Family Trust

[JGS]

Hi ,

I have question about family trust.

I am in the process of selling 2 of my rental properties and buying a house to live in. The fund of seling my rental properties will be sufficient to cover my new house without mortgage.

I plan to set up family trust for my new house, however my accountant said I have to put rental money to my Trust account as I live in it and better to have mortgage in the trust since otherwise it will generate income and taxable at 33%

I was thinking maybe not good idea to put new house under family trust, my concern is I can't pay it off since it will generate income (from my own rental) and taxable for 33%.

I don't like the idea of investing the money somewhere else while I still
have the mortgage and the mortgage rate is quite high 7.5%.

I am more into "pay it off all my mortgages and my mind will be worry free".

The perfect situation will be no mortgage in the family trust (pay it off)
and I don't have to pay for the rental (so no income for trust), but this is a bit risky.

Any other options ?

Thanks

JGS

[drelly]

I have my own home in a family trust and I don't pay rent to it...

[JGS]

Hi Dave,

I have asked my accountant about in lieu of paying rent, I pay the expenses for the house and live in it but he said it's a bit risky and it's not proportional (too small), because let's say it's 700 K house and I live in the house only paying expenses.

Cheers

JGS

[essence]

I think I know what you're getting at. Here's my interpretation of the situation.

Sell the rentals you have at present.
Buy PPOR to go into trust.

As there is no income, the trustees will have to have some way of supporting rates/insurance/maintenance. This "extra" money from the Trustees (possibly via a A/P) becomes a debt to the FT. This is a paper transaction only.

As far as I'm aware, there's nothing to stop you having a FT with your own home in it mortgage free, setting up a trading trust which the FT has shares in, and then borrowing against the FT house to buy a rental property. As the FT house mortgage is used for PURCHASE OF A RENTAL PROPERTY, the interest of this mortgage is tax deductible for the TT.

This means you can expense all costs in the TT BEFORE you disburse profit/loss. ie.

TT
income 15,000
Rates/Ins -3,500
Interest on Mtge -10,000
Depreciation -4,000

TOTAL $-1,000

This is attributed to the TT beneficiaries (yourself) to be added to their tax income for the year. Trustees of the TT can distribute the loss to whom they feel needs it.

I am not a lawyer/accountant, so do not act on my interpretation. It would pay to go to another accountant to get a different opinion. Spending $500(?) to save thousands is worth it in the long run.

Just because your accountant does your accounts, doesn't make him/her good at Trusts (think about that).

[Dean@Massiveaction]

There is nothing risky or dodgy about owning your own property in a family trust with or without debt. IF you have a mortagge it's not tax deductible that's all. As you have no debt, no issue. Talk to a decent property accountant might help. I recommend Peter Davidson [email protected]
Dean

[JGS]

Hi Dean,

My Accountant said, if I live in it and not paying rents to trust (only expenses), IRD will be suspicious.

I will check with other accountant

thanks

JGS

[graemeh]

My Accountant said, if I live in it and not paying rents to trust (only expenses), IRD will be suspicious.

I think you need a new accountant. IRD only care about tax. If your family trust buys a property and lets you live in it rent free, they don't care. If your family trust tries to claim the interest on the mortgage to buy the house you live in the IRD will consider it tax avoidance (or is it evasion).

If I understand correctly you are selling two investment properties and using the money to buy a house to live in.

Think of it as two separate transactions. You sell the investment properties, paying any tax for depreciation recovered etc. You then take that cash, borrow some more cash and buy a house. The only issue you really have is how to get the cash or house into the family trust and that is where gifting comes in.

There should be a number of articles on propertytalk about this, as well as Matthew Gilligan's columns in KPI. I don't recall one that covers your exact situation but you should be able to get the key information from them.

[Perry]

The matter of common sense understanding of Trusts
never ceases to amaze and bother me. Simply put, a Trust
is a parking place for an asset. Or assets - plural. Your
house or many houses (rentals?) - it's irrelevant. Even
your car, if you so choose. This main reason for a Trust is
asset protection. If the Trust makes an income, it must file
a tax return. If it suits the circumstances, a Trust can exist
without an income. The second big benefit is it's ability
to distribute income.

As Essence commented, in the absence of any Trustee
income, you can pay all the Trust's expenses (creating a
resultant debt to you by the Trust) and write those
aggregate costs off as a gift, annually, out of natural love
and affection for the beneficiaries (that qualification is
important). If less than $12k, no gift statement need be
filed with IRD.

If the Trust owns several rentals and your house, it can
lease all of them to you. You can sub-let the rentals and
live at home. The properties in the Trust become the
collateral for borrowing by the Trust, which includes your
home. Certain costs are then deductible by the Trust, i.e.
those costs involved in the Trust earning an income.

In that scenario, the Trust would file a tax return. That
return would – ordinarily – be zero, neither profit nor
loss, as it would distribute any 'profit' to the
beneficiaries, who would declare that income and pay tax
on it at their own rate. Caution about juveniles, who get
the Cullen club (over the head) treatment.

The major cost of that scenario is the accountant's fee and
the need for appropriate records, such as the Minutes of
the Annual Meeting of the Trustees. Expect the
accountant's bill for the Trust to exceed $1k. For a sole
trader, own-property manager, the bill should be
considerably less, $300-800, depending on the state of
orderliness of the raw fiscal data that you give to the
accountant.

Certain sub-lessee costs are also deductible by you,
separate from the Trust. Apart from in-home, office-type
costs, your own home expenses would generally not be
deductible.

Don't overlook the option of a Trustee company as a sole
Trustee. (But still be sure to have an independent
Director). It does seem to have some advantages over
'private persons' as Trustees. It's cheaper to start out that
way, rather than change it, later. (I found out about that
option, too late!)

I think the suggestion about shopping around for other
accountancy advice is worth heeding. Also, don't put
advisers on a pedestal. They are giving advice. You have
the option of disagreeing. IMHO, advice should be pros
and cons statements attached to each option, coupled with
the advisers recommendation on the best option, and why.

Then you can make an informed decision. The buck stops
there.

[Chemill]

I think your accountant may not be clued up with family trusts. Best to look for some one else. Unless he has some super-tricky scheme to accelerate the gifting process, I'm pretty sure he's on the wrong track.

Unless you've misunderstood him. You can gift $27,000 and an individual or $54,000 as a couple into a trust (may want to confirm these values) - any more and your'e charged gifting tax.

Chemill