23 Feb In Investing We Trust
“Put not your trust in money, but put your money in trust” Oliver Wendell Holmes, Snr.
From an investment and asset protection perspective you should learn and know about trust structures and why they are important in your strategy.
There are various types of Trust structure common for investing:
- Discretionary/ family trust
- Unit trust
- Hybrid trust
The focus of this article will be on discretionary/family trusts as they are the more widely used for simple purchases of rental properties. For more complicated investments or circumstances other structures may be appropriate.
Trusts have what is called a trustee – it is the trustee that is responsible for the day to day decision making and overall responsibility of everything that happens in a trust.
Most property savvy accountants and lawyers will suggest you have a company as the trustee. The reason for this is the high level of asset protection that a company affords. For example if you have a tenant sue you and the property is owned in a trust then in most circumstances they can only get the assets in the trust and then come after the company that owns nothing & does nothing. After that they can get no more; that family home in your own name is safe. In reverse if you get sued personally they can only get your family home if structured property they can’t come after that investment property as well.
We have established that trusts (with a corporate trustee) have amazing asset protection benefits but it doesn’t stop there! They also provide protection from certain taxes.
In Queensland land tax is assessed per corporate trustee; so what does this mean? You ask. Say you own a number of investment properties and the total land tax value of them (the same value the council uses to calculate your rates) is greater than $600,000 (individual threshold). You would have to pay land tax EACH YEAR! However, If each of these properties were owned in a trust with a company as trustee you would pay $0 land tax provided that they individually fell under (the lower) $350,00 threshold.
We have saved the best benefit for last; income splitting. Trusts do not pay tax in their own right; what this means is that if you have a cashflow positive property that makes a profit each year that profit must be “distributed” to either an individual or a company to pay tax on that profit.
For e.g mum and dad have a property in a trust that makes $10,000 per year (rental income less expenses). Mum stays at home with two children under 5 years old and dad works and earns $80k per year. With a trust (setup correctly) we can distribute $416 to each child (which mum and dad can put towards kindy or other costs related to that child) and then give the balance of $9168 to mum. As the tax free threshold is currently $18,200 mum pays NO tax.
Things to consider
So before you head out and set up a trust structure there are a few very important things to understand which may affect your decision.
Negative gearing does not work in a trust. If you have a property that makes a loss each year a trust cannot distribute this loss; it must stay in the trust until income is made to offset it. This could happen if the loan gets paid down over time or the property is sold for a gain. So why would you ever put a negative geared property into a trust? Firstly for asset protection! Secondly if you have two trusts and one makes a loss and the other makes a profit you can distribute from the trust with a profit into the trust with a loss to soak up the loss (albeit assuming you have a good trust deed that allows this).
So by this point I assume the next logical question is how much does this kind of thing cost? Most quality trust and company setup a cost around $2000. Buyer beware!! There are some really cheap alternatives out there but I have seen disastrous results from not being able to use them to buy property to not providing any asset protection at all. Like everything with property investment the size of the moneys invested are (in my opinion) too big to not do things properly.
Obviously this article can only touch the surface and is very general in nature and there is plenty more to learn on the subject. This is a complex topic that we have simplified in many instances for readers understanding. To start with there are plenty of books written by accountants and lawyers on trusts and properties; some are available at our local library and most can be purchased at book stores. To find out if they are relevant in your case please contact us.