To trust or not trust

[sammmeee]

Husband and I have properties all in our names but in different percentages.

As does happen, hubby was at a "boys" day with football and alcohol mixed in one of his mates thinks we are crazy for put properties in our own names and they should be purchased with trusts.

we both are payg income earners with hubby earning nearly double of my wage. How would a trust help us. Some properties a cashflow pos some negative.

 

[D.T.]

Where are the properties? All in one state or scattered around Australia?

A trust could help you in 2 ways that I can see so far:

1) Land tax threshold (in most states) refreshes with the establisment of each trust. Meaning if you had say $X in your name, $X in husbands name, $X in trust1 and $X in trust2 you could pay no land tax on any of it, whereas you might be up for heaps.

2) If the trust was a discretionary trust, you could distribute income to the lower earner now and therefore get taxed at a lower rate. That may change in the future whereby other partner stops work (fired, injured, who knows) or the lower incomerer (new word) increases their earnings (promotion, new business opportunity) and then can distribute to the other person. In your current setup you're stuck with who earns what based your percentages.

After the fact there might not be much you can do due to the costs of transferring them, but may be a worthwhile way going forward. Discuss this with your accountant.

You also need to weigh in the costs for establishing the trust and for the maintenance / annual returns of the trust.

 

[Terry_w]

Alcohol and property structuring are not a good combination.

 

[Paul@PFI]

Leave my good friend al out of this.

Trusts may be a suitable alternative but getting advice at any social gathering should be avoided. Real issue here is you weren't aware. Shows that the existing tax adviser is either inept or lacks knowledge - Dont worry most have no idea. Wonder what other things they don't know ?? Personal advice is always needed.

- Fixed Trusts may enable change of ownership of the "beneficial interest" without stamp duty and legal transfers etc... ie Unitholders are issued a"unit of ownership which then crepresents a portion of the total. You can change proportionate rights to trust income + capital. No duty? eg : Hubby + wife 50/50 can become 20/80 at a later date.
- Fixed Trust : SMSF can be an investor (sometimes). Strategy to increase SMSF ownership and reduce personal investment can be sound.
- Personal investment that is negative geared can be done along with a SMSF that is +ve geared....Some gearing issues apply to this popular strategy.
- Fixed Trust : Refinance principle allows the trustee to refinance and payout a unitholder. The unitholder can use the funds for non-deductible use but the loan is deductible. A unique trusts outcome. Yes you can increase the deductible loan without buying property !!
- Disc Trust : Flexibility in way income / capital gains etc can be distributed.
- Land tax concessions can be both harsh and beneficial for trusts. Depends on state. Many accountants aren't good with this.
- Stamp Duty : Putting IPs into a trust a bad idea as this is dutiable. Future purchases maybe.
- Stamp Duty : Understanding how a trust can be assessed with duty a wise issue.
- CGT : Some trusts pass on CGT discount. Some might have trouble.
- CGT : Understanding why owning multiple IPs in a trust can trigger a CGT issue

Its worth doing a full review for all future purchases. Also a review of how much you have in super. There are some very good super arrangements that can work with some trusts.

The mistake most investor make is caused by that standard contract for property which gives three choices of ownership...All of them are fixed. Trusts can change that approach and result in a more flexible basis for ownership and income.

 

[Terry_w]

I wrote a post on the 15 (or 14?) benefits of using a unit trust to own property - but I can't seem to find it now.

 

[Paul@PFI]

I also went looking for the thread to Terry's very good summary.

 

[MTR]

Yes, Terry has provided some great information for free on SS... how good is that... thanks TW

I only started using a Trust 3 years ago, no other way for me now as its perfect for what I am doing.

MTR

 

[Paul@PFI]

God bless Google.. Of course this is just unit trusts. Discretionary, hybrid and other trusts also.

http://somersoft.com/forums/showthread.php?t=89302

 

[Terry_w]

Plenty of advantages of using a UT v using an individual to own property

1. ability to transfer part of the property without changing title. You can transfer the units.

2. The transfer of units can be done at reduced stamp duty or no stamp duty. In NSW it is currently 0.6% of the value of the units. Compare this to transferring ownership of the property. NSW is still saying that stamp duty on the transfer of units will be abolished at a later date too.

3. Ability to save CGT by transferring the units in stages. ie. instead of selling all the property this year you could sell half now and half next year to reduce CGT. (this could be done in personal names but more cumbersome).

4. Ability to get a residential property into a SMSF. Normally prohibuted by the SIS act, but there is an exemption for the transfer of units from a person or a DT to a related SMSF, SIS Reg 13.22C.

5. Ability to borrow indirectly for private expenses and have the interest deductible. e.g. You own units in trust, equity builds up, you sell units to a DT or spouse who borrows to buy the units. Interest deductible to the borrower. Cash used to pay down private debt. stamp duty may be payable depending on state and CGT would be payable too.

6. If the unit trust is a fixed unit trust then ability to access the land tax free thresholds in NSW and Vic, not sure about other states.

7. Ability to keep the ownership of the units secret. Ownership of the land will be the trustee and this is publically searchable, but ownership of the units is a private arrangement and not searchable. Compare this to a company - all shareholders are recorded and their DOBs and home addresses is searchable by the public.

8. Ability to negative gear by the unit owners borrowing to acquire the units. Interest can be deductible against their personal income.

9. Ability to improve loan serviceability. say you owned a property and it had build up heaps of equity, but you couldn't access it because of a major credit default, or because you were not working. You would be stuck. But, with a unit trust you could just insert a new director to the trustee company and use their income to service.

10. Estate Planning. It may be easier to leave control of the in the trust property to someone by making sure they control the trustee company. This can be done without probate, and even bypassing probate. You can do this via shareholdings of the unit trust corporate trustee. Either have these shares owned by a different trust or pass them on to someone while you are alive.

11. Asset protection. Trust assets don't fall into the hands of trustee in bankruptcy, but units will if you personally own them. More asset protection than owning in your own name, but much less than a discretionary trust. Terms of the trust can also slow down the trustee in bankruptcy taking control and selling property.

12. Asset protection in death. Generally trust assets do not form part of your estate, so less chance of the UT assets being affected by a challenge to your will, such as Family provision challenge. But in NSW this is NOT the case.

13. Ability to jointly purchase a residential property with a SMSF as tenants in common.

14. Ability for a SMSF and a related party to each separately own units in a unit trust which owns residential property. The units owned by the individual could gradually be sold over to the SMSF as it builds up more cash (from contributions and earnings etc).

15. Ability to extract money from your super, indirectly. eg. imagine you had a UT which owned property purchase for $100,000 but now worth $300,000. You also had $300,000 in super. Your SMSF could buy the units from you and give you $300,000 cash (think i covered this above??_)

16. Ability to pledge the units as security under the Personal Property Security Act.


These are just off the top of my head and no one should try these at home without supervision by a lawyer as there are many regulations and laws surrounding this sort of stuff and easily to get things wrong.

Orioginally from here http://somersoft.com/forums/showpost.php?p=1046287&postcount=4

 

[sammmeee]

thanks soo much for all your replies..

yes alcohol and stucturing dont mix..

I did know about trust structuring but like most things the more you learn the more you realise you dont know..

My accountant is in Bris. I never speak to them I do the return and they check and sign off. My Broker is A+ might need to find a different level of accountant before the next purchase. But first I need to learn more otherwise I will not understand what they are advising me to do, or the right questions to ask. Will start to research the different options.

 

[Foxy Moron]

Wow. Some fantastic pearls from Terry's post. You are certainly a valued contributor to this forum. There are many wily tactics mentioned here with using a unit trust to acquire both resi and commercial property, particular where you feel it is likely that a transfer of ownership (or part therof) is likely down the track....ie transfer of units between family members, individual to disc trust, shuffling between members of a smsf and the fund itself etc. I like the comment 'dont try this at home'. So true. One of the traps is the vastly different stamp duty mechanisms applied by various states. I think in Queensland we get it worse....duty applies not to the (net) value of the units being transferred but to the unencumbered value of the dutiable property held by the trust (percentage of trust interest). Ouch. Something to think of if wanting to apply these types of tactics to a Queensland based property. It seems that the southern states much kinder re stamp duty on transfer of trust units in most cases. Disclaimer - Just my opinion. I am a fox not a lawyer.

 

[Dingus]

I considered a unit trust for my property purchase in QLD (as I could borrow in my own name to purchase the units), however with the duty that applies on ownership transfers, I settled on a discretionary trust as I also had savings...

Looking at the options for future income distribution and ownership, I think discretionary was the best option for QLD... however I don't think I have any SMSF options.