Structure

[Tim Roach]

Hi....
I have a couple of rentals but am only now turning to property investment seriously. I've just had a meeting with an accountant to get my structures sorted.

Prior to I had thought of setting up a family trust (not done yet), LAQC (move existing properties) and a trading company. I am advised to set up as above but with a trading trust, not a trading company - clearly this will esculate set up costs... I apreciate much depends on personal circumstances etc etc... however given that I will buy property to hold (LAQC) and property to trade (Trading Trust), does this represent sound advice and does anybody do it differently?

Thanks, Tim

[Dean@Massiveaction]

You'll find lots of advice here Tim. A typical structure would be LAQC and Trading Trust, NOT a trading company. Developers use companies more often than investors.
The 2 people I respect the most in structures have diffferent opinions. Matthew Gilligan would typically say LAQC and Trading trust with a corporate trustee.
Garth Melville, who is a structure specialist would say use trusts for everything. With issues like this don't take free advice here, go and see one of the above and make sure you get it right from the start

[CJ]

Tim - the advice you ahve been given follows the common wisdom. Have a search on the forums and you should see it discussed in depth.

[Tim Roach]

Thanks Pooomba / CJ - my meeting was with MGA hence tallies with your comments... will do some further background searches as you've suggested - Cheers, Tim

[Dean@Massiveaction]

Hi Tim. Didn't notice the Proverbs 1:20 signature yesterday. Very cool!!

[xris]

I for one would be interested to hear any opinions about what pooombah has said. There appears to be little, if any, difference between the two structures, but I have often seen comment about 'do it this way, not the other'. Why?

The two structures in question are...



Trust 2 (settlor is you; whoever as trustees; whoever as beneficiaries)

Trust 1 (settlor is you; only trustee is a company not associated with you; beneficiaries are trust 2 and a charity, but not you or your associates)

Company owned 100% by the trust 1 (you as director)





Trust 2 (settlor is you; whoever as trustees; whoever as beneficiaries)

Trust 1 (settlor is you; trustee is an independent company not associated with you; beneficiary is the independent company and a charity)




These structures may not be correct anyway, so comment would be useful no doubt, especially for anyone thinking about structures but who is confused.

A direct question from me would be: “Why should the actual trading be done by a trust in a company rather than a company in a trust?

xris

[Perry]

Another question might be, how much more prudent it is
for the (original) settlor to be a family member, e.g.
parent, sibling or child?

[CJ]

perry - Dont thing the settlor thing matters. Note: IRD deems settler to be anyone who has gifted to trust.

xris - not sure if you got teh structures right. What is important is that the trading is done in a trading trust, (not in a company) and that the B&H is held in another trust. It is the use of two trusts (specially set up, run and operated) that avoids tainting. Any other entity is not needed and possible may ruin the structure (other that the fact the trading trust must have a corporate trustee). Note: my understanding may be incorrect.

[spaceman]

Xris's structures are tainted..... IMHO

The two structures in question are...

Trust 2 (settlor is you; whoever as trustees; whoever as beneficiaries)

Trust 1 (settlor is you; only trustee is a company not associated with you; beneficiaries are trust 2 and a charity, but not you or your associates)

Company owned 100% by the trust 1 (you as director)

Trust 2 (settlor is you; whoever as trustees; whoever as beneficiaries)

Trust 1 (settlor is you; trustee is an independent company not associated with you; beneficiary is the independent company and a charity)
xris

In your examples you have one settlor of both trusts and the relavent line from the tax act would be.

(f)a trustee of a trust and a trustee of another trust, if the same person is a settlor of both trusts; or

So the trustees are associated because of the common settlor and this in turn associates/taints the others involved.

Well that's what I reckon anyway

This whole tainting thing is a bit of a bug up my ass .... I have yet to be convinced by anybody that you can set up a structure to avoid tainting.

I won't bore anybody with my reasons why I think this (search the site if you want to know as I've ranted on and on about this before)

But I will say that when I was in NZ last I heard one of Poomba's recommendations speak ( Matthew Gilligan from GRA). He immpressed me with what he said and I tried to book an appointment to see him properly before I left the country. Unfortunately they were unable to squeeze me in before I left, however I plan on seeing him when I next return and perhaps then I will have my mind changed for me.

He was basically asked the "TAINTING" question when he spoke .....I believe he chose his words very carefully when he said:

"That none of the trusts he had set up had been attacked by the IRD" .....or words to that effect... I don't claim to quote him verbatim.

What he didn't say is that the trust's guaranteed protection from tainting.

Might be splitting hairs on my part but I think there is an important distinction.

cheers
Spaceman

[Dean@Massiveaction]

Matthew has often said he has never had a trust he has set up successfully attacked. Due to IRD regs being so interpretive and changable they seem to decide to have a go at people as test cases from time to time. Isn't it ridiculous that you have to try and figure out the law because the law "is an ass"??

[Perry]

Dont thing the settlor thing matters. Note: IRD deems settlor to be anyone who has gifted to trust.

To a point. The original settlor will be named in the Trust Deed.
There is a requirement for certain types of Trusts, like these,
to have a credible "natural love and affection" component, as
I recall, between the settlor and the beneficiaries. My understanding
is that a self-set-up Trust, where the settlor is also a beneficiary
and Trustee, is more susceptible to the sham Trust accusation
and possible attack.

All advice I have is that it's prudent to have the original settlor
in the Trust Deed to be another family member who is "of age."
I.e. not a minor.

[Ivanhoe]

(f)a trustee of a trust and a trustee of another trust, if the same person is a settlor of both trusts;

That's why you use a corporate trustee.

[spaceman]

Read it again

(f)a trustee of a trust and a trustee of another trust, if the same person is a settlor of both trusts;

That's why you use a
corporate trustee.

It's the common settlor that causes the association, it doesn't matter who the trustees are, corporates or not.

The whole point of having two trusts is so they aren't associated..... but if the same person settles both trusts...... then wham bam thank-you ma'am, your screwed.

IMHO anyway

Cheers
Spaceman

[xris]

Sorry people, but spaceman's logic is good.

It neatly explains why you cannot have your cake and eat it too.

You cannot be untainted and have total contol, ie be a settlor of both trusts with the relevant power over the entire structure.

If you are settlor of both trusts, thus maintaining control (irrespective of who is the trustee), then you are tainted.

The ird can then choose whether to be nice to you or to make your life hell.

Spaceman, drelly, do you agree?

xris

[CJ]

Spacemans comments look right. If you aren't the settlor of a trust, I would avoid gifting into it as that will then deem you as a settler and may stuff you up. I wonder how you get capital into a trading trust then. You may find someone willing to put in $10 but enough to buy a house?? Me thinks that loans between the trusts may be needed??