When someone is building their career, they usually have so many different things to think about that they forget some of the most important issues.
What I mean is that they forget to think about the future as they’re so caught up in the present.
Take, one of my clients, Thomas, for example.
He has worked hard in an industry that is heavily regulated.
The family home he and his spouse purchased some time ago now has over $1 million in equity and he had no debt against it.
The problem was that his industry was susceptible to litigation so all his hard work could be undone if he was ever sued.
His home could technically be sold from underneath him in a successful lawsuit, which may not be covered by insurance.
Compounding the situation was the desire by Thomas and his wife Jess, to buy a new high-value property while retaining the current home as an investment.
What was at stake?
When Thomas came to see me, it was clear there were a number of potential problems with their plan.
Their current property, as well as their future one, which he planned to own jointly with Jess, were both in New South Wales.
Rental income would be split equally between the spouses however, Jess wasn’t earning any income and Thomas was at the highest marginal tax rate.
The cost of their new home was $1.75 million, which would all be debt funded.
The couple was concerned about asset protection for the new property, and how they could remove Jess from the equation if Thomas was ever successfully sued given his occupation.
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As well as a need for appropriate asset protection, I identified family cash flows, estate planning and their requirements for building up an asset base to supplement their superannuation as three other significant issues.
Another consideration was the fact that using equity from their current home to buy their new one would result in a large non-deductible debt against the investment property.
Ownership alternatives
Understanding the issues and the desired outcomes meant we were able to restructure the loans and ownership structures of both properties.
We did this by transferring 100 per cent interest of the old home to a trust – importantly without triggering either Capital Gains Tax or Stamp Duty.
This created a new debt of 100 per cent of the market value of the existing home, not just 50 per cent which would have been the outcome if Thomas had purchased Jess’s 50 per cent share.
The new structure also created asset protection over both properties if Thomas was ever litigated against.
So, the restructuring of the transactions not only increased the deductible debt by more than $1 million, but it also created as a secondary point an interest deduction of $45,000 a year for Thomas from the investment property.
Of course, it was vitally important that the dominant purpose of the restructure was for asset protection and estate planning, and not tax minimisation.
Lessons learned
If Thomas and Jess hadn’t come to see me, they would potentially have pushed forward with a plan that left them open to successful litigation that would have exposed both properties as well as an adverse taxation position.
By working with a professional advisor with significant multi-discipline experiences, the couple was able to utilise the asset protection advantages of owning the interest in the investment property within a trust.
A secondary benefit was that Thomas could allocate debt against 100 per cent of the investment property not 50 per cent without exposing the new home to potential litigation.
