I am often asked “what are the benefits of using a Trust to buy a property?” and while this can be a confusing topic the simple answer is a Trust can offer Tax benefits and provide excellent asset protection for investors.
WHAT IS A TRUST?
A trust is a relationship whereby property is held by one party for the benefit of another.
A trust is created by a settlor, who transfers property to a trustee.
The trustee holds that property for the trust’s beneficiaries.
Trusts exist mainly in common law jurisdictions and similar systems existed since Roman times.
HOW DOES A TRUST WORK?
A trust allows a person or company to own assets on behalf of someone else or on behalf of a group of people.
The trustee is the person that owns or controls the asset, while the beneficiaries of the trust are the person(s) for whom the asset (e.g. a property) is owned.
WHY DO PEOPLE INVEST USING A TRUST?
There are three main reasons
1. Tax benefits: Trusts offer the advantage to reduce your tax bill by distributing income to family members with lower taxable income.
2. Asset protection: Trusts allow you to control and receive income from assets without having them in your name.
This may protect these assets in the event that you’re sued or you go through a divorce.
3. Estate planning: Some trusts may allow you to effectively pass assets on to future generations without paying excessive taxes or going through estate disputes
WHAT TYPE OF TRUST CAN BE USED FOR PROPERTY INVESTMENT?
Of all the Trust structures these three seem to be the most suitable (before deciding on the type of Trust you should use discuss fully with an experienced Trust Solicitor and/or Accountant):
1. Discretionary Trust
Often referred to as a family trust when the beneficiaries are linked via family relationships is one of the most common types of trusts in Australia.
They are set up for one or more reasons: to protect the assets of a family and to hold the assets for future generations of the same family.
2. Unit Trust
A unit trust is one where the assets are held and administered by the trustee of the trust for the holders of units in the unit trust.
This means that unit trusts pre-determine the unit holders entitlements, which may be for income, capital or both.
Unit trusts are often used where unrelated parties run a business together and where the units are then held by a family trust and for managed funds where investors hold units in the trust.
3. Hybrid Trusts
Hybrid discretionary trusts can be hybrid discretionary or hybrid unit trusts.
They take the best features of both discretionary and unit trusts and mix them together in the one entity to create a powerful and flexible tax planning solution.
ADVANTAGES AND DISADVANTAGES (not a definitive list):
Advantages of trusts
• Asset Protection.
• Income distribution.
• Retirement planning.
• Fewer regulations.
Disadvantages of trusts
• Trustee/s have the power to administer the Trust.
• Potential loss of Tax concessions and deductions.
• Set-up and accounting fees.
• GST, Stamp Duty, Capital Loss/Gains (depending on the situation).