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  • Avatar of trust4saltrust4sal
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    @trust4sal
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    I've spend countless hours reading and trying to understand a very basic question: should I buy an investment (Commercial) property in a "Pty Company (as a trustee for Family Trust)" or directly under "Discretionary Family trust"?  This is our first investment.  I've two kids and my wife doesn't work, so I understand the use of Trust for using the tax benefits.   It's a small commercial land and we'll not be borrowing money from any lendor for that.

    In terms of company versus trust: main points that I've seen around include:

    - Use Trust (without of Pty Ltd as a Trustee): as it provides 50% CGT discount benefit.  It is going to be a long term investment … so I see this as a major benefit if property price increases when we sell it.
    - Use Trust (without Pty Ltd)?  We don't have any other business setup or involvement in any business activities.

    Accountant stated 'Use Pty Ltd" as it provides more security against litigations etc ("too many if scenarios" as he put it).  And I'm kicking myself in the backside already as I rushed into setting up a company already and DFT with the company as a trustee :(  But now I'm not convinced.

    Please share your views!

    Avatar of Dan42Dan42
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    @Dan42
    Post count: 620

    I agree with your accountant.

    Trusts are not legal entities, the trustee is. So the legal owner of the property will be XX Pty Ltd as trustee for XX Family Trust.

    The trust is the TAXING entity, so regardless of the trustee, it will have access to the 50% CGT discount.

    Avatar of TerrywTerryw
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    @Terryw
    Post count: 14,630

    The company as trustee for the trust will provide the most benefits and flexibility.

    Trustees can be personally sued and this could lead to the loss of personal assets. Companies offer limited liability which will add a heap of protection.

    If you just use a company (without a trust) you will pay more CGT (no 50% reduction available) and it will not be flexible as dividends  can only be issued in accordance with shareholdings – but the company could get around this to a certain extent by employing people. Company shares are also considered property – so if you are sued they could fall into the hands of creditors.

    Terryw | The Loan Experts Pty Ltd | FinLaw Pty Ltd
    http://www.terryw.com.au
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    Law, Loans and Tax

    Avatar of trust4saltrust4sal
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    @trust4sal
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    Thanks guys … Very helpful info.  The picture is clear now!

    Avatar of BankerBanker
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    @Banker
    Post count: 371
    Terryw wrote:
    Company shares are also considered property – so if you are sued they could fall into the hands of creditors.

    You stated you will not be borrowing. If you contribute cash to buy the property, it will be on the balance sheet as a loan from you to the trust. Therefore an asset to you – e.g. Similar to shareholdings. Be careful not to set up a ‘dud’ trust where the asset is vulnerable regardless of if it is the trust, trustee or or beneficiary is sued…

    If your focus is distributions – trusts are great!

    Avatar of TerrywTerryw
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    @Terryw
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    Hi Banker

    I am not sure what you mean by "You stated you will not be borrowing".

    Yes, if you lend to a trust then that is an asset to you. But any future capital growth in the trust will be safe if a beneficiary of the trust is sued. Trust could pay back the loan to the individual later on when it can increase the loan.

    Terryw | The Loan Experts Pty Ltd | FinLaw Pty Ltd
    http://www.terryw.com.au
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    Law, Loans and Tax

    Avatar of BankerBanker
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    @Banker
    Post count: 371
    trust4sal wrote:
    I;ll not be borrowing money from any lendor for that.

    Hi Terry. Agree with your post however no point in tipping is cash to buy in trust and having no asset protection for the original purchase price plus costs e.g. Only protecting growth.

    Every time I use to annual review a file in the bank I would point out beneficiaries loans. If you have finance outside of the trust e.g. Home loans or personal investment loans – they can be refinanced e.g.

    home or investment loan 300k
    beneficiary loan in trust 200k

    refinance to a split – 200 in trust, 100 in personal name. Purpose of funds for trust loan is refinance beneficiaries loans to bank debt. Beneficiaries used funds to pay down debt in personal name. Needs to be controlled by the bank to keep the LVR in check.

    Almost all my clients are trusts – I don’t let them keep beneficiary loans on balance sheets.

    This might involve guarantees as the borrow and asset owner might not be the same however provides a more secure trust structure.

    Avatar of TerrywTerryw
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    @Terryw
    Post count: 14,630

    Thanks Banker, I missed that.

    Sounds like your a good banker if you point that out..

    If trust4sal has cash to contribute to the trust then this may be at risk for up to 5 years from the date of any future bankruptcy, but may still be a better option than loaning it to the trust. Often when bankrupcty happens little or no checks are done by the bankruptcy trustee – it is just too time consuming. And even if they do find something which may be able to be clawed back it is still not that easy to do.

    Trust4sal you had better seek legal advice re all this before doing anything.

    Terryw | The Loan Experts Pty Ltd | FinLaw Pty Ltd
    http://www.terryw.com.au
    Email Me

    Law, Loans and Tax

    Avatar of Dan42Dan42
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    @Dan42
    Post count: 620

    Banker, as I've pointed out before, there IS asset protection in the trust.

    Sure, if person A loans money to the trust, and person A goes bankrupt, that money loaned to the trust is available to the creditors. I get that.

    But if the asset was not in a trust, THE WHOLE ASSET is available to the creditors.

    eg – Asset book value $500,000 (current value $750,000) – Loan from bank $400,000, Loan from Person A $100,000

    Person A goes bankrupt. If asset is in trust, creditors can get $100,000
    If asset is not in trust, creditors can sell $750,000 asset.

    Which would you prefer???

    Avatar of TerrywTerryw
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    @Terryw
    Post count: 14,630

    Yes, Dan it is hopefully only temporarly also.

    There may also be additional methods available to protect any personal equity.

    Terryw | The Loan Experts Pty Ltd | FinLaw Pty Ltd
    http://www.terryw.com.au
    Email Me

    Law, Loans and Tax

    Avatar of TerrywTerryw
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    @Terryw
    Post count: 14,630

    Another point – if you have $100,000 to lend to a trust then this is already available to potential creditors. But tying it up in a trust makes it more complicated and possibly less likely that someone will a) notice it and b) go after it.

    Terryw | The Loan Experts Pty Ltd | FinLaw Pty Ltd
    http://www.terryw.com.au
    Email Me

    Law, Loans and Tax

    Avatar of Dan42Dan42
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    @Dan42
    Post count: 620
    Terryw wrote:
    Another point – if you have $100,000 to lend to a trust then this is already available to potential creditors. But tying it up in a trust makes it more complicated and possibly less likely that someone will a) notice it and b) go after it.

    I agree. Also, in my scenario above, the trust could borrow the $100,000 and payout the creditors, meaning the trust asset does not have to be sold.

    Avatar of nkrasnnkrasn
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    @nkrasn
    Post count: 13

    I am new to property investing but I am looking to buy an investment property and I have a company Pty Ltd set up as Family Trust. So in a nut shell, I am trying to confirm whether there are more pros to using a family trust to buy an IP???

    As my new tax accountant says there isn't much difference.

    Also, many years down the road, if I want to transfer the IP property into my child's name, is it  a simple process using a family trust as opposed to buying in my own name outright?

    cheers

    Natasha

    Avatar of RPIRPI
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    @RPI
    Post count: 304

    Hi NK

    If your new accountant says there is not much difference between buying in a company and buying in a trust, I strongly suggest you change accountants.  No 50% capital gains tax exemption for a start.

    If your accountant is talking about the difference between your own name and a trust that is not so bad.  

    I am a huge advocate of buying in trusts for both legal and accounting reasons, others have different opinions.

    If the property is in your own name and you want to transfer it to your child, you are effectively selling it to your child and duties etc will be calculated at market price.

    A trust already has them as a beneficiary and provides a multitude of options.

    RPI | Certus Legal Group / PRO Town Planners
    http://www.certuslegal.com.au
    Email Me | Phone Me

    Property Lawyer & Town Planner

    Avatar of TerrywTerryw
    Participant
    @Terryw
    Post count: 14,630
    nkrasn wrote:
    I am new to property investing but I am looking to buy an investment property and I have a company Pty Ltd set up as Family Trust. So in a nut shell, I am trying to confirm whether there are more pros to using a family trust to buy an IP???

    As my new tax accountant says there isn't much difference.

    Also, many years down the road, if I want to transfer the IP property into my child's name, is it  a simple process using a family trust as opposed to buying in my own name outright?

    cheers

    Natasha

    Why do you already have a trust set up? If this is trading it may not be a good idea to buy property in this same trust.

    And I agree with RPI, there is a huge difference between a company and a company acting as trustee.

    If you want to transfer the property from the trust to a child there will be stamp duty and CGT, legals, loans to worry about. You could leave the property in the trust and pass on control to the child, once they are over 18 – they could just become the director of the trustee.

    Terryw | The Loan Experts Pty Ltd | FinLaw Pty Ltd
    http://www.terryw.com.au
    Email Me

    Law, Loans and Tax

    Avatar of RPIRPI
    Participant
    @RPI
    Post count: 304

    Hi Terry

    I agree with bankruptcy Trustee and also liquidators, they seem to miss a lot and sometimes their understanding of structures is poor.  Been a bonus for my clients thus far.

    RPI | Certus Legal Group / PRO Town Planners
    http://www.certuslegal.com.au
    Email Me | Phone Me

    Property Lawyer & Town Planner

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