With cuts to superannuation tax concessions and contribution limits, family trusts are having a bit of a resurgence. So, if family trusts are the new black, are they only suited to the rich. Certainly not says Financial Expert and Founder of HashChing, Atul Narang.
Buying an investment property through a family trust
Are you planning to invest in property to grow your wealth? You are not alone – property investment remains a popular wealth creation strategy in Australia with one in every five Australians owning an investment property, according to the Financial Wellbeing Index (2016). But it’s a sad truth that only a handful of these investors are highly successful, with large property portfolios under their belt. So, what differentiates this successful bunch of investors from the rest?
Well, leaving aside good luck, how you structure your investment goes a long way in determining your returns from it.
Yes, you read that right. How you choose to structure your investment property impacts your finances significantly. This is one of the primary reasons that family trusts have been so popular with the wealthy Australians since times immemorial.
What is a family trust?
Today, family trusts are no longer limited to the wealthy. Offering better asset protection and some tax benefits, trusts are now increasingly being used by the ‘not so rich’ and ‘soon to be rich’ to hold their real estate investments.
But, what is a family trust? In simple terms, a family trust is a financial structure wherein no individual in the family owns any asset. The trust itself owns the assets, and the trustee manages the distribution of the trust’s income. Besides, a trust can borrow money and invest like an individual.
A family trust offers the following advantages:
- Profit sharing – The trustee can divide the income of the trust between the beneficiaries in any manner, subject to the rules of the trust, to minimise the tax liability of the beneficiaries. It is also possible to give up to $416 to children below 18 years of age to save more tax.
- Capital gains discount – If a trust has held a property for more than a year, only 50 percent CGT is applicable.
- Asset protection – As the property in a trust is not owned by any individual, it means the property is protected from creditors even if any of the beneficiaries goes bankrupt.
- Estate Planning – A trust deed clearly lays down how each beneficiary’s portion would be disposed of upon their death, avoiding an emotional mess in the family. Besides, under a trust, you can pass on the family estate from one generation to another without incurring any stamp duty or other expenses.
You can set up a family trust by following the steps below:
- Select the trustee and the beneficiaries attached to the trust.
- Draft a trust deed detailing the functions of the trustee. Once the trustee signs this deed, an unrelated person, who is the settler, must place a nominal amount of money in the trust.
- Now, get the trust deed approved by the local state government by paying the stamp duty to get the government’s stamp.
- The last step is getting an Australian Business Number (ABN) and setting up a separate account to carry out the business of the trust.
It’s possible to set up a trust online, but any mistakes in your application could lead to your trust being treated as a bogus entity. It could, therefore, be in your interest to work with a financial expert to set up your trust correctly.
Good to know – Before you decide to set up a trust structure, it is important to consult a financial advisor. Remember, while you can share the profits to minimise tax, you cannot share the losses. You also cannot take advantage of negative gearing if your trust is facing rental loss.
Borrowing money as a trust
Family trusts can borrow money from lenders to invest in real estate to be held in the name of the trust. However, not all lenders are willing to lend to trusts while some others might charge higher fees or interest rates, depending on the complexity of the trust structure. Often, it also happens that a lender may require all the adult beneficiaries of the trust to act as guarantors on the trust loan.
To maximise the benefits you receive from setting up a trust structure, it is, therefore, advisable for investors to hunt for trust loans that are competitive and suitable for their situation. A mortgage broker could be quite helpful in such cases. Being in the know, they have access to lenders who offer trusts the same interest rates as they offer to individuals, without the requirement of any guarantee in some cases.
Add Comment