Using a Trust

Hi,

I'm almost going to settle on a block of flats- the first property I've bought using a trust.

A few observations...

. Cost for me to set up the trust was $600 + GST
. There were problems with the bank. There were more legailites and checking- it was only one day late to settle in the end- but that was helped because I had a bit of driving time available.
. I'm with a "Professionals Choice" package with the NAB. That would normally mean that I did not pay loan application fees. But, going through the family trust, there was a question as to whether the loan could be included in the PC package. They allowed it for me- but it would be worth while for anyone else trying the same to check early.

The bank took out my $600 fee- but they may not again.

.Insurance cost increased. My NRMA multi-policy did not apply- as the new place was in FT name, not in my name. (Perhaps that would have been negotiable if i had known before).

.Insurance on a block can vary hugely. First quote $3,200. Second $620- and only so high because multi policy discounts did not apply to the trust.
 
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Trust Question

Seriously:
Is it possible to purchase a "shelf trust", similar to a shelf company?

Not-So-Seriously:
The only scary thought with purchasing a shelf family trust is that it might come complete witht he family.

Regards
Anthony
 
Re: Trust Question

HI

Originally posted by frian03
Seriously:
Is it possible to purchase a "shelf trust", similar to a shelf company?

Not-So-Seriously:
The only scary thought with purchasing a shelf family trust is that it might come complete witht he family.


No, it is not possible to have a shelf trust and this is because a trust is created for the benefit of a particular person or family.

I'm with you though on the idea of one coming complete with family. . . . aaaaarrrgghhh!!!

Have fun

Dale
 
Originally posted by geoffw
Hi,

I'm almost going to settle on a block of flats- the first property I've bought using a trust.



That's ecxellent Geoff. Well done. Are yo able to throw a few numbers at us? What kind of LVR did the NAB give you on a block? Did they see it as commercial? Is the block rural or metro? What's your return?

I'd love to buy a block and hope to be in a situation where I can start looking soon. I saw a great one in Albury the other day on the web. 6 x 2 bedroom with LUG's for $90k each renting for $135pw. All strata titled and single story. Looked good from the pictures and would have had scope for adding decks off some of them and adding some value. I didn't have hte opporunity to move on them at the time. Soon though.
 
Owen,

Always glad for a chance to talk more!

It's in Queanbeyan, just near the ACT, but with prices well below ACT. The block is 8 br's + caretaker's unit. Cost was $455K, returns $760 pw- 8.7% gross return. So not really into the big deals yet, it just sounds like it...

The nice thing about it is that there's land which can be used for some more units. I'm in the process of getting plans drawn up now- but if it doesn't, that's cool.

Normal returns for a flock of bats in Qbn are closer to 10%, but the development opportunity made up for the difference. They're like hen's teeth though (although there is on going by auction next week- http://allhomes.com.au/c/ah?a=sp&p=30953).

NAB did not have a problem with it being residential- that was the first thing I asked them. But the mortgage insurers treated is as commercial- they would not let anything through over 70% LVR. But the bank man arranged for us to act as guarantors for the loan using equity in 2 other properties- and saved a LMI bill in the process.

It did mean a little liquidity problem- I borrowed enough for all expenses, but I don't get to touch any until a few days after settlement.
 
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Geoff,
I'm kinda new to this trust stuff , but I read from some of Dale's posts that you can't negative gear by borrowing money in your own name and then investing it into a discretionary trust.....so how is this all structured. Are the loans in the name of the trust (?) and then does the trust itself produce an income ...so there is no negative gearing ?
Hope I'm making sense here !

Peter H.
 
Not sure I understand the last point. I have a trust which owns a unit. We borrowed the money in our name, loaned it to the trust, trust buys asset and the Trust pays the interest. All cross-guaranteed of course. What's the problem???

Donna L
 
Peter,

The block I'm buying is cash flow positive. So negative gearing is not an issue- I will earn more than I spend.

The trust structure here gives me some freedom to move income to whichever beneficiary is the appropriate recipient. That's covered in Dale's "Tax Battles" manual. I'd recommend reading it. I'll leave it to Dale to provide details- but I did get a lot out of it.

As far as negative gearing- I don't know. I'll leave it to the experts.

There is an animal called a "hybrid trust" which apparently gives you some benefits of negative gearing. I don't understand it at all- I would have to leave it to an accounting person to understand it (Dale, where are you?).
 
Hi Donna,

I was under the impression that if you borrowed money in your name, and then gave it to the trust, if you are ever sued the person sueing you could come after the money you originally borrowed and legitimately have a claim to it (since it was in your name). Hence, the asset protection aspect of the trust is lost. Is this correct?

John
 
Hi John,

I agree. If the funds provided to the trust are in fact a loan and not a gift, then the loan receivable is an asset of the individuals and fair game in any legal action.

Furthermore, in the absence of the individuals charging a commercial rate of interest to the trust on the funds advanced, notwithstanding thier status as beneficiaries of the trust and the expectation that they may receive a distribution of income, its arguable that none of the interest incurred on the borrowings from the lender would be an allowable deduction.

Ouch...
 
Hi Geoff

[QUOTE
There is an animal called a "hybrid trust" which apparently gives you some benefits of negative gearing. I don't understand it at all- I would have to leave it to an accounting person to understand it (Dale, where are you?). [/B][/QUOTE]

Richard's knowledge and expertise is fantastic and a wonderful bonus for all of us in "forumland" - it also means that I do not answer everything because there is nothing to add after Richard has answered . . .

As for the Hybrid Trust, they look like a great idea in that they are a cross between a family trust and a unit trust. You borrow money to buy the units in the hybrid trust which entitles you to income. From there, the trust uses this money to buy IP's which will be positively geared because the trust has little to no debt.

The trust distributes income to you, and other beneficiaries and you offset the bank loan fees and interest against your share of the trust income - effectively negatively gearing an IP and still using a trust structure.

The only downside is that asset protection appears quite weak. The more legal experts (??!!??) that i talk to the more confused I am because they all seem to think a little differently about this issue.

I am still wary enough not to widely recommend them to my clients, at this stage. Who knows though what the future will hold.

Have fun

Dale
 
Re this post of mine...

but the development opportunity made up for the difference. They're like hen's teeth though (although there is on going by auction next week- http://allhomes.com.au/c/ah?a=sp&p=30953).

This bof was returning $70K pa- with potential for $80K.

I was expecting, with average returns around here, for that to be worth $800K to 900K.

Apparently an offer of $950K has been refused.

It will be interesting to see the reult next week.
 
Donna,
To explain previous post ....
My understanding (gleaned from some of Dale's previous posts on other topics ) is that if you borrow money in your own name and you then lend/gift ....whatever (?) that money to a discretionary (family) trust, you cannot claim the interest on the money you have borrowed as tax deductible because with a discretionary trust the income to you is not "guaranteed".

Unit trust is different, you buy units and income is distributed in proportion to units ......But this stuff is new to me and I'm very much the student ...hence my previous post ....Perhaps Dale can educate us here ...Help me Dale !!!

Peter H.
 
Originally posted by landlubber
Donna,
To explain previous post ....
My understanding (gleaned from some of Dale's previous posts on other topics ) is that if you borrow money in your own name and you then lend/gift ....whatever (?) that money to a discretionary (family) trust, you cannot claim the interest on the money you have borrowed as tax deductible because with a discretionary trust the income to you is not "guaranteed".

Unit trust is different, you buy units and income is distributed in proportion to units ......But this stuff is new to me and I'm very much the student ...hence my previous post ....Perhaps Dale can educate us here ...Help me Dale !!!

Peter H.

Hi Peter

You seem to have the rules under control.

BTW, If you borrow money at commercial rates and on lend it tot he trust at commercial rates the trust can have a tax deduction for the interest that it pays. You will have a zero tax situation if the two interest rates match as the interest that you receive as income from the trust will equal the interest that you can claim as a tax deduction.

Cheers

Dale
 
Thanks Dale,
So the point is ...lend to the (discretionery) trust at commercial rates .... don't simply give/gift ?
correct ?

Gotta buy your tax battles manual ...send me an email and tell me how .....OK ?

Peter H
 
Excuse me for my ignorance....

but can a trust borrow in its own name once it is able to service debt from income earned elsewhere?

Andrew.
 
Hi Andrew

Originally posted by AndrewC
Excuse me for my ignorance....

but can a trust borrow in its own name once it is able to service debt from income earned elsewhere?

Andrew.

Yes, a trust can do anything that you can do when it comes to finance, so, borrowing without assistance from the people behind the trust is quite typical.

Have fun

Dale
 
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