All Topics / Legal & Accounting / To trust or not to trust??

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  • Profile photo of Anthony ZanattaAnthony Zanatta
    Participant
    @azanatta91
    Join Date: 2016
    Post Count: 25

    Hi all, first time poster here – be gentle please :)

    I’ve started researching into property investment and plan on buying my first property in the next 12 months, however before looking at properties themselves I’m sussing out my goals and I’m slowly developing them into a viable business plan that I can follow moving forward.

    I’ve currently hit a brick wall when it comes to whether I should set up a trust or not. I understand the importance of asset protection on the whole, however I’m not sure a trust is the best thing for me at this point in time. I’m currently 25 and single, looking to buy 3-5 properties in the next 5 years and don’t have any beneficiaries to distribute proceeds to aside from myself. As far as I see it, I’ll be setting up a trust which will cost more in startup and maintenance fees, lead to more paperwork and adversely affect my taxable income if a property becomes negatively geared.

    This may just be my naivety in the subject area talking, and I realise that it’s a costly venture to move properties into a trust after purchase, so I’d really like to get my structure right before diving in the deep end.

    Long story short – in my eyes the only benefits I’ll receive from setting up a trust relate to asset protection. A prenup can take care of the relationship half of the equation if things were to turn pear-shaped, leaving only litigation against me on the rental side of things as a big unknown. Is it common to have landlords sued by tenants etc?? Is this a real risk that I should be taking into account when making a decision on whether to establish a trust or not??

    Many thanks in advance!

    Anthony

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Hey Anthony,

    Asset protection can be a valueable thing – particularly for those in litigious industries, ie doctors, lawyers, developers.

    You will need to look at whats the real chance of you being sued and whether its worth it. In terms of our clients, I would say <10% have their properties within a trust, and of that most only have *some* within a trust structure, generally in relationship to mitigating land tax as their portfolio grows, than asset protection.

    Overall I do see a lot of text book educated first time investors bring it up as it’s something they’ve read, but not a whole lot who are advised from their lawyers/accountants etc come out the other end setting up the structures as the cost/benefit isn’t necessarily there.

    Keep in mind that having your properties within a trust will reduce your borrowing capacity with a number of lenders so it may be something which will create further drag on your ability to build a portfolio.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of Anthony ZanattaAnthony Zanatta
    Participant
    @azanatta91
    Join Date: 2016
    Post Count: 25

    Hi Corey,

    Thanks for your reply, I can definitely confirm that I fall into the “text book educated” category.

    I’m an engineering consultant, however I don’t run my own business so I’d say my risk of being sued is quite low. I agree with your comments on cost/benefit – I just assumed that due to my thinking being opposite to what practically every book has told me I was missing something!

    Once again thanks for taking the time to shed some light on this, it’s much appreciated!

    Cheers,
    Anthony

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    The answer to most who ask me should they use a trust to own property is ‘probably not’.

    The risk of being sued is overstated by spruikers who try to make money out of selling trusts – most of them unqualified too.

    Tenants can and do sue, but it is very rare. I have been investing in property for over 20 years and no tenant has ever attempted to sue me – except perhaps in the tribunal over minor lease disputes. But hold a property in a trust won’t protect the property because they will sue the owner of the property which will be the trustee. Trustee is indemnified out of the trust assets so all the assets of that trust will be at risk – but your personal assets may be at risk.

    I think the great danger would come from if you are in business. There are always disputes in business so this can be very risky. But I have been self employed for about 15 years and never been sued. I have had some disputes, but never that serious. But I have sued a client in court myself. That is risky potentially as if you lose you could be up for costs.

    I advise on asset protection a fair bit yet I have only seen about 5 or so people end up bankrupt. So it is pretty rare.

    Keep in mind that there are other ways to ‘protect’ assets without those assets being held in trust.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Anthony ZanattaAnthony Zanatta
    Participant
    @azanatta91
    Join Date: 2016
    Post Count: 25

    Hey Terry,

    I’ll admit I haven’t really looked into any other ‘asset protection’ methods however now that I know there are in fact other ways I can do some legwork. Thanks for the heads up!!

    Regards,
    Anthony

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Azanatta,

    Some of the answers that sprang from the linked thread in this post:-
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/page/2/#post-5023378
    …. provided some clues re “other asset protection methods”. Check it out.

    While in there (the “big picture” thread) do have a look around at other subjects approached in other replies to that thread. You could find some quite interesting reading…..

    ;)

    Benny

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Welcome, welcome! 👍😎

    Agree with the above.

    The main pros of trust are asset protection and distribution of profits while the main cons are costs, serviceability, waive of negative gearing and land tax from first cent.

    The vast majority don’t invest via trust and the vast majority of them fair well without it, but anything can happen so ultimately its an individual choice.

    This point nailed it right on the head:

    Overall I do see a lot of text book educated first time investors bring it up as it’s something they’ve read, but not a whole lot who are advised from their lawyers/accountants etc come out the other end setting up the structures as the cost/benefit isn’t necessarily there.

    Most trust talk I see are coming from ‘about to be’ investors that the idea of a trust calms their nerves and makes them feel safer about the ‘risky’ business of property investing. I totally get where they are coming from (heck, I had the same ideas when I started 😂)

    Hope this helps?

    Cheers,
    Ethan

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Ethan

    Trusts can actually increase serviceability in many instances.
    Trusts can negative gear just like a person can
    Land tax on the first dollar is only for land in NSW. In QLD a trust owning land gets a separate threshold for example.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Ethan
    Trusts can actually increase serviceability in many instances.Trusts can negative gear just like a person canLand tax on the first dollar is only for land in NSW. In QLD a trust owning land gets a separate threshold for example.

    Thanks, Terry!

    Serviceability – with which lenders are trusts better than individual?

    Negative gearing – yes, they sure do. I meant that you can’t offset your taxable income against the losses of a property in a trust. The trust itself can do it within the trust, yes.

    Land tax – thanks for the correction. Shame on me for thinking about NSW when talking about Australia wide. What’s the threshold in QLD? Would be great if someone could list the land tax rules differences in all states regarding individual/trust?

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    With serviceability it is not a matter of which lender, but the situation and the structure.

    Land tax is too complicated to list the differences across all states. Even comparing 2 states is complex.
    In QLD each trust could get a separate threshold of $350,000. Same with companies.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    I have posted a new thread of a few ways a trust can help improve borrowing capacity. see https://www.propertyinvesting.com/topic/5031860-trust-strategies-to-increase-borrowing-capacity/

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Anthony ZanattaAnthony Zanatta
    Participant
    @azanatta91
    Join Date: 2016
    Post Count: 25

    Many thanks for all the responses guys. Benny, that link you provided is a gold mine! I’ve got a list of questions I need to research into and this thread pretty much answers the majority of them. I’ve got my reading cut out for me today though :P

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