To Trust or not to Trust

[ILoveProperty]

Hi all
I've been reading past threads about trusts, trying to figure out what to do. Of course now I am more muddled up than ever and hope that some of you with experience can help

My situation:
Married, wife about to have our first baby (low income and none for maybe a few years), one investment property in my name (-ve geared)

Plan:
Buy at least 10 properties over the next twenty years, probably in Victoria.

Reasons for having a trust:
Tax benefits - (distribute income to family members who are on low tax rates) That would be my wife. As any children who we could distribute income to won't be ready for 18 years. Would it be better to buy +ve geared properties in my wifes name and -ve in mine. Then there is the issue of higher land tax for trusts.

Asset protection - Neither of us is likely to be sued via work. If the properties we end up buying are all with 90% loans with banks, they hold the titles, so if my wife or I find ourselves in a situation where we are being sued, well we don't actually own any properties? the banks do? Sorry, absolutely no idea on this, so thought I'd ask

I really would like to set up a trust. From what I've read it's the way to go. But with land tax and higher ongoing costs...

Any advice would be very much appreciated
Thanks

 

[Andrew]

You can make distributions to minors, just don't exceed the limit (about $600)
for unearned income. Any above this limit is taxed at punitive rates.

andy

 

[geoffw]

You could buy -ve properties in your name. But then the go +ve after some years. And then you sell them for a big profit.

And other things change. I would never have believed that my wife's income would go higher than mine. But it has.

And if you're sued, the bank only has 90% of the original loan. In 7-10 years (if you've chosen well and the property doubles according to the Australian average) they've only got 45% (also assuming you have not paid any of the loan off).

 

[ILoveProperty]

Andy, thanks. Considering there are no minors in my family yet, is it possible to add beneficiaries (family members) to an existing trust?

Geoff - yep you're right. It's all about planning for the future isn't it. The light has finally clicked on. Thanks

 

[Andrew]

Normally a discretionary trust deed is fairly broad in its definition of general
beneficiaries. For instance, my trust deed specifieds, IIRC, any descendents
of my or my spouse's grandparents. That covers just about anybody alive
who we're related to.

The benificiaries don't have to be alive when the trust is created, so long as
they fit within the definition as listed in the deed.

andy

 

[CATA]

Some deeds will allow you to add/remove unrelated beneficaries with a minute entry, others will need resettling. This will allow you to add a company to cap your tax rate, or another person/entity that you choose.

Cata

 

[ILoveProperty]

Andy, thanks, love it. That should cover the future family!

and Cata, with a deed that can allow the addition of a company, in the minutes. Sounds like I would have most other possibilities covered

cheers

 

[Terryw]

Hi, Many deeds are worded in such a way that a new company is automatically a beneficiary if one of the trustees, appointer etc has an interest in that company - ie shareholder, director, or other office holder.

Adding a beneficiary can often result in a resettlement which can be extremely costly.

Terryw

 

[Mry]

Adding a beneficiary will in most cases cause resettlement. Drafting the beneficiary clauses to be as wide as possible at the start is standard practice with most trust providers although there can be restrictions in the deed clauses for some (to get them out of being a beneficiary if they are in receipt of a pension for example).

The advice of most accountants is to 'read the deed' when you get it. If you have an issue upon receipt of the deed, it is at that time you would want to add and change beneficaries, which may cause resettlement, for a capital gain equal to the settlement sum ($10 bucks for my clients, who cares?).

Excluding the asset protection advantages, a trust (more specifically, a HDT) is useful as it gives you a lot of flexibility for what you can do with the property and gives you more control over where the taxable income from the property can go. The only times a trust is not useful is if -
You plan to live in the IP at some time and want the PPOR exemption.
You have no one you can make distributions to.
You have very few asset protection risks.

You also have to remember that accounting fees go up since the trust ITR has to be done. You won't see a lot of benefits from a trust in the short term but you see them later on when it goes +ve and when a capital gain is incurred.