Trusts v Own name
- Thread starter JohnA
- Start date
Given your jobs, you probably don't have much of a risk of being sued, so the asset protection aspect of a trust probably doesn't make the cost worthwhile.
The other advantage of a trust is the tax flexibility. This only really becomes useful for non self employed people when the properties are heavily positive geared and/or one person is in a very high income tax bracket when the other is in a much lower bracket.
An exception to all this might be if you've already got a number of properties, as the asset and cashflow position starts to change various perceptions of liability and income. Most people would own a few IPs in their own name prior to going down the trust path.
The other advantage of a trust is the tax flexibility. This only really becomes useful for non self employed people when the properties are heavily positive geared and/or one person is in a very high income tax bracket when the other is in a much lower bracket.
An exception to all this might be if you've already got a number of properties, as the asset and cashflow position starts to change various perceptions of liability and income. Most people would own a few IPs in their own name prior to going down the trust path.
It depends on your circumstances, and what you consider to be more important. Here are some ideas:
Family trusts offer some asset protection, which given you're both employees, you don't need in terms of work liability. If you're just starting, the property is likely to be negatively geared, which you can't claim against your personal income if it's in a family trust. That will be a cost to you. When the properties become tax positive, the income streaming ability of a family trust is valuable, but recent tax changes means you can only distribute a few hundred dollars tax effectively to each child under 18.
A big window of opportunity is when the children are 18 and they're not making much income (e.g. they're still studying), but that's a long way off for you. By then, there are other ways of structuring your tax.
When you sell, owning in a family trust would allow you to steam the capital gains, which you can't do in your own name. One option is to hold the property until death, then put it into a testamentary trust. Then if the testamentary trust sells the property, the gains can be distributed tax effectively to minors (such as grandchildren). (Minors are taxed at adult rates on income from testamentary trusts.)
So you have to decide the tradeoffs. Are you willing to give up the tax losses now for probable lower capital gains tax in the future? How important is asset protection to you? How much property are you planning to buy (which likely increases the tax deductions now, but also increases likely capital gains in the future). That sort of thing.
My own experience is that people rarely use trusts early in their IP investing careers, unless they are in a job with high legal risk. Remember you can always buy the first couple in your own name, then as your portfolio gets bigger and you have more tax flexibility, future investments can be made in trusts or companies or whatever.
It is also worth pointing out Trusts are expensive to set up at the initial stage,and the EOFY reporting costs are not cheap with any accountant.Trusts are not the be all and end all in collecting houses,i am sure some will dissagree with me here,but early in the investing process,why pay for things you really do not need.i personally have 2 houses in personal names,and 6 in the trust,as i was in a high risk industry where getting sued was common.
Sit down and write out the advantages and disdavantages. Do some spreadsheets and projections etc.
Consider also the non cash benefits such as flexibility. eg unit trust with the units owned by yourselves. Costs maybe a few hundred extra per year to run, but so much more flexibility such as:
- ability to move the units to SMSF later on and then tax advantage of income with nil tax and no CGT.
- ability to borrow for private purposes and claim the interest, the refinancing principle.
- abililty to transfer units to other family members without stamp duty - some states.
etc
Also consider the spousal transfer strategy for property in VIC in personal name.
Consider also the non cash benefits such as flexibility. eg unit trust with the units owned by yourselves. Costs maybe a few hundred extra per year to run, but so much more flexibility such as:
- ability to move the units to SMSF later on and then tax advantage of income with nil tax and no CGT.
- ability to borrow for private purposes and claim the interest, the refinancing principle.
- abililty to transfer units to other family members without stamp duty - some states.
etc
Also consider the spousal transfer strategy for property in VIC in personal name.
how does this work?
A trustee of a unit trust can borrow to redeem the units of the trust releasing funds to the individual who sells the units. Interest could be deductible if the units are producing income. Would trigger CGT but there are some ways this could be minimised.
John, read my posts on this forum as I often write about trusts. You can also look for a book called "Trust Structure Guide 2012".
