Hi Everyone
This is our first time on here so hope we do this right.
My Partner i have 2 investment properties & are looking at buying a third. I have recently read & it has been suggested to me that it would be a good idea to put future properties in trust to protect assets and also for the tax advantages.
Any feedback would be appreciated as we have no knowledge of this.
ThanksSteady,
The type of trust you are interested in is a hybrid trust. Basically it is a mix of a unit trust and a discretionary trust.
It works in that the you purchase special income units in the hybrid trust. This trust then purchases the property. The property is trust property, hence asset protection, and then the income from the property is distributed to you (after taking into account outgoings).
You can then claim the interest on the loan against the income from the trust.
Make sure the accountant you speak to knows about hybrid trusts.
Look up previous posts in this forum as I am currently undergoing the same and have posted a topic and there are plenty of others that have done the same. You will find some of the answers that you are looking for but most importantly make sure you have an accountant who understands trust structures and invest in property themselves. Don’t get too stressed and confused as I have.
Hope this helps.
Shelley
Thanks for the feedback I will follow up on suggestions.
Question re hybrid trust. If you set up a hybrid trust and buy units – aren’t the units then an asset of yours and open for attack from bankruptcy, litigation etc Where does this leave your asset protection?
I think if the units were taken, the trustee may be able to redeem them to prevent any further income going to them (that may depend on the trust deed though). If they were bought in the first place using a loan from a bank, presumably the bank would get the money back before any other creditors got anything.
However, if you bought units with money you already had yourself, then I think yes, you’d have a problem. In that case you’d probably be better to gift the money to the trust in the first place.
Of course this is all just general comment based on what little I know, and should not be construed as any type of advice.
Cheers,
GPGP…you’re much too modest.[biggrin]
Richard Farleigh
Question re hybrid trust. If you set up a hybrid trust and buy units – aren’t the units then an asset of yours and open for attack from bankruptcy, litigation etc Where does this leave your asset protection?Don’t forget under a HDT, the discretionary nature of the trust allows any proceeds of any sale or income to be assigned as the trustee chooses. He/she may elect to not allocate funds to the new owners of these units.
I have read elsewhere that proposed changes in the Bankruptcy Act may change the above though.
Originally posted by woodsman:under a HDT, the discretionary nature of the trust allows any proceeds of any sale or income to be assigned as the trustee chooses
By my understanding, owning units provides a right to the income generated by that capital (not CG though). If the trustee decided not to honour that right, apart from any redress the unit holder might have, the ATO may not allow the unit holder any claims for the deduction of loan interest he/she might have.
The whole point of having units is to provide a right to income to satisfy the ATO requirement that loan interest can only be deducted if the funds are used for income-producing purposes. If the borrower doesn’t have a right to income, then I think the ATO would likely argue that the funds are not being used for that purpose.
GP
Does the use of a trust structure absolve the trustee of personal liability in the event of insolvency?
A trustee usually will give personal guarrantees, so if properties drop in value and the lender forcloses, then the trustee will personally be liable.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
So if the trustee is potentially liable for losses incurred by the trust, in what way does a trust structure protect either the investment assets or personal assets of the trustee?
Thanks in advance,
F.[cowboy2]foundation, if assets are in your name and you make a mistake lawyers can come after assets in your name, however if assets are in a trust they cannot touch those assets if they are suing you. Also it provides a number of tax advantages.
FFComm
Foundation
Yes, owning assets under a trust means they are not your assets, but belong to the beneficiaries – one of which may be you.
So if you go bankrupt, these assets are usually untouchable.
But if you have given a personal guarrantee, that is a totally separate matter. eg say you started a business in a shop under the trust. The land lord in not going to accept you as a tenant unless you give a personal guarrantee. Otherwise you could close the shop down tomorrow and he would have no tenant.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
[blush2]Of course!
I was thinking in reverse – that the protective value of purchasing properties through a trust is that private assets would be protected from liability in claims against the trust,
whereas,
the protective value of a trust is that trust assets are protected in the event of a claim against the investor.So do lenders require a personal guarantee from the trustee when lending funds for property to be bought through a trust, or is the trust itself the borrower and therefore liable for the debt?
Sorry if I’m a bit thick about all this. I think I understand the advantages (and disadvantages?) tax-wise, but am still trying to understand the asset protection side.
Cheers, F.[cowboy2]what is meant when the lender forcloses?
and what is the purpose of a personal guarantee?
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