Family Trust buys Family Home - how are loans / bank accounts and R/C's set up ?

[Bluekiwi]

Sorry to bore you all with this topic but I am trying to get a handle on the specifics of how this works.

1. I sell house to Family Trust at market value and gift the equity.

2. House now has the Family Trust on the title as owner ?

3. Mortgage is in the name of the Family Trust ?

4. Bank required PG's from the Settlors or the Trustee's ?

4. Family Trust bank account set up in he name of the Family Trust or "The Trustee's of the Trust" ?

5. Family Trust Bank account also set up as a Revolving Credit account to access the surplus equity.

6. Money from the Family Trust account is lent to the Trading Trust or Rental Trust bank accounts for propery investing.

7. Family home mortgage repayments interest only come from our personal account to the bank.

[CJ]

I will give it a try:

1. I sell house to Family Trust at market value and gift the equity. CORRECT.

2. House now has the Family Trust on the title as owner ? NO. THE TRUSTEES WILL BE ON THE TITLE, NOT THE TRUST

3. Mortgage is in the name of the Family Trust ? THE MORTGAGE WILL BE OVER THE PROPERTY. IT WILL PROBABLY BE IN THE NAME OF THE TRUST (OR TRUSTEES?)

4. Bank required PG's from the Settlors or the Trustee's ? THEY WILL PROBABLY NEED A PG FROM SOMEONE, BUT YOU CAN GET AROUND IT DEPENDING ON EQUITY IN THE TRUST AND ANY OTHER INCOME IN THERE ETC.

4. Family Trust bank account set up in he name of the Family Trust or "The Trustee's of the Trust" ? THE NAME ON THE BANK ACCOUNT CAN BE ANYTHING BUT THE NAME OF THE TRUST IS FINE.

5. Family Trust Bank account also set up as a Revolving Credit account to access the surplus equity. IF YOU WANT.

6. Money from the Family Trust account is lent to the Trading Trust or Rental Trust bank accounts for propery investing. IF YOU WANT.

7. Family home mortgage repayments interest only come from our personal account to the bank. NO. SHOULD COME FROM THE TRUST (OUT OF THE RC?). IF FROM YOU IT WILL EFFECTIVE CREATE A STREAM OF MINI LOANS FOR EACH PAYMENT.

[Bluekiwi]

Okay need some further clarification:

I will give it a try:

1. I sell house to Family Trust at market value and gift the equity. CORRECT.

2. House now has the Family Trust on the title as owner ? NO. THE TRUSTEES WILL BE ON THE TITLE, NOT THE TRUST.
So I am selling the house to myself. Wife and I are current owners and we sell it to ourselves as Trustee's (does the name even change on the title?). I dont get how this works.

3. Mortgage is in the name of the Family Trust ? THE MORTGAGE WILL BE OVER THE PROPERTY. IT WILL PROBABLY BE IN THE NAME OF THE TRUST (OR TRUSTEES?) Title and mortgage need to be in the same name I thought ?

4. Bank required PG's from the Settlors or the Trustee's ? THEY WILL PROBABLY NEED A PG FROM SOMEONE, BUT YOU CAN GET AROUND IT DEPENDING ON EQUITY IN THE TRUST AND ANY OTHER INCOME IN THERE ETC.

4. Family Trust bank account set up in he name of the Family Trust or "The Trustee's of the Trust" ? THE NAME ON THE BANK ACCOUNT CAN BE ANYTHING BUT THE NAME OF THE TRUST IS FINE.

5. Family Trust Bank account also set up as a Revolving Credit account to access the surplus equity. IF YOU WANT.

6. Money from the Family Trust account is lent to the Trading Trust or Rental Trust bank accounts for propery investing. IF YOU WANT.

7. Family home mortgage repayments interest only come from our personal account to the bank. NO. SHOULD COME FROM THE TRUST (OUT OF THE RC?). IF FROM YOU IT WILL EFFECTIVE CREATE A STREAM OF MINI LOANS FOR EACH PAYMEN. Can I have an AP from my personal current account to the RC then

Anyone who can enlighten me further on points 2,3 and 7.

[orbital]

1. I sell house to Family Trust at market value and gift the equity. CORRECT

Incorrect.
The Trust purchases the house from the vendor, consideration for the purchase is debt by the trust to the settlor. There is no gifting at this point, merely a debt owed tot he settlor for the purchase price. This is can then be gifted $27,000 per year/per settlor by the settlor to the trust, ie. the debt reduces by $27,000/$54,000 etc per year. Depending on the equity in the house and age of settlors this could take more than the settlors lifetime so they will in their will specifiy that the debt to trust will be discharged on their death.

[CJ]

2. do you have an independant trustee? Otherwise you are right and may not even need to change the records and the Land Office. A trust definately doesn't get listed on the title.

3. I didn't think so. Anyone??

7. the problem with using personal funds for trust debts is it increases the risk of being treated as a sham (search for sham trust on here and you will probably find a link to a martin hawes article he publishes each year in the hearld.) Maybe put in a regular amount each month (different to mortgage payment - round to nearest $100) and dont do withdraws from the Trust when you want to purchase food etc.

[Bluekiwi]

Cheers CJ thanks for that

[Perry]

It may help to remember that a Trust is
described as a 'legal obligation,' and is not
a 'legal entity.'

[Bluekiwi]

Yes I think you are right...

I am slowly starting to get to grips with most of this (sort of):

1. I think the S&P document details the vendor as "The Trustee's of xyx Trust" (The Trustees of the Family Trust are the purchasers)

2. And the title just lists the names of the trustee's on it. (Anyone know how Family Trusts are set up, do we have wife, myself - and Independant trustee ?? (as this complicates the next questions).

3. Mortgage is over the property as CJ says but the mortgage loan is either "In the name of the trust" or "In the names of the Trustee's" (Company Solutions website articles confuses me here).
Note: The important issue I have told to watch out for, is to avoid the trust on one hand owning the property as its asset, but not having the corresponding mortgage as its liability.

4. I AM A KNITWIT I HAD 2 POINTS 4'S.

4 (THE 2ND 4) and 5: The bank account named "The Trustee's in xyz Trust" can this simply be the RC account ?

7. I am sort of aware of the problems.
Yet I can find no set way of doing this correctly.
I am happy to have my Trust RC account pay the monthly Fixed loan interest bill (great to have the bank paying itself back).
And have a monthly AP from our personal account to the Trust RC.
But this is not the most effective way of minimising interest costs, is their a way to set up these accounts correctly and keep interest cost down.

[Perry]

Your grip is sound, thus far. Be aware
that the 'status' of the trustees can
have unexpected impacts on certain tax
transactions.

[CJ]

7. This is the problem with having multiple entities. The funds are separate and distinct so it is difficult to play around with interest rates and account balances.

Ideally you (personally) would be debt and asset free, and everything you earn would be gifted into the trust. (if you are lucky enough to be saving and therefore transfering in more than $27k per person per year, then you might need a small rethink).

[ChrisDes]

Sorry to bore you all with this topic but I am trying to get a handle on the specifics of how this works.

1. I sell house to Family Trust at market value and gift the equity.

2. House now has the Family Trust on the title as owner ?

3. Mortgage is in the name of the Family Trust ?

4. Bank required PG's from the Settlors or the Trustee's ?

4. Family Trust bank account set up in he name of the Family Trust or "The Trustee's of the Trust" ?

5. Family Trust Bank account also set up as a Revolving Credit account to access the surplus equity.

6. Money from the Family Trust account is lent to the Trading Trust or Rental Trust bank accounts for propery investing.

7. Family home mortgage repayments interest only come from our personal account to the bank.

Hi Blue Kiwi,

I am currently 3/5 years through a LLB / BCOM at Uni so I will help share some light on this! I am currently doing a paper (Equity) which is all about trusts / wills and and asset planning. Obviously I am still a student but I think my advice is still worth it's weight

1. I sell house to Family Trust at market value and gift the equity.

Correct.

I am assuming that you currently own the property in your own personal name.

The sale of the property to trust is done through the normal Agreement for Sale and Purchase (ASAP) the value placed can be based on the Government Valuaction (GV or now known as CV) this has be found to be a bona fide value for property.

So after the ASAP has gone through, the trust will now own the trust outright and the debt for purchase will be owed by the trust to you personally.

Eg: House worth $500 000 is sold to your family trust, an ASAP is drawn up and the house is sold as per the normal transaction.

The trust now owns the house worth $500 000, with a debt to your personally of $500 000.

The debt is an asset to your personally - so in reality you have an asset of $500 000 to your personal name which therefore is not protected from any creditor claims.

This debt is then forgiven by you to your trust at the rate of $27 000 per year ($54 000 per couple if you are married / own the property jointly with spouse) (this is the maximum amount a person can gift to avoid gift duty being owed to the IRD which is a large % of the gift amount over $27k)

Remember that in order to have the debt to the trust cleared you must declare with the IRD that you have forgiven $27 000 to your family Trust (this is quite straight forward but an Accoutant or Lawyer can also arrange this for you)

Having property in a trust requries some paper work and expense but it will be worth it in the long run. Think of the gifting you have to do as the ongoing medicine in order to cure the fact your property was not placed in trust years ago!

2. House now has the Family Trust on the title as owner ?

The title lists the trustee's as the owners of the property. The trustee's own the property on trust for the beneficiaries of your family trust.

Remember that the transfer of a property into a family trust means that you no longer own the property - the trustee's hold the property on trust and the beneficaires of the trust are the ultimate owners. The settlor of the trust will have a life interest to live in the trust property.

3. Mortgage is in the name of the Family Trust ?

Correct. With a personal gurantee by yourself and spouse as to the lending by the trust.

The mortgage documents can also remain in your own name although it is advisable to have this changed over to the trust (deed of assignment?) with a PC to you personally as this keeps things nice and neat and tidy.

The more records you keep and the more documentation you make of any decisions related to trust assets - the more likely that you can defend off any potential claims on this property in the even of the worse occuring - eg some kind of credior claim over your family home.

4. Bank required PG's from the Settlors or the Trustee's ?

Correct. There would be no way a bank would lend to a trust that has no financial's etc so this will definately be required by your lender.

4. Family Trust bank account set up in he name of the Family Trust or "The Trustee's of the Trust" ?

Correct. This depends on your bank as to who's name is listed on the statemets - usually it will just be "XYZ Family Trust" however some banks was address it as "Trustee's of XYZ Family Trust" this doesn't really matter as long as the account is clearly that of the Family Trust and not mixed with your personal assets.

5. Family Trust Bank account also set up as a Revolving Credit account to access the surplus equity.

This is up to you and your circumstances.

6. Money from the Family Trust account is lent to the Trading Trust or
Rental Trust bank accounts for propery investing.

Correct.

I would suggest that you set up another trust / LAQC (LAQC - If you want to maximum tax benefits but give up asset propetection of investment property) to own any property investments in order to protect your family trust owned home from any potential creditor claims.

(Make sure your personal accounts, savings accounts, mortgages, trust accounts, saving accounts etc) are at a different bank then your property investments.

7. Family home mortgage repayments interest only come from our personal account to the bank.

If you want the trust to own the family home then you would be best to set up the trust cheque account to have mortgage repayments debited from. You would personally advance money to the trust to meet these repayments each month / fortnight. Just remmeber to have your lawyer include a provision in the Trust deed of the Family Trust that allows you to meet the monthly mortgage costs of the Family Trust.

I hope this helps. Well done for choosing to protect your assets through a Family Trust - eventually when all of the gifting is complete for the whole purchase price - the trust will fully protect your home from any potential creditor claims. They really are a necessity for any business person and just about any one!

Please keep in mind this advice is just that advice and I would still encourage you to seek further information from a competent lawyer and accountant as to your own personal circumstances.

Cheers

Chris

[ChrisDes]

I am slowly starting to get to grips with most of this (sort of):

1. I think the S&P document details the vendor as "The Trustee's of xyx Trust" (The Trustees of the Family Trust are the purchasers)

Correct.

2. And the title just lists the names of the trustee's on it. (Anyone know how Family Trusts are set up, do we have wife, myself - and Independant trustee ?? (as this complicates the next questions).

When property is being held in a trust you do not NEED an independent trustee. You can have a trust set up as follows:

Settlor (Yourself and your wife)

Trustee's (Hold the Property on trust - Yourself and your wife)

Beneficaries (Who the property will go to eventually on the winding up of the trust - your children, potential children, yourself and your wife)

However this situation is not advisable.

As this really is not holding the property on trust at all and could be overturned by a court - the trust is really just an extension of yourselves personally.

A more desirable set up would be to introduce what is known as an indepedndent trustee - an accountant, lawyer or professional trustee company. They introduce a matter of profesionalism to the trust - they have no interest to any of the parties and can be relied on to make an inpartial decision.\

Remember that trustee's are liable for trust debts so it is more common these days for lawyers to appoint what is known as a trustee company as a trustee of the trust. This company will not have any assets - in this way the lawyer protects themselves personally from any liability arising from the trustee obligations.

Eg: Your lawyer is with X, Y & Z Lawyers, they have a trustee company called XYZ Lawyers Trustee Company Ltd that has no assets.

XYC Lawyers Trustee Company Ltd is a trustee of your Family Trust.

It means that the Lawyers can have any one in the law firm do work for your family trust and avoid persona liability for activities in the trust.

You can have a clause in your trust deed to allow yourself and your wife as trustee's the ultimate right to fire your professional trustee and re-appoint another trustee. In this way if the independent trustee does something you do not like / want then you can get rid of them.

3. Mortgage is over the property as CJ says but the mortgage loan is either "In the name of the trust" or "In the names of the Trustee's" (Company Solutions website articles confuses me here).
Note: The important issue I have told to watch out for, is to avoid the trust on one hand owning the property as its asset, but not having the corresponding mortgage as its liability.

Correct.

7. I am sort of aware of the problems.
Yet I can find no set way of doing this correctly.
I am happy to have my Trust RC account pay the monthly Fixed loan interest bill (great to have the bank paying itself back).
And have a monthly AP from our personal account to the Trust RC.
But this is not the most effective way of minimising interest costs, is their a way to set up these accounts correctly and keep interest cost down.

Probably not, but the greater benefit here is to have your assets protected for the future of your beneficiaries - likely to outweight issues of reducing interest costs by a small amount each year.

Chris

[ChrisDes]

Something to keep in mind

You may also want to keep in mind that instead of having yourself and your wife as trustees of the trust - why not form a trustee company to act as trustee of the family trust.

The directors of this company are therefore the trustee's of the family trust.

The advantage of this is if you want to at some point appoint a new trustee, or change the trustee's of the family trust you simply do so by changing the diectors of the trustee company.

This would save money in the long run as you no longer need to update the individual trustee's listed on mortgage documents, title, bank accounts etc in the event of a new appointment or retirement of trustee - as the trustee would remain as the trustee company irrespective of who the directors of the trustee company are.

Eg:

Yourself and you wife settle a Family Trust. (The Blue Kiwi Family Trust)

The Family Trust has the sole trustee of (Blue Kiwi Family Trustee Company Ltd)

This company has yourself, your wife and your lawyer as directors

The directors of this company therefore control all assets of the family trust which is owned by the trustee company. Remember that in this scenario that (Blue Kiwi Trustee Company Ltd) would appear on all trust property, bank accounts, mortgages etc.

Once again a lawyer would have some more to add to the above but this is a broad outline of the advantages.

Just some more food for thought!

Cheers

Chris

[Bluekiwi]

Great

Thanks for that Chris. Some great help.

[mortgage broker]

1. Check with a solicitor on this one, you may need some advice specific to your numbers, you may be otherwise be liable for gift duty. http://www.ird.govt.nz/duties-levies/gift-duty/