Trust Structures

[jrc77]

Just bouncing around some ideas for structuring next purchases and looking for ideas before I talk to my professional advisers.

Currently have:

1. Discretionary trust with corporate trustee - used for running business out of with significant profits distributed to beneficiaries each year. Call this Trust1.
2. Discretionary trust with individual trustee - used for holding some shares. Call this Trust2.
3. IP's in individual names.

If I was to purchase additional IP's in a trust structure, do I:

a. Create a completely separate discretionary trust with corporate trustee.

Notes:

Could distribute profits from Trust1 to new trust to soak up any initial losses in this new trust (if property was negatively geared).

Wouldn't get a land tax free threshold anywhere but Qld?

Flexibility for distributions of income, and CG down the track.​

b. Create a unit trust with corporate trustee and have the units held by Trust2.

Notes:

Any negative gearing losses would occur for Trust2 - so could distribute from Trust1 to Trust2 to utilize them if the share income from trust 2 doesn't already.

Wouldn't get a land tax free threshold anywhere but Qld?

Flexibility for distributions of income, and CG down the track.

All the various unit trust advantages that Terry outline here (http://somersoft.com/forums/showthread.php?t=89302)​

c. Create a fixed unit trust with corporate trustee and have the units held by me (or my wife) individually.

Notes:

Any negative gearing losses would occur for unit holder - so can utilize them immediately.

As long as fixed unit trust get access to land tax threshold of beneficial owner (I think?).

No flexibility for distributions of income, and CG - however get the various unit trust advantages that Terry outline here (http://somersoft.com/forums/showthread.php?t=89302). So maybe able to transfer units to Trust2 or SMSF down the track?​

d. Something else I haven't thought of?

Regards,

Jason

 

[Aaron_C]

First question - why do you need a trust for residential property? What are you hoping to achieve?

 

[alexlee]

2. Discretionary trust with individual trustee - used for holding some shares. Call this Trust2.

Also, why have individual trustees for trust2? Corporate trustee is much more flexible.

 

[Paul@PFI]

Trusts

If I was to purchase additional IP's in a trust structure, do I:

a. Create a completely separate discretionary trust with corporate trustee.

Notes:

Could distribute profits from Trust1 to new trust to soak up any initial losses in this new trust (if property was negatively geared). Have you considered that this may be a scheme and anti-avoidance PartIVA may apply? What is the commerciality ? Also if you distribute to that trust but dont then pay its share of income I would expect ATO would invoke their lovely new "benefits others" view.

Flexibility for distributions of income, and CG down the track. Sort of. Cant distribute to a SMSF. Loans cannot be refreshed and convert non-deuctible debt into deductible in a DT v's a UT.

b. Create a unit trust with corporate trustee and have the units held by Trust2. Lets assume T2 is a Disc Trust. Why bother having fixed to discretionary if its the sole unitholder? Loan deductibility issues pose the major obstacle here.

This isnt a sructure that is preferred. But each can be different. Only your advisers can assess your circumstances.

Long term you dont want a disc trust owning prop. End game is it gets stuck there in my experience and then duty and CGT issues affect decisions. You want a SMSF to own "equity" in longer term. Asset protection, bankruptcy, liquidator access etc... Unit trust like "c) tends to suit this.

All the various unit trust advantages that Terry outline here (http://somersoft.com/forums/showthread.php?t=89302)

c. Create a fixed unit trust with corporate trustee and have the units held by me (or my wife) individually. And a SMSF? Existing super can establish a SMSF and it could commence to own units in UT. You borrow using OTHER property as loan security so trust has no charge over IP. And grow SMSF unitholding over time with contributions. Strategy to acquire your units as prop becomes +geared perhaps? Depends on loan security of course (SIS Reg 13.22)

As long as fixed unit trust get access to land tax threshold of beneficial owner (I think?). It depends where prop is and what sort of trust deed. Land tax is more complex that this. For example in NSW the trust cant "double dip" the threshold. You need to consider this carefully.

No flexibility for distributions of income, and CG - however get the various unit trust advantages that Terry outline here (http://somersoft.com/forums/showthread.php?t=89302). So maybe able to transfer units to Trust2 or SMSF down the track? Maybe...SIS Reg 13.22C / D must be considered. /B]

d. Something else I haven't thought of?
- Asset protection issues
- Overseas posting in future ?? ASIC require one resident Director.
- State stamp duty laws. ie transfer duty on changes to benefical ownership. Do you know these?
- Marital issues. What happens "if".
- Cost. Upfront establishment and annual compliance
- If its a UT what % you v's wife.
- How do you fund your units in a UT ? A joint loan and one amount draw might be a foolish act. Segregated loans for each of you is clever.
- Your advisers ? Are they smart in this area. If not you might get chewed up. Just had a client in who had a taxadviser tell him he could setup a SMSF and buy his sons IP. s66 SIS says you cant.

 

[jrc77]

First question - why do you need a trust for residential property? What are you hoping to achieve?

I'm not definitely doing it this way (still deciding between going the trust structure path or individual names).

The main advantage I see in using a trust structure would be flexibility.

For example - distributing income and capital gains. Say a property I bought now for $500k was worth $2m in twenty years time - if sold would trigger a large capital gains tax bill. Bought in individual name there would be little I could do to reduce it. My understanding is that if bought in discretionary trust (or unit trust with units held by discretionary trust) then this capital gain could be distributed amongst the beneficiaries (my wife, my then over 18 children, myself etc).

Also potential ability to transfer property to SMSF later down the track is appealing.

Even if not selling, the flexibility to distribute income to lowest marginal tax rate benificiary is appealing.


Regards,

Jason

 

[Terry_w]

Further to Paul's comprehensive reply, you haven't considered succession issues (or haven't mentioned them).

Consider passing of assets and control of trusts upon your incapacity and/or death.

Keeping properties in personal names may allow these to be passed to testamentary discretionary trusts so family can benefit more from children getting taxed as adults. Alternatively units of a unit trust could be passed.

Also, loans to the trust, or gifts. How is the trust going to fund the initial deposit etc.

 

[Paul@PFI]

s66 SIS Act says NO YOU CANT if its a Disc Trust. If its a Unit Trust there are also LOTS of conditions requiring advice.

I'm not definitely doing it this way (still deciding between going the trust structure path or individual names).

The main advantage I see in using a trust structure would be flexibility.

Also potential ability to transfer property to SMSF later down the track is appealing.



Regards,

Jason