Trusts and personal liability

[h8dk97]

Hi All,

When you buy a property for trust can you avoid the personal liability, are there any difficulties with banks and does the loan for trust differ from loan in just a persons' name?

If you can't avoid personal liability with trust are there any other ways i.e. company? I heard that HK in his seminars explains how not to be personally liable, but is it possible really, would banks just let you do it?

Thank you in advance.

Regards,

Jerry

 

[Rolf Latham]

HIYA

You will always be personally liable for a finance deal in a trust.

Yes there are "non-recourse" products out there but why would you go for a 60 % LVR and then walk away form a deal.

Tends to be restricted to higher risk commercial stuff.

Ta

rolf

 

[XBenX]

Ive done a bit of reading on the forum regarding trusts..

One thing I havent quite got my head around regarding using trust is in regards to borrowing

Take this example

I find an IP i wish to buy (that I wish to place in a trust - for asset protection reasons of course Mr Taxman)

Would I go about my normal loan application process ? Do I inform the lender of my trust strategy ?

The loan is approved and settlement occurs... what is the process here ? Is the name on the contract me, then it is transfered to the trust ?

Thanks

 

[Peter_Tersteeg]

Hi XBenX,

Then name on the contract is the name of your trust. The property is purchased by the trust, not you.

The lender of course, looks towards you as part of the process of optaining the loan. Lenders will make you jump through a few more hoops, but so long as you're talking to the right people, it shouldn't be much of a problem.

 

[XBenX]

Ok so the trust is the entity buying the property, that makes it clearer now. I was getting confused w/ transfers etc.

As for the loan process does anyone have any examples of how applying for finance for an IP owned by a trust differs from finance for an IP owned by a person.

Ie is the DSR and LVR still assessed in the same way ?

Are both personal income/rental income still counted on the application ? (In which case your borrowing ablility would not be affected)

 

[Rolf Latham]

HI XBX

Generally a trust application is not much different to a personal, BUT

1. Many trusts use a corporate trustee, which means some lender treat you as a company. Westpac for example will not let you use the Professional pack for that type of structure.

2. Additionaly you may have fun with some mortgage insurers, depending on the content of your trust.

Otherwise much of a muchness

Ta

Rolf

 

[Jas]

Originally posted by XBenX
As for the loan process does anyone have any examples of how applying for finance for an IP owned by a trust differs from finance for an IP owned by a person.

They are generally the same as you have to guarantee the loan personally - so your serviceability etc is still an issue.


Are both personal income/rental income still counted on the application ? (In which case your borrowing ablility would not be affected)

Both are counted, but as you go guarantor on the loan, your serviceability is affected.

Jas

 

[XBenX]

Thanks guys

 

[Peter_Tersteeg]

In my experience, the process and parameters for applying for a loan in the name of a trust is the same as a person. The lender will look at the finacial statements of you, the trust and the trustee (if it's different from you, such as a company). You also need to show evidence of the existance of each concerned entity - similar to providing proof of your own identification.

Some representives of lenders will discourage you from using a trust. Usually it's because they have little understanding of what they are. This probably just means that you need to talk to someone else who is able to help you.

Overall, you need to jump through a few extra hoops, but if your stuff is in order, it's not a big deal - just factor in a little extra time for it all to go through.

 

[h8dk97]

Thank you all, your replies answer my questions too.

 

[geoffw]

I did not have any procedural problems relating to a trust. But I did have practical problems.

I'm in NAB's Professional Choice thingo, and generally, I don't have many problems. They understand what I'm trying to do, and bend over backwards to help (as do many in similar banks and products).

The big problem for me was that the trust had to have the trust deeds approved by the legal department of the bank- which did not happen for me as an individual. There were extra consequential problems occurring because that took a while.

Part of the problem was due to documents disappearing in transit- that may not have occurred if I wa in Sydney.

But make sure that you allow for some extra time- just in case.

 

[TOBA]

Hi all,

When you buy a property under a trust, can you claim the non cash deduction such as building allowance, fittings depreciation and loan cost?

My understanding is that as the trust has no income yet, this deductions will be useless. Unless the trust is allowed to carry the losses?

Then if that deductions is not allowed, wouldn't be it better to buy under a person's name? In PIA program, when you entered the income as 0 (zero) because the trust has no income, you will be much worse as compared when you buy as a person who has some income.

Any help will be much appreciated

 

[michaelg]

Hi,

To explain in a little more detail, the hoops mentioned regarding trusts and company trustees are;

1) The lender may charge an extra fee - to have their legal people review your trust deed. Be prepared to have copies of your trust avaliable to be sent with application.

2) If you use a company trustee, you will need to remember to have your company seal with you, whenever you sign a document as a Director or Secretary.

3) If you use a company trustee, you will need independant legal advice as the Director, and may require a document signed by the solicitor giving the advice.

4) Using a trust, the bank will require a guarantor. The guarantor will require independant legal advice, and may require the solicitor sign a document saying as much.

5) Using a trust, the bank will require a guarantor. The guarantor will require independant financial advice, and may require the accountant sign a document saying as much.

6) If you use a company trustee, ensure your accounts are up to date, the lender may request a financial snapshot of your company (profit/loss, balance statement).

That's all the problems I can think of that occurred to me

If you're setting up a trust for the first time, the borrowing capacity, will be about the same as if you were getting the money for yourself.

Michael G

 

[Jas]

Originally posted by Matnur
Hi all,

When you buy a property under a trust, can you claim the non cash deduction such as building allowance, fittings depreciation and loan cost?

Yes, the trust can claim all the things you can (and a few more).


My understanding is that as the trust has no income yet, this deductions will be useless. Unless the trust is allowed to carry the losses?

Got it in one, the trust can carry the losses


Jas

 

[Sim]

Originally posted by PT_Bear
Then name on the contract is the name of your trust. The property is purchased by the trust, not you.

Actually this is not quite correct...

The name on the contract is the name of the trustee. The property is purchased by the trustee "as trustee for" the trust, not by the trust and not by you.

So the contract would have:

"MyCompany Pty Ltd as trustee for MyTrust" - although strictly speaking I believe that "MyCompany Pty Ltd" is the preferred approach. That the trustee is acting on behalf of the trust, is actually only implied - which can lead to problems in the future if it comes to questions about whether the asset is actually held in trust or not - hence the practice of writing "as trustee for" in the contracts - so that it is perfectly clear. You should have separate documentation outlining the decision of the trustee to purchase the asset for the trust anyway.

CAUTION: in many states, companies who purchase property (whether as trustee or not) do NOT get the statuatory cooling off periods provided to individuals. For this reason it is often better to sign the original contracts in your own name "and/or nominee" and get your conveyancer to provide you with a nominee letter specifying tranfer of interest to the trustee after the cooling off period. If someone complains about the nominee clause, just explain to them that you are waiting on advice from you accountant as to whose name it will be put in (which is possibly actually the truth !)

CAUTION: there may actually be stamp duty implications in what I just said, and there are also other potential pitfalls !!!

I am not an expert in this field - you must get your own advice on how to approach these matters - your accountant and conveyancer/solicitor can advise you on the best approach for the area you are purchasing in and the structure that you are using.

 

[Sunstone]

Dear guys,

Also with regards to company seals these are no longer required.

Corporate Law changed about 4 years ago which meant that it is no longer a legal requirement to have a company seal put on documents. Some parties still request it but those are the ones unfamiliar with the change in corporate law.

Cheers,

Sunstone.

 

[The_Husband]

Another option when using a trust is to just get the loan in your personal name. In theory, you are acting as trustee of the trust and you can still claim the interest etc as being trust expenses. This is what I have done with some of my properties.

Is this right Dale??

Thanks

TH

 

[DaleGG]

Originally posted by The_Husband
Another option when using a trust is to just get the loan in your personal name. In theory, you are acting as trustee of the trust and you can still claim the interest etc as being trust expenses. This is what I have done with some of my properties.

Is this right Dale??

Hi

It would depend upon who the trustee is? If it is a company, then you could have created problems . . . if it is you, then that should be fine.

Whilst there will always be shortcuts that you can take, they do not always provide the most efficient results down the track.

HoHoHoHo

Dale

 

[The_Husband]

Thank you Dale. That is ok then. I am the trustee of my trust, not a company.

Thanks again

 

[TOBA]

Thanks for the answer Jas and everyone. I made some calculation using PIA program. When you purchase the property under the trust name it will incurr losses at least for 5 years ( assuming rental return of 6.5% or less), because you can not get tax credit (the trust income is zero)

Is this acceptable to Tax Office when your trust incur losses for 5 years in a row?