Hi all,
I have just purchased a property with my brother. We are yet to finalise whether it will be purchased in our names or a trust.
I have been searching the internet for info on trusts which led me here. Could someone please enlighten me as to the benefits of purchasing a property in a trust (unit or discretionary) as opposed to in our individual names. Also if you know the difference between a unit trust as against a discretionary trust that would be great.
Thanks in advance.
Asset protection.
If you use a discretionary trust, the asset is not yours, the trustee holds it on trust for the beneficairies. So if you are sued, in most cases, the asset is not part of your estate for the bankruptcy trustee to grab.Tax savings
The trustee has discretion (in a DT) on how the profits may be distributed. Usually you are able to reduce taxx by distributing the income to family members with the lowest incomes. The recipient then pays tax on this income (not the trust). eg. Kids can earn approx $2666 pa tax free (this financial year use the low income tax offset). So if you had 10 kids in your extended family (your own, step kids, grand kids, brother's kids etc) you could earn around $26,660 tax free. You then have an agreement with the kids whereby they give the money back to you.Disadavantages of a Discretionary Trust
– maybe you will pay more in land tax ad some states do not give the tax free threshold to trusts.
– Trusts cannot distribute losses. if you the property is negative geared, it cannot reduce your own tax.Tax accounting
– should only cost slightly more than owning the properties in your own name as the trust needs to lodge a tax return.A unit trust is one where there are fixed units held. so any profits must be distributed equally in accordance with percentage of ownership. The units are an asset, so if you are sued persoanlly, your income and units may be lost to creditors.
Unit trusts are good for joint investments as everything is fixed in terms of profit share, control etc. You can also have your units owned by a discretionary trust for asset protection and tax reasons.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
Also note that in some states you must nominate the purchaser at the time of signing the contract ie Joe Blow & Peta Blow or Smith &Weston Family Trust you cannot leave it open or have 'or nominee' .
Good points.
In regards to nomination, if you don't specify 'and/or nominee' at the time of purchase then to transfer later may result in double stamp duty.Regards,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hey Guys,
I had an incident with using the 'and/or nominee' option with a contract not long ago and was advised by a solicitor the following:
If you do put 'and/or nominee' on a contract, the nominee needs to be in existance at the date the contract was entered into. i.e. if you signed the contract on the 1 Jan 08, the nominated entity you decide to purchase the property in must have been in existance at the 1 Jan 08. So you can't set-up the entity say a week later. I guess your nominee has to be viewed as the purchaser from the contract date and how can it sign a contract of it doesn't exist?
Has anyone else come across this? Is this advice correct?
(sorry i'm detering from the main question but thought it a good opportunity to ask)eyes2thesky
Yes, this used to be a problem.
Some time ago when I did the research either the entity had to be set up, or there had to be the intention that the entity would be set up.I have a feeling now, that at least in Vic, so long as there is no financial gain in the nomination, it is not too much of an issue. Not sure about other states though.
In any event, legal advice is worthwhile.
Further reading:
https://www.propertyinvesting.com/weeklywordsCheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Thanks for all the help. In answer to some of the questions I have put and/or nominee on the contract so no problem there.
As for what you said Terryw in that the trust cannot distribute losses, is that relevant because won't the trust be making a profit? The trust owns the property and receives rent in the form of income but does not incur many expenses because the mortgage interest is paid by us. Or am I wrong in saying this?
I'm really struggling to see the advantage of purchasing in a trust other than the asset protection especially if you can't negatively gear it? Is the reason you can't negatively gear it because it doesn't incur many expenses?
alfer wrote:I'm really struggling to see the advantage of purchasing in a trust other than the asset protection especially if you can't negatively gear it? Is the reason you can't negatively gear it because it doesn't incur many expenses?
I had the same questions and this article here addresses them all and more: http://www.propertyupdate.com.au/articles/149/1/Trusting-Trusts/Page1.html
I read it a while ago and it explains about trusts and when to use them really well.
alfer wrote:Thanks for all the help. In answer to some of the questions I have put and/or nominee on the contract so no problem there.As for what you said Terryw in that the trust cannot distribute losses, is that relevant because won't the trust be making a profit? The trust owns the property and receives rent in the form of income but does not incur many expenses because the mortgage interest is paid by us. Or am I wrong in saying this?
I'm really struggling to see the advantage of purchasing in a trust other than the asset protection especially if you can't negatively gear it? Is the reason you can't negatively gear it because it doesn't incur many expenses?
If the loan was used to purchase the trust's property, then the trust should be claiming the interest. If you lend money to the trust, which is possible, the trust should be paying you interest. This interest would be income to yourselves and would be taxed – assuming you had other income.
If you use a unit trust or a hybrid you may be able to borrow to buy the units and to claim the interest yourself, but using one of these structures will lose you the flexibility of distributing income to the lowest income earner.
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
I am about to purchase a property, with luck, at an auction. I will be signing the contract "and/or nominee" Do I need to have identification and letter of authorisation from the nominated person?
Nae
Depends on the state you are buying in. In Victoria, in the past, you needed written authorisation from the nominee before you entered into the contract. If you were going to nominate a trust or company, these needed to be set up prior to the signing of the contracts too. But things may have changed.
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
Terryw wrote:NaeDepends on the state you are buying in. In Victoria, in the past, you needed written authorisation from the nominee before you entered into the contract. If you were going to nominate a trust or company, these needed to be set up prior to the signing of the contracts too. But things may have changed.
Thanks for your reply. I actually decided to utilise the services of my solicitor. I asked THEM! In Victoria, you do not need written authorisation or anything from the nominee to add them to the contract. You simply sign it "and/or nominee" and the solicitors do the rest. You can add the name of the nominee upon signing if you wish, but it is not necessary. This method of signing also allows you to have the contract under a business name if you so choose.
Nae
I have had different advice regarding this. You will need to enter into a written agreement with the person you will nominate to act on their behalf before you sign a contract. If you don't you can still nominate them, but will be charged stamp duty as if you settle and then onsell to them.
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
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