Trusts... These are new to me. Why do you have them

[Paterson00]

Hi all,

I am currently trying to learn about trusts. I would like to know the benefits of having property held in trust. I am told that it is for asset protection and tax advantages. As I understand it, a discretionary trust or family trust may be best.

I have recently booked in to have a consultation with an accountant to learn about them and after the initial half an hour free time he will be charging me $350 per hour for his time and also $1500 to set up the trust should I decide that I want one. That seems expensive. I have been looking at setting one up myself through www.lawcentral.com.au The charge through going through these guys is just $150 and it seems really simple, maybe too simple.

Because of my lack of knowledge about them I am unsure if I need to go through the accountant.

Once the trust is in place, what is required for maintaining it. Is it a requirement to have minutes kept or anything else to legitimize the trust etc.

Any tips or links that could explain it to a newbie would be great, slow speaking with small words would be the best approach, or even pictures..

 

[Terry_w]

A trust is a relationship between the trustee and the beneficiary. The trustee holds property for the benefit of the beneficiaries and there are special obligations attached. This is all legal advice and can only be explained by a lawyer.

One of the benefits of holding real property in a trust is the ability to minimise or reduce tax payable by the family group as a whole by distributing money to those on the lower incomes which results in lower taxes being paid.

Another major benefit of a properly set up discretionary trust is asset protection if a beneficiary were to become bankrupt at some stage. The assets of the trust are generally safe from creditors.

Although you could set up a trust on line for a small sum or for free even these are extremely complex relationships covered a number of different areas of law:
Asset protection
Trust law
Corporations law
Equity
Family law
Bankruptcy
succession
taxation
stamp duty
land tax
etc

These are just some of the areas the advisor has to be knowledgeable in. A trust deed should also be tailored to your situation. You need advice on who the current and future appointors and trustees should be and how this is structured.

I see trust deeds everyday in which the next appointor is the legal personal representative of the current appointor upon their death. This could end up being a public trustee company - or aunty Ethel. Would you want to build up family wealth only to have it controlled by someone you don't like who could benefit themselves?

 

[Terry_w]

Once a trust is established you must read the trust deed and be very familiar with the duties of the trustee - if this is you or if you control the position. Breaching the trustee duties could result in you being sued by beneficiaries.

The trustee must also record all decisions in writing, so minutes or resolutions need to be made for every decision - opening bank accounts, buying property, borrowing money etc - you also need to consider if the trustee has the power of borrow and the power to mortgage property. If this power isn't granted in the deed the trustee could be breaching their duties if they do borrow or mortgage trust assets.

The trust will need to prepare a tax return each year and if their is a company as trustee annual fees to ASIC are payable - abotu $230 pa.

 

[alexlee]

Go buy a couple of books on Australian trusts. Cost you maybe $100.

If you read them and still don't understand what's going on, and are unwilling to pay an accountant to plan and operate one for you, don't use a trust.

The fact is, if you don't understand trusts and still use them, you might as well be holding a gun without knowing which end the bullet comes out of.

 

[Mitch1]

Do you need a trust (are you purchasing a property that is positively geared as an investment with obvious capital growth - increasing equity, even if it isn't going to make money from the get go, the general plan is that it will !)

This is one of the main reasons people have trusts, to protect that asset, it's equity, and the additional ability to lend within the trust, to utilise the equity for further investment. Lending cannot be done without the right set up either but you will only find that out after talking to a lawyer/accountant, preferably both.


If the answer to that is yes, then why would you attempt to do a DIY job that could end up costing you far more than 1/2hr to an hour of additional time to do it right?
I found out these things by seeking out professionals who know this stuff, recommendations from here are a great resource, but questioning a cost that can literally save you thousands and protect your assets is a tad narrow minded.

I imagine DIY trusts are a bit like home and contents insurance, if you don't know what you are signing up for, inundation can have a whole different meaning.

 

[Aaron_C]

Please don't set up your own trusts if you don't even know what it is.

 

[Terry_w]

I set my first trust up years ago, before I was qualified in anything, and it was all structured wrongly. I set it up through a famous accountant (back then). I purchase one property, found out the problems and then sold the property and haven't used the trust since.

This is what can happen with advice.

I have also seen others who have set up trusts incorrectly. Some were invalid from the start others had bad mistakes - settlor was the main beneficiary's son! A few had set the trusts up using online providers not knowing about land tax - one guy was (and still is) paying $3000 pa in land tax which he could have avoided.

 

[Paul@PFI]

Here are some of the issues with you doing a DIY trust.

1. You have chosen the human trustees options. Thats not smart. In facts its pretty foolish. A company trustee is a much smarter option.

2. Who should the appointor be ?? Lets say its you. What if you die, or are incapacitated.
3. Who are excluded beneficiaries ?? Do you know why not to use parents or a child to "save tax"?
4. What is the land tax position for your proposed trust ?
5. What are some stamp duty triggers for your proposed trust ?
6. Do you know how to prepare effective trust resolutions for distribution of income ? I would argue most clients of mine dont know how to calculate income so the answeer to the above is No. That can have some serious tax problems.

There lots more. Thats why its $1500 to setup etc...The guy across the desk knows these answers and will steer you out of a costly mistake. terry's post is a very good explanation of many areas.

Annual costs of compliance should be understood. You have no idea how many people I have encountered why think that becase Steve & Diane are trustee for the trust and the trustee pays tax that its OK to just add the trust income 50/50 into their tax returns. No trust return.

 

[A Jeremy]

$1500 is pretty standard and how much is asset protection worth to you?

If you set it up with a company as the trustee, you can create multiple trusts, as your portfolio increases, to minimise your land tax obligations. Of course you have to weigh this against the $1500 fee every time you start another trust.

'Because of my lack of knowledge about them I am unsure if I need to go through the accountant."

You may have just answered your own question. I think it's clear, if you choose to tread this path you need to engage a professional.

In terms of maintenance, I do a BAS every quarter - because it is registered for GST - a tax return annually, and sign a declaration every year stating that the trust will continue for the next twelve months as it had for the previous twelve.

 

[Terry_w]

If you set it up with a company as the trustee, you can create multiple trusts, as your portfolio increases, to minimise your land tax obligations. Of course you have to weigh this against the $1500 fee every time you start another trust.

This works in QLD if the trusts are not identical, but not in NSW or VIC and probably not in other states - NT has not land tax.

 

[A Jeremy]

Oo, I did not know this. Thanks Terry.

Imagine my surprise when...

 

[see_change]

Although terry mentioned one benifit of trust as land tax , this is treated differently in different states .

Eg in NSW if you have a property in a trust , you pay land tax from dollar one ( as some forumites have found out ) , so that's a big draw back of buying in a trust in NSW .

On the other hand , in Queensland , each trust has a seperate threshold . In the last cycle we held 15 IP's in q'land and paid no land tax .

As stated , being able to distribute income to different beneficiaries is a significant benefit . My wife no longer works so we distribute the income from a trust to her . ( she actually does work , she looks after the IP's , shares and super so we relax at night ) .

Cliff

Cliff

 

[Terry_w]

Eg in NSW if you have a property in a trust , you pay land tax from dollar one ( as some forumites have found out ) , so that's a big draw back of buying in a trust in NSW .

Hi Cliff

It is still possible to avoid land tax in NSW if the property is owned under a fixed unit trust.

 

[see_change]

Hi Cliff

It is still possible to avoid land tax in NSW if the property is owned under a fixed unit trust.

Maybe next cycle

Any purchases we make in the foreseeable future are likely to be outside NSW.

Cliff