Family Trust 101

[smithingbob]

Hi all,
I'm an aspiring investor that has been hanging round these forums looking and learning educating myself about the in's and out's of basic property investment. Having just finished "Tax Structures 101" by Matthew Gillgan I have a query how to "Set up a Family Trust to protect family home".

Q. What generally happens when you gift a house to a trust? e.g. I own a house valued $400k mortgaged with a loan of $200k. When gifting the house to the trust I:

1. Gift the house to the trust: the trust has house worth $400k and owes me (the settlor) a $400k debt
2. I forgive the trusts debt to me: trust owes me $0, I still have a $200k loan to the bank

At this point I still have a $200k loan. Is that loan still secured by the house which I no longer own?
Is it correct that:

• if creditors had cause to come after me personally they house is protected as it is owned by the trust,
• however if I default on the $200k loan the bank sell the house in the trust as it is security for the loan?

[Rosco]

I prefer 2. You sell the house to the Trust for $400k (market value), the Trust takes out the $200k loan. The Trust then owes you $200k. You would then look at gifting this, either all at once or at $27k per year, depending on your situation and your advisors recommendation.

I prefer this as it makes sense. The Trust owns the property and has the loan. Also often if number 1 is done, the whole $400k is gifted, and often this shouldn't be done as it would have made the settlor insolvent.

Ross

[Ivan McIntosh]

In practical terms, the bank is not going to allow you to transfer the property without retaining the right to use the property as security.

There are also time periods before creditors are unable to come after you for the property; either 2 years or 5 in certain circumstances. If you are owed part or all of the $200k - lets say because you are gifting at only $27k/year - your creditors can come after you for the debt owed to you by the trust.