Just wanted to ask what the difference between Loaning and Gifting to a DFT?
I don't totally understand both concepts, can anybody give any pointers?
I'm trying to decide as i have 50K in savings and want to get active!
Any help would be greatly appreciated!
A loan is due to be repaid to the lender at the end of the term. So if the lender goes bankrupt, the bankruptcy trustee can get their hands on the loan.
A gift is not due to be repaid back. However, they can be clawed back for a limited period if the intention was to defeat creditors.
If you lend money then you will probably need to charge interest – so you may have tax issues to consider – you receiving income and the trust getting a deduction. maybe a low income relative could loan the money to the trust – but many things to consider.
My understanding is………….
If i lend to the DFT, the trust will be paying interest (to me) on the cash i loan to it (50K), this interest the trust pays is tax deductible due to it using it for investment purposes (deductible to the trust of course), I am looking into cf+ property so this may not be such a bad idea? (i.e using the tax deductibility to offset against income produced by property?)
The interest i recieve from the trust is added to my annual income and therefore will be taxed………
If loaned (or gifted in any case) will the trust distribute this cash to beneficiaries? Or can it sit in the DFT's Bank acc for when i find that all important first deal?
anything to add would be greatly appreciated!
Thankyou in advance
The money given to or loan to the trust wouldn't be income so i don't think it should be distributed to beneficiaries – as they may have to pay tax on it! it would just be an asset of the trust and can be invested in a bank account until you want to spend it.
I was thinking maybe you could give the money to a low income relative and they could lend it to the trust – if you can trust the relative though. But this has dangers too as what will happen if that relative is sued, goes bankrupt or dies. Probably not worth the risk.
So what prevents myself from loaning it to the trust? i see i must be missing something!
I was just thinking you may be able to save some tax by getting a low income earner to lend to the trust – but so many things to consider it may be not worth it for a small amount.Steve McKnightParticipant@SteveMcKnightPost count: 1,689
Thanks for your post, and thanks Terry for replying.
I receive a lot of requests for help and further information about trusts, so with this in mind I've drafted up a reasonably comprehensive answer that I hope helps members.
Most people who buy property use a portion of their cash reserves to fund the deposit and also closing costs.
The balance needed to pay out the vendor is then normally financed via a loan secured by a first mortgage over the property (e.g. a home loan).
A typical situation is to pay 20% of the purchase price as deposit in cash (+ closing costs) and then finance the remaining 80% of the purchase price via some sort of loan or finance.
A property can only be purchased by a separate legal entity, which means that only people or companies can be property owners. What about trusts then?
Well, a trust needs a Trustee (who can only be a person and/or a company) to act on it's behalf, since a trust does not have separate legal entity status in its own right.
Therefore, a trust cannot buy property or borrow money in its own right… however the Trust Deed, which is the rules the Trust must operate under, will typically give the Trustee the power to buy assets and borrow money on behalf of the Trust.
This is why banks require a copy of Trust Deeds before lending – to make sure the Trustee has the power to borrow on behalf of the trust.
When buying property using a trust the correct legal way to note the purchaser is <Trustee Name> As Trustee For <Trust Name>.
If the Trustee is an Individual:
Fred Smith As Trustee For The Fred Smith Family Trust
If the Trustee is a Company:
Fred Smith Pty Ltd As Trustee For The Fred Smith Family Trust
BORROWING IN A TRUST
Earlier I mentioned that typically 80% of a property's purchase price is financed through a loan and 20% (plus closing costs) is paid in cash.
But what about when the Trust has just been created and doesn't have any cash reserves? This is the situation you describe James.
In this case, instead of there being one loan, there will be two (or more) loans.
Loan 1: To a financier for the (presumably) majority portion being borrowed of the purchase price (e.g. 80%)
Loan 2: To the person or entity lending the remaining money needed to settle the purchase (e.g. 20% + closing costs).
Let's say you are setting up the James Family Trust, and have set up James Pty Ltd to act as Trustee and you want to purchase 123 Red Street for $200,000.
XYZ Bank has agreed to lend you $160,000 (80%), however you still need $40,000 (20%) plus another (say) $10,000 to cover closing costs such as legals, stamp duty etc.
If you were buying the property in your own name then you would simply use your cash reserves, or else tap into other finance options if appropriate and available (e.g. line of credit against a home).
However, the assets of the trust and the assets of the Trustee / Beneficiaries are not accumulated – they are owned separately.
Therefore, a second loan is needed from James to the Trust to cover the 20% plus closing costs needed to settle.
The journal entries in the books of the various entities involved in the transaction would be:
A. The Lender
Dr: Loan – James Pty Ltd ATF James Family Trust $160,000
Cr: Cash $160,000
Dr: Loan – James Pty Ltd ATF James Family Trust $50,000
Cr: Cash $50,000
C. James Pty Ltd ATF James Family Trust
DR: Property 123 Red Street $210,000
CR: Loan – XYZ Bank $160,000
CR: Loan – James $50,000
LOAN IN A TRUST
Once upon a time loans to/from Trusts were notional only, however the ATO has cramped down on this and now loans need to be more genuine, which includes having a formal loan agreement and charging interest (even if that interest is capitalised).
In the above situation, because James is lending and gaining interest on his 'investment loan', the interest on that loan is tax deductible.
Furthermore, because 123 Red Street is an investment property, the interest paid by the Trust to the financier and James will be tax deductible too.
Finally, a debt forgiven may trigger a capital gain. For more information on this complex topic, see an accountant or check out what's written on the ATO's website:
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
Success comes from doing things differently
Thankyou both Terryw And Steve
If it weren't for you blokes, guys like myself would be chasing our tails endlessly!
I hope other guys that are as green as i can put this info to good use also!
JamesDan42Member@Dan42Post count: 620
If you decide on loaning the money to the trust, get a loan agreement drawn up. It will be relatively inexpensive, and shows the ATO that the loan is legitimate.
I wouldn't gift the money to a relative; this could end in tears. For $50k, the interest you would earn would be $4k at 8% for a full year, so it's definitely not worth the hassle, or the worry of hoping you keep in the good books with the relative. And besides, if you have $50k to put in, you are probably earning interest on that money at the moment anyway, so your increase in income will not be $4k, but $4k less the interest you are currently earning.
Thank you for your knowledgable posts. We just purchased our first investment under a discretionarty trust with a company as trustee. 97% was finance and the rest of the funds around 30000 was intended as gift to the trust as it was our personal funds. We made a mention of this in our minutes for the trustee company. But we transferred the funds directly from our personal bank accounts to the settlement agent. Have we compromised our asset protection? If so how can we rectify this. Some one mentioned on another forum to transfer the money now to the trustee account and transfer it back now ie almost a month after settlement. Will this work? Thank you
Ideally you should have done a deed of gift.
If you were to go bankrupt the trustee in bankruptcy may look at your bank statements and query the transaction. You would say it was a gift and they will argue that it was a loan and is due back to you. You could produce the minutes of the trustees showing they accepted a gift from you.
You mention transferring the money to the trustee account – where is it now? I think you may have used it to settle. Transferring it around and back again doesn't really change anything i think.
Thank you Terry. What is a deed of gift? and where can i find a sample of the same?
Your lawyer should be able to draw one up for you. It is a simple deed outling the gift and its terms. You could probably do one yourself.
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