corporate trustee, how much is this likely to cost, I expect about $1500.

To transfer money in to a trust, you can gift the money or loan the money. Is these the only two ways?

If you gift the money then there is a good separation between you and the assets. If you loan the money then you still have a link, is there any issues with having a 0% interest rate? With loaning money does this work, since a trust must distribute profits, so Income – expense = profit, then increasing expenses would reduce the profit to potentially zero. Is repaying a loan counted as an expense to be able to reduce the profit, is getting capital back counted as income to me.

Example:
Loan trust 10k
Trust makes 1k in the year, and pays back 1 k of loan
Loan is now 9k, has 10k of assets, 0 profits
I have 1k returned of capital, I know if it was interest it would be counted as income, but capital being repayed should not be?
I then loan/gift the money back to the trust
Trust has 11k of assets and a 10k loan.

If I did want to get money out of a trust latter to buy a house, the only ways that I can think of is that the trust loans the money, or repays a debt?

Thanks for any advice or suggestions

 

[alwayscurious]

costs of setting up HDT with Company

It costs around $2600 - $3000 to get an accountant to do it.
I think about 1200 - 1500 of this is actual licencing fees ie company costs $900 or so to set up, trust around $200 - 300...

etc.

 

[JamesGG]

Hi,

Another thing to keep in mind also is that while paying interest is a deduction, to the best of my knowledge the same does not apply to reducing the balance of a loan.

Also, it is my understanding that everything should be kept at "arm's length". Thus, a 0% interest rate might attract the attention of the tax office as that is not commercially viable.

Good luck!

James.

 

[GreatPig]

Example:
Loan trust 10k
Trust makes 1k in the year, and pays back 1 k of loan
Loan is now 9k, has 10k of assets, 0 profits

I'm no accountant, but I don't think it works like that. If the trust makes 1K during the year then that's 1K of income that has to be distributed and taxed. If you actually use it to pay back capital, then I don't think there's a problem with that, but there will still be 1K of income in the books that has to be distributed and taxed. As James mentioned, repaying capital is not a deductible expense.

And I don't think there would be a problem with an interest free loan to the trust provided it came from your after-tax savings. If you borrowed the money and wanted to claim interest deductions yourself, then you'd likely have a problem, but as far as I'm aware, you can pretty much do whatever you want with your own savings.

If you lend the money to the trust, then you should be able to just repay the loan to get the money out to buy a house. If you gifted the money, then I'm not sure of the best option.

GP

 

[iKwak]

Is the procedure to setup a trust account the same in Australia and the United States?

 

[NigelW]

Is the procedure to setup a trust account the same in Australia and the United States?

No. The trust and tax laws are vastly different. Also, if you're thinking about cross border investment then there's an additional layer of cross-border tax laws to navigate.

I suggest you see a US lawyer first.

Good luck
Nigel.

 

[tubs]

If you lend the money to the trust then it is not protected, as in a bankruptcy it is seen that the trust owes you money, and it can be easily retrieved. I know that you said you were interested in protecting what you had so be careful.

Tubs

 

[Nicholas H]

since paying back a loan is not a deductable expense. So there is no benifit to loaning money to a trust. I guess I am just trying to get my mind to understand the little bits.

So if I gift the money to a trust, it is as it should be, well protected.

Is there any issue with the trust lending money (captial) back to me at a later stage to buy a property if we desire, that should not count as income, there would be records to say we owe the money, this is not to avoid tax or anything like this it just means that if we want to buy a house in say my wife's name it is possible.

 

[Terry_w]

since paying back a loan is not a deductable expense. So there is no benifit to loaning money to a trust. I guess I am just trying to get my mind to understand the little bits.

So if I gift the money to a trust, it is as it should be, well protected.

Is there any issue with the trust lending money (captial) back to me at a later stage to buy a property if we desire, that should not count as income, there would be records to say we owe the money, this is not to avoid tax or anything like this it just means that if we want to buy a house in say my wife's name it is possible.

There are plenty of benefits of lending money rather than giving it away. The trust is a third party which you may temporarily control - but won't always control. So if you want to leave that money via your will, as one example, you may want to loan it to the trust.

If a gift is not properly documented it would be considered a loan and not protected.

A trust can lend a beneficiary money only if the deed allows it. Otherwise a breach of trust.