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Lessons from Gina Rinehart and using the right types of trusts.

Australia has been enthralled by the row between the nation’s richest person, Gina Rinehart, and a number of her children. At the heart of the battle are disputes concerning a family trust.

Let’s see what lessons we should learn from this.

Recently Gina Rinehart’s problems with her children have been front page news across the nation.
There have been a few lessons from this saga that we can all learn from.
The main points are summarized below:
1. You may recall that her Family Trust had a Vesting date that triggered a capital gains tax of $100 million per beneficiary. Most if not all Trust Deed have an 80 year Vesting date which means that the Trust Deed ceases to exist at this point and all assets than pass to the beneficiaries triggering stamp duties and capital gains tax.
The problem with this is where normally one sells a property to than have the cash to pay the tax when a Trust “Vests” the beneficiaries end up with a huge tax liability but no cash to pay for it.Hence they are forced to sell the property to pay the tax. One may not want to sell the property.
If one wanted to hold onto the property one would need to find cash else where to fund the tax. Or one could borrow from the bank (assuming one can secure a loan) with the property as security.In either case it’s not an ideal situation to be in. You have a tax liability when if your Trust Deed did not have a Vesting date than you would not have this problem.

You may say that 80 years is a long time and you won’t be around to worry about it but with modern medicine you could but at the very least you will leave a huge problem for your children and grand children.

In Gina’s situation this could potentially send the children into bankruptcy as they will have a $100 million tax bill each (as reported) without either the asset nor the cash to pay the tax. Not a good position to be in.

 LESSON 1:
Make sure that your Trust Deed does NOT have a Vesting date. The Chan & Naylor “Property Investors Trust” Deed is one such Trust Deed that does not have a Vesting Date.It also has an Approved Product Ruling from the ATO and allows the negative gearing to be claimed against your salary and protects the property from litigation and at the same time keeps it within the family blood line away from the childrens In Laws in case of a marriage breakup.LESSON 2:
Make sure you retain control of the money by remaining as Trustee. The Trustee has full control over the assets. You may recall Gina’s children attempted to remove her as Trustee. With control you can still distribute funds to them but at your discretion.
LESSON 3:
Make sure you retain the position of Appointor. The Appointor has the power to remove and appoint a new Trustee. The Appointor is the most powerful person in the Trust. In most husband and wife situation they hold the Appointor position jointly.
LESSON 4.
With marriage break ups at an all time high (above 30% and higher because many people live together and their break ups are not recorded as marriage break ups)Do not pass any assets across to the children until after one passes on. You can still lend children money but register a mortgage or caveat over the property or assets. One can call those funds back in case their marriage breaks up.
LESSON 5:
Property that you hold can still be provided as security for a bank to lend money to your children to purchase their home with. The bank will hold their home as the main security (80%) and should something go wrong than you are only exposed to 20% being the top up security held on your property. You can safeguard this with a second mortgage over their property.
LESSON 6:
Never hold investment properties in your own name but in a Property Investors Trust (PIT) Because at your discretion you can still distribute rental income to them from the PIT.
You can still put the property up as security for a loan from the bank for them and when you are ready to pass control and ownership to them the title on the property can be changed (ie trustee can be changed) with no stamp duty or capital gains tax.
If you held the property in your own name and attempted to transfer the title to your children (before your death) there will be stamp duty and capital gains tax to pay.The problems experienced by Gina Rinehart and her children are not problems that you only find in the rich.They are experienced by everyday people who have assets such as property.The only difference is that problems of the rich get published in newspapers.

Most importantly make sure you get good advice before you do anything. It’s very expensive to try and fix something after the event.

As my mother would say “An ounce of prevention is better than a pound of cure”.

Ed Chan is Non Executive Chairman of Chan & Naylor the only National Accounting Group that specializes in the correct structuring of property investments.
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About

Ed is a founding partner of Chan and Naylor accountants and a leading property tax specialist. He has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Visit www.Chan-Naylor.com.au


'Lessons from Gina Rinehart and using the right types of trusts.' have 3 comments

  1. Avatar for Property Update

    April 4, 2012 @ 9:06 pm vasilija wilson

    Thank you so uch for this info. I have great plesures reading you info Micheal
    Regards
    Vasilija

    Reply

  2. Avatar for Property Update

    October 15, 2012 @ 9:42 pm Real Estate Wollongong

    Thank you so much for sharing this information. I always love learning new things.

    Reply

  3. Avatar for Property Update

    May 4, 2013 @ 5:54 pm Bruce Green

    What about the rule against perpetutities ?

    Reply


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