Some property investors choose to set up a trust, through which they can purchase assets.
Trusts can be beneficial for protection of assets, distribution of income for tax purposes and creating inter-generational wealth.
But like everything, there are things you need to know.
Different trust structures
There are four main types of trust, ‘Discretionary’, ‘Fixed’, ‘Class’ and ‘Hybrid’. Discretionary trusts offer flexibility in how income is distributed. A Family Trust is an example of a discretionary trust and that is the most popular structure for property investors in Australia.
Because it’s discretionary, the people governing the trust have the ability to direct income to mum, dad, different children and so on.
The other types of trust have more rigid rules around the entitlements of beneficiaries…essentially who gets what and when.
Benefits of the family trust
Using a family trust as an ownership structure means the members of the trust will not be legal owners of the property, but beneficial owners. The trustee (individual or company) owns the asset and there is separation between the asset owner and those that will benefit from it.
One advantage of this is that the property is protected if one of the trustees goes bankrupt or defaults. If you owned it as a joint venture instead, it would be exposed to the risk of each individual and could be accessed by creditors.
Secondly, you can distribute income in a way that reduces the tax each beneficiary pays and if the trust holds the property for longer than one year, it will be eligible for discounts on future capital gains tax.
Finally, the trust’s deed lays out how assets can be transferred to new beneficiaries. This means you can pass on wealth to future generations without paying capital gains tax, or stamp duty.
Potential red flags
There are plenty of potential downsides when it comes to using trusts. A lot of people might have financial planners suggest trust structures for them and find out later that it doesn’t suit their style at all.
Think of b Invested founder Nathan Birch. His strategy of quickly releasing equity to build a personal portfolio would not be possible if his money was tied up in a trust.
And some of his own clients have come to him after experiencing their own horror stories and finding themselves stuck and unable to invest.
If your property begins running at a loss, you won’t be able to offset it against your own income. And then there are government concessions. In NSW and Victoria for example, trusts don’t qualify for the land tax-free threshold.
If you want to transfer other properties into the trust that you already own, you will incur stamp duty and capital gains tax. Even though you are essentially only transacting with yourself.
Reach out to b Invested
Nathan remembers one lady who came to him after a previous buyer’s agent had set her up with three properties, in different trusts, and she had to pay compliance bills on all of them individually.
Often, by the time clients come to b Invested, they have already been put between a rock and a hard place by other buyers agents or planners that have given them dud advice.
If you want to discuss your goals, need help building a strategy, or just want more information on how trusts work, reach out to b Invested and set up a no-obligation mapping session. A trust may work for you, it may not, but you first need to understand where you want to get to and what you need to achieve to get there.