New to family trusts

[Renee29]

Hi, I could do with some info and advice as I'm really new to how family trusts work, i just have a basic understanding from the last few months that ive been researching online. It's abit long winded but please bear with me. My father passed away not to long ago but he was the settlor for the family trust that he set up around 8 years ago, which contains a free hold 77 acre farm, with a house on it, with the government evaluation currently at around $450,000. His 6 children are all beneficiaries but he left his powers of appointment to my brother and our older sister (whom are now also the trustees). Now my brother and I would really like to hold onto as much of the property as we can, for future generations and for us to live in. The rest of the siblings have now agreed for us to pay them out. The only problem is that the trust has never made any real money, so the trust is pretty broke right now, but we would like to pay them out as soon as possible (family dramas). My brother and I are not exactly financially capable either, I'm studying for the next 2 years, so am only on a benefit. My brother does own a home but hasn't made much of a dent in his mortgage and has had a few issues in the past with his mortgage repayments (which he has rectified), but he does have a fairly good paying job, in which he's secure in. If there are any websites that anyone could point me to, in order to do more through research on how we could pay the siblings out, and maybe our legal responsibities in doing so, then that would be great. Advice on what we could do next would also be really helpful, do we try to get a mortgage with the trust as it is? Mabe dispelled the trust and then it may be easier to get a mortgage? One more thing I should point out, is that our 8 year old sister (also a beneficiary) lives in the house with her mother, the mother wants her daughters share and I doubt she will leave that house without it. Which means if we do get a mortgage then we won't be able to stay in that house as we are paying off the mortgage, we can't afford to be paying double rent. I understand as a trust we have the discretion to move her on but we are trying to stay out of the courts.
Anything will help, thanks in advance.

[Ivan McIntosh]

Interesting situation, and not that uncommon. It seems to me like you would need a three part solution, which all takes effect on the same day:

1. Sell the property from the trust to yourselves, and on settlement:
2. Wind up the trust; and
3. Pay out the beneficiaries, with you and the brother using your shares as part of the purchase price.

All of this depends on whether you can get agreement from all parties, particularly the existing sister's mum to move out once paid (leaving aside questions of what she does with her daughter's shares - if you don't trust the mum then that might kill the whole thing right from the start until the daughter comes of age), and whether you can raise money against the farm that you and your brother will now own to pay for the acquisition. You also need to think about the structure in which you wish to own the farm, whether that is you and bro as "normal" owners, or in trust for your descendants.

[Rosco]

I would suggest a first step is talking to a mortgage broker. Can you get a loan to pay out your siblings?

450,000 / 6 = $75k each.

So you and your brother would need to borrow $300,000 to pay them out. So can you borrow $300k?

That is 67% LVR, but it is a small farm so banks might not lend 80%.


Ross

[Renee29]

Interesting situation, and not that uncommon. It seems to me like you would need a three part solution, which all takes effect on the same day:

1. Sell the property from the trust to yourselves, and on settlement:
2. Wind up the trust; and
3. Pay out the beneficiaries, with you and the brother using your shares as part of the purchase price.

All of this depends on whether you can get agreement from all parties, particularly the existing sister's mum to move out once paid (leaving aside questions of what she does with her daughter's shares - if you don't trust the mum then that might kill the whole thing right from the start until the daughter comes of age), and whether you can raise money against the farm that you and your brother will now own to pay for the acquisition. You also need to think about the structure in which you wish to own the farm, whether that is you and bro as "normal" owners, or in trust for your descendants.

Hi, thanks for the reply Ivan,
Sorry, I'm not too sure what a process like this would actually look like.
So first, would we need a mortgage broker that can put this plan down on paper for a bank to consider?

I imagine that we would then also involve our trust lawyer, who would write up something saying that my brother and I will be purchasing the property (which will be on settlement? Could you explain what that involves? and then do we then use our "shares" to purchase the property?), then we will pay out the 4 beneficiaries once the mortgage comes through? (assuming the beneficiaries agree and that we can actually get pre approved for a mortgage).
The lawyer should also add that once the siblings have their money, that they are no longer part of the trust and that in doing all this, it would "wind up the trust"? Is this something the bank would need to be aware of to pre approve a mortgage for my brother and I?
I understand we would also need other things, such as proving we can actually pay back the mortgage etc, but would something like this be one of the main documents the bank would need? Because, yea, the trust won't sell to us unless we can prove that we can pay them out after the property is under our names.
So, we would only need to deal with a mortgage broker, the bank, and our Trust lawyer?

Also would the bank then look at my brother and I as personal home buyers and not as a family trust? As i understand, family trusts are treated as their own entity's and are judged as such, in regards to the trust being approved for mortgages and the trust's ability to pay back the mortgage?

We are also unsure whether we would like to keep the property in trust, I feel like it is alot of hassle to keep it in one, as well as there being a few pitfalls to having a trust...such as possibly being declared as a "sham" trust, if we don't administer the trust properly. This is something that worries me, but I am not sure if that worry is warranted or not.

Sorry, as you can probably tell, I don't know alot about mortgages either, as well as how they work in relation to family trusts. We should really be paying for info like this, which we will most likely have to do (especially if I can't get my head around it all), so am really grateful for the replies, as well as the forum itself.

[Renee29]

Thanks Rosco,
Yea, we will definitely be sitting down with a mortgage broker, hopefully sometime this week.
My brother seems confident that we can get a mortgage of 300k (because its a freehold property, and he seems to think that we should be able to borrow up to the value of the property) but I'm not so sure, as I don't know alot about mortgages and how they work.
It will also be hard seeing that i am only on a benefit at the moment and will most likely remain on one for at least the next two years. In saying that, I will be able to contribute to the mortgage repayments once my brother and I move onto the property, as it will be like paying a normal weekly rent. Something I am hoping the banks will take into consideration anyways.
I am not sure what LVR is but I will have a look into it.

[Wayne]

Did it work out for you?