What should my daughter do?

[MMM]

Hi all,

I was hoping you could help me clarify something.

I am new to the game. I have purchased on IP using a hybrid trust controlled by a company trustee. I have two daughters and wife who are beneficiaries. My wife and I are directors of the trustee company.

My daughters have worked hard and saved enough cash for a descent deposit and wish to purchase their first property in joint venture.

I have been told if they use the hybrid trust via purchasing units the company trustee directors will be implicated as guarantors and as a result their borrowing power reduced.

The intent of setting up the trust in the first place - other than being advised it is wise to do so - is to protect the assets which it holds. However, financing options are proving to be very limited and not competitive.

Should my daughters buy their first IP outside of the trust in JV with better financing options or buy units in the trust and reduce the borrowing power of the trustee directors?

Sorry for the rambling. Thinking out allowed a little. It feels like a catch 22 Any clarity is appreciated.

 

[thatbum]

What do you mean by your daughters buying an IP in the trust?

Also, why did you do a hybrid trust and not some other form of trust? Your asset protection is presumably comparable to the other forms anyway.

 

[pinkboy]

HDT, JV between family members and parental guarantee?

All the brokers will be along shortly.


pinkboy

 

[Mr. Fabulous]

All the brokers will be along shortly.

 

[Peter_Tersteeg]

If a property is purchased via a trust with a company director, it's the directors of the company who need to sign the guarantee.

Your daughters may be beneficiaries, but you're the directors. They're not going to be the ones signing documents if the trust purchases property, the director are. There's no way around this.

If your daughters want to be the signatories (and you don't want to be signing for it) they need to buy in their own names or via an entity which they control.

From a finance perspective, it's a really bad decision to set up a hybrid trust. Lenders aren't friendly to them at all. I'd also question just how effective they are for asset protection purposes. My understanding is that discretionary trusts are far more 'tried and tested' than hybrid trusts. The only benefit I can think of for a HDT is access to negative gearing, but even this has restrictions.

 

[Jess Peletier]

I can't give legal advice regarding trusts, but from a finance perspective hybrids are pretty horrible to get finance for as you've found out. Most lenders won't even look at them.

If your daughters are in professions that are 'risky', it may be worthwhile for asset protection purposes, but to my mind the limits imposed through this structure finance wise could hinder them more than help them long term.

Either a unit trust or discretionary trust are easier to get finance for and can also be useful for asset protection purposes, so if asset protection is definitely on the cards, best to speak to a pro about which way to set it up, taking your daughters goals and the types of properties/strategies they hope to use into consideration.

Add to that - if they are both serious about building a portfolio, a joint venture can impact their borrowing capacity with many banks, as they will be fully liable for the whole debt but only be allowed half the rent in their serviceability with many lenders.

There's ways around this but good to know before jumping in. If they can go it alone, I would recommend it.

 

[Terry_w]

Good golly. "hybrid trust" sounds dangerous. get some legal advice first.

 

[MTR]

Love this one

 

[peaches]

Sounds like the original advice for HDT may have been quite a few years ago when they were all the rage or your advisor is out of date. As already stated most lenders won't touch and even if they would your daughters cannot borrow using the trust, only the trustee or its directors can sign the mortgage and the guarantees.

Buying as tenants in common is probably the solution however there are a lot of downside issues that need to be carefully considered. Do not just take any old advice on this as it can end in a lot of pain and not just financial pain. You need legal and mortgage structure advice from professionals who have experience in the area.

 

[Paul@PFI]

When did the HDT buy the property ?? Has it ? You say new to the game and you are using a HDT ?? That's not clever.

One of the features of a HDT is that it issues units AND has a discretionary object. Who owns the units ? Then how much was settled on the discretionary element of the trust ?? Few lenders will lend to a HDT and those that do have some tough hurdles. One key issue is WHO borrows and how units are issued. The ATO rules must be closely complied with or all deductions are at risk.

Directors who guarantee don't always have this noted on credit reference. That said they may. For personal asset protection anyone exposed to a guarantee should ensure they have a degree of control or influence as Trustee etc . You don't want the debt and no asset.

Complex to explain all issues. Happy to talk. My Direct email below.
Quick answer - They should not buy using a Hybrid. Many smarter alternatives.

 

[MMM]

Hi All,

Thanks for the insight.

As far as a HDT is concerned I have one because I listened to all the experts and advisers. I am not an expert in property investment. I just work hard at a risky job and hope to have enough for when I cannot work anymore or drop dead. It now looks like my options to build a portfolio using a HDT are close to zero.

My daughters are not able to borrow enough to go it alone hence the JV. I just want them to get into the market sooner rather than later. They do not have risky occupations but work hard and save well.

It seems to me that having a structure is waste of time, money and angst. Better to be in the game than out.

Please excuse the frustration and I apologize if I offend anyone. It just feels like it's the people selling the shovels who are actually making the money.

 

[sanj]

is anyone still pushing hybrid trusts? are chan and naylor still doing it?

 

[Jess Peletier]

is anyone still pushing hybrid trusts? are chan and naylor still doing it?

I believe they are.

 

[westminster]

Hi All,

Thanks for the insight.

As far as a HDT is concerned I have one because I listened to all the experts and advisers. I am not an expert in property investment. I just work hard at a risky job and hope to have enough for when I cannot work anymore or drop dead. It now looks like my options to build a portfolio using a HDT are close to zero.

My daughters are not able to borrow enough to go it alone hence the JV. I just want them to get into the market sooner rather than later. They do not have risky occupations but work hard and save well.

It seems to me that having a structure is waste of time, money and angst. Better to be in the game than out.

Please excuse the frustration and I apologize if I offend anyone. It just feels like it's the people selling the shovels who are actually making the money.

Ah so you are looking for options outside of your own HD Trust for your daughters to go into a JV to buy something together but not have liability for 100% of the loan each?

 

[Jess Peletier]

Hi All,

As far as a HDT is concerned I have one because I listened to all the experts and advisers. I am not an expert in property investment. I just work hard at a risky job and hope to have enough for when I cannot work anymore or drop dead. It now looks like my options to build a portfolio using a HDT are close to zero.

That may not be the case - a HDT might limit your borrowing, but if you can get a couple of properties in it it's not necessarily a waste.

Many trusts are only good for a few IP's before land tax kicks in, so one trust holding a huge portfolio isn't usually the best way to go.

You can always plan out the next few using a combo of the HDT, no structure, DT's and/or unit trusts, depending on your situation.

Before you do that though, I would suggest mapping out a plan to reach your goals based on the properties themselves. The kind of structure you use for each will vary depending on the type of purchase - buy and hold, neg geared, development to sell etc.

 

[albanga]

I believe they are.

They also told me I would be liable for CGT On the sale of my PPOR which was never an investment property and I have lived in it for 3 years. Hmmm

 

[Terry_w]

Hi All,

Thanks for the insight.

As far as a HDT is concerned I have one because I listened to all the experts and advisers. I am not an expert in property investment. I just work hard at a risky job and hope to have enough for when I cannot work anymore or drop dead. It now looks like my options to build a portfolio using a HDT are close to zero.

Who advised you to set up a HDT and why?

There is nothing wrong with hybrid trusts, they are still used today and are effective and have their place. But they can't, and never could, do all the things that some marketed them as supposedly doing.

 

[Terry_w]

Hi all,

I was hoping you could help me clarify something.

I am new to the game. I have purchased on IP using a hybrid trust controlled by a company trustee. I have two daughters and wife who are beneficiaries. My wife and I are directors of the trustee company.

My daughters have worked hard and saved enough cash for a descent deposit and wish to purchase their first property in joint venture.

I have been told if they use the hybrid trust via purchasing units the company trustee directors will be implicated as guarantors and as a result their borrowing power reduced.

The intent of setting up the trust in the first place - other than being advised it is wise to do so - is to protect the assets which it holds. However, financing options are proving to be very limited and not competitive.

Should my daughters buy their first IP outside of the trust in JV with better financing options or buy units in the trust and reduce the borrowing power of the trustee directors?

Sorry for the rambling. Thinking out allowed a little. It feels like a catch 22 Any clarity is appreciated.

You misunderstand a lot of the hybrid trust. Your daughters cannot buy a property through the hybrid trust. But they could borrow to buy units of the hybrid trust with the trust property being used as security.

However this will be complicated if the trust owns other property already.

A hybrid trust would also provide little asset protection because the units are 'property' and if a unit holder were to go bankrupt the creditors would stand in their place and have the same rights - to income and/or capital of the trust.