New Trust or keep LTC

[Bluecoat]

Currently have an LTC which if shares are sold to a new trust will give us a savings of around $4k pa as well as asset protection . Move personal freehold house to Trust, as might as well utilize the Trust. So single easily entity and easily managed. Plan is to buy more IP's.

The setup costs will be around 4-5K with with 4K in depreciation recovery plus added cost of returns.

For the benefit of 4K per year is it worth it to restructure?

[richard56]

Hi
Just being nosy..but where do the 4K per yr saving come from?
Thanks
Richard

[Anthonyacat]

Consider this; you have the opportunity to invest in something for $5k, that gave you $4k per year for at least the next 5 years, potentially forever. Would you do it? It certainly seems worthwhile to me.

Presumably your $4k per year is savings as a result of distributing profits to low-income beneficiaries. Be aware that legally they do have the right to this money; it's not yours anymore.

[Rosco]

Currently have an LTC which if shares are sold to a new trust will give us a savings of around $4k pa as well as asset protection . Move personal freehold house to Trust, as might as well utilize the Trust. So single easily entity and easily managed. Plan is to buy more IP's.

The setup costs will be around 4-5K with with 4K in depreciation recovery plus added cost of returns.

For the benefit of 4K per year is it worth it to restructure?

Hi Bluecoat,

What % of the LTC can you transfer with no depreciation recovery? Also who gave you the depreciation recovery figure. Is this the depreciation recovery, or is the $4k the tax on the depreciation recovery?

I ask because sometimes you can transfer all the shares in an LTC with no depreciation recovery, or sometimes you can transfer a large % without depreciation recovery. Depends on circumstances.

Set up costs of around $4k to $5k. This isn't just for the transaction you are looking at! If you just looked at the tax benefit side
- share valuation and transfer, maybe $250 cost
- set up trust, normally under $2k through a lawyer
- personal house to trust (seperate transaction, and you need to consider seperate cost vs benefit)
So probably only really $2k cost to get the tax advantage.

So if cost $2k set up, $4k tax on depreciation recovery = total $6k. If you can get $4k tax saving, that is a pretty good return! 67% return per year!


Other option - what if you just transferred the shares to the lower earning spouse? Does that give most of the $4k tax savings, but with a lot less costs?

Ross

[Bluecoat]

Hi Bluecoat,

What % of the LTC can you transfer with no depreciation recovery? Also who gave you the depreciation recovery figure. Is this the depreciation recovery, or is the $4k the tax on the depreciation recovery?

I ask because sometimes you can transfer all the shares in an LTC with no depreciation recovery, or sometimes you can transfer a large % without depreciation recovery. Depends on circumstances.

Set up costs of around $4k to $5k. This isn't just for the transaction you are looking at! If you just looked at the tax benefit side
- share valuation and transfer, maybe $250 cost
- set up trust, normally under $2k through a lawyer
- personal house to trust (seperate transaction, and you need to consider seperate cost vs benefit)
So probably only really $2k cost to get the tax advantage.

So if cost $2k set up, $4k tax on depreciation recovery = total $6k. If you can get $4k tax saving, that is a pretty good return! 67% return per year!


Other option - what if you just transferred the shares to the lower earning spouse? Does that give most of the $4k tax savings, but with a lot less costs?

Ross

Excellent Thanks Ross.

12K depreciation claimed so about 4K.

should be no Depreciation Clawback if the building (excluding land and chattels) was purchased originally for under $200k.

So $250 will be the total cost from your side ?

Only issue I have is I don't understand gifting as far as My own house is concerned. Right now I have no debt on it but could potentially use the money if I wanted to. How will this change when transferred to a trust?
The security aspect will change as If I borrow against the LTC , does the banks have security overall?

[Rosco]

Cost for valuation and share transfer - somewhere around $250. Depends on how hard the valuaiton is, but should just be property values, plus other assets like bank account, less shareholders current account and bank loans.

Gifting - A lawyer who sets up your trust should fully explain this to you as part of the cost of set up

Ross

[Bluecoat]

Great thanks. So what is the process Ross, what do you need from me, lawyer is in Hamilton as well.

[Rosco]

Great thanks. So what is the process Ross, what do you need from me, lawyer is in Hamilton as well.

First step is setting up Trust with lawyer. Then can look at the share transfer part.

Ross

[Bluecoat]

Over the weekend , saw quite a few opportunities for Sub dividable or MDU projects and hold .
If owned by trust the loss will be locked in a trust against future profits.
Not Ideal in a trust but good in existing LTC

[Bluecoat]

Consider this; you have the opportunity to invest in something for $5k, that gave you $4k per year for at least the next 5 years, potentially forever. Would you do it? It certainly seems worthwhile to me.

Presumably your $4k per year is savings as a result of distributing profits to low-income beneficiaries. Be aware that legally they do have the right to this money; it's not yours anymore.

Certainly. Except I would also want to grow the portfolio. At the moment income is not big enough to go and do my own thing.
Increase value and improve yield is what I am looking at . so initially it will be hugely negative , so Trust would not be ideal as losses are locked in.
Any suggestions? Another entity perhaps?

[Anthonyacat]

Certainly. Except I would also want to grow the portfolio. At the moment income is not big enough to go and do my own thing.
Increase value and improve yield is what I am looking at . so initially it will be hugely negative , so Trust would not be ideal as losses are locked in.
Any suggestions? Another entity perhaps?

Situation sounds confusing now, different from initial post? For a trust to provide any tax advantages at all, there needs to be positive income.

If there's going to be something hugely negative, you're most likely going to want to deduct the cost against your income from employment. Your current LTC structure is most likely the way to go.

Do you have an accountant? They'll know your situation much better, and will be able to advise correctly - forum advice can only go so far.

[Bluecoat]

Situation sounds confusing now, different from initial post? For a trust to provide any tax advantages at all, there needs to be positive income.

If there's going to be something hugely negative, you're most likely going to want to deduct the cost against your income from employment. Your current LTC structure is most likely the way to go.

Do you have an accountant? They'll know your situation much better, and will be able to advise correctly - forum advice can only go so far.

Thanks . My accountant suggested to form a trust and sell shares on existing LTC which will be 4k better off as per earlier posts. But he was vague on new development properties .
Say new sub dividable property with house costs $900K , originally it will be loss obviously. I could form a new entity or keep on my own name until development is completed then transfer the old house to the original LTC?
When are they revoking the loss against the personal incomes. From memory I think its staggered over the years?

[Anthonyacat]

Thanks . My accountant suggested to form a trust and sell shares on existing LTC which will be 4k better off as per earlier posts. But he was vague on new development properties .
Say new sub dividable property with house costs $900K , originally it will be loss obviously. I could form a new entity or keep on my own name until development is completed then transfer the old house to the original LTC?
When are they revoking the loss against the personal incomes. From memory I think its staggered over the years?

I wouldn't generally recommend your subdivide-and-sell idea above, as it's likely to be caught and taxed under section CB12.

I don't believe a time frame for ringfencing losses has been set yet, but the draft comments I've seen have been that it'll be staggered in over 5 years. I wouldn't be surprised if the first year is the FY18/19 year.

Could consider either creating another LTC in your own name for developments, or keeping your current LTC in your own name, and selling out the existing positive rental property directly to a trust.

But above all you should just seek clarity from your accountant. If they're vague, question them harder until they're not. You'll find they either didn't mean to be vague and thought they had made themselves clear, or they have no idea what they're doing so are being vague intentionally to hope you won't notice. Important you know which!

[Bluecoat]

Apart from extra costs, is "S

elling out the existing positive rental property directly to a trust" has any other hooks?

Yes I paid for a second opinion but they were more interested bringing all my accounts to them. Hence I am a bit undecided.

[Anthonyacat]

Apart from extra costs, is "S

elling out the existing positive rental property directly to a trust" has any other hooks?

Yes I paid for a second opinion but they were more interested bringing all my accounts to them. Hence I am a bit undecided.

No significant hooks that I can see; it's technically slightly higher risk than an LTC owned by a trust, in that a large lawsuit or bank repossession could target other trust assets.

You could similarly do the initial plan and sell the LTC to the trust, then do the development in your own name, unless there are unusual risks with the plan.

Several options. Hard to say what is the best one.


...Hey, want to bring all your accounts to me?