Do You Need A Trust?

[Rosco]

DO YOU NEED A TRUST?

What Do You Want a Trust For?
Relationship Property? A Trust isn't bullet proof and you would need to get some expert legal advice around relationship property, and most likely have a relationship property agreement too.

To save tax? For most property investors, a Trust will be less tax effective, as any losses stay within the Trust and cannot offset personal income (so no tax refunds). For business and property owners that are making a real profit after a fair owner wage, a Trust is a great entity to spread income to other beneficiaries and minimise tax.


The main reason is asset protection.





The first part to consider is what are you protecting your assets from? What is your or your partner’s risk of being sued? I look at:

• Director risk: If you are a director in a company (such as a finance company, for example), then you have director responsibilities and risk. In a worst case scenario, you could be sued as a director.
• Trustee risk: Are you a Trustee in another person's Trust. If so, you could be liable as Trustee.
• Have you given personal guarantees?
• What is your potential risk to Health and Safety? If you are in the construction industry, this could be quite high! And it's not just owners who can be liable. Any employee could be held to be liable.

You need to consider these items and any others that might affect your risk or your chance of being liable.





If you have high risk, then a Trust would help to separate your assets from your risk. Generally, this would mean putting your personal home in a Trust to start with. For investment properties and businesses, you need to consider the structure carefully and there can be lots of catches or costs to restructure.

Setting up a Trust is only part of the process and you need to be aware of the ongoing administration and compliance requirements:

• New Trust laws (due to come in late 2017 or early 201 setting higher obligations on Trustees.
• Normally you would have an independent Trustee. Commonly cost $75 + GST per year for this service.
• For signing of documents as Trustee (e.g. Finance documents), Commonly cost $75 + GST.
• If we are a Trustee, we require a compulsory annual meeting, normally done by phone. Commonly cost $100 + GST for this phone meeting.
• Gifting. Commonly cost $255 + GST.
• Annual Financial Statements, Minutes and tax returns for the Trust. This can vary widely depending on the work required, but is likely to cost at least $500 + GST per year.
• Trust Minutes and discussion for major transactions.
• Separate Trust bank account and keep Trust affairs separate to personal.

Setting up a Trust is done through a lawyer and normally costs $2,500 to $5,000 depending on what is included and what property needs to be transferred into the Trust.

In my opinion, when should you be looking seriously at a Trust?

• High risk as above
• Profitable business making $50,000 or more after fair owner wages
• Profitable rentals
• As your overall equity builds up to $1million plus, it is worth considering Trusts as you have more to lose.

I haven't put these items here as a 'sales pitch', but I hope they give you a realistic idea of the ongoing costs for a Trust and that all the little things can add up!

Ross

[brokerman]

This is a really useful post so thank you, I've copied it to my 'list of useful stuff' folder!

[Rosco]

Thanks! It's amazing how many people set up Trusts because their neighbor has one, without considering the long term implications

Ross

[brokerman]

Thanks! It's amazing how many people set up Trusts because their neighbor has one, without considering the long term implications

Ross

I see a lot of Trusts in client emails and when I ask what it was set up for or when was it last reviewed the line goes very quiet!

[Anthonyacat]

Completely agreed, excellent post.

There have been many more clients to whom I have asked 'why do you want a trust?' than those I have suggested a trust for without them asking.

[ak22]

Hi Rosco,

Thanks so much for the article. I've been digging for Trust infos in the net and couldn't find a more elaborate explanation other than defining what Trust is.

I have couple questions,
1. Can you still borrow even if your properties are under trust?
2. Can you still use equity of property under trust as collateral to buy another IP?

Cheers

[Shalodge]

There is a reason not covered .. Succession planning.. Where children have remarried etc... placing (especially) income generating assets into a trust can avoid inheritance related arguments. Proceeds can be applied to family members who can be beneficiaries without risking assets being claimed by children's partners..

My personal view is that land holdings (not houses) will become very solid economic foundations for the security of future generations as long as they are protected and where possible enhanced. Fragmentation and poor decision making can impact the financial stability of not only the current generation but the future ones as well. The gap between the haves and have not's is growing and is in part due to the effect of property on intergenerational wealth.

I and my children will make small sacrifices now to create an enduring legacy for our grandchildren and great grandchildren.. Trusts are the best way of doing that IMHO. The OP looks only at the immediate risks and issues around forming a trust.

[Anthonyacat]

Hi Rosco,

Thanks so much for the article. I've been digging for Trust infos in the net and couldn't find a more elaborate explanation other than defining what Trust is.

I have couple questions,
1. Can you still borrow even if your properties are under trust?
2. Can you still use equity of property under trust as collateral to buy another IP?

Cheers

Both of these are possible, though lending can take a little longer to get sorted due to the additional signatures etc, and discussions with professional trustees.

[Rosco]

Hi Rosco,

Thanks so much for the article. I've been digging for Trust infos in the net and couldn't find a more elaborate explanation other than defining what Trust is.

I have couple questions,
1. Can you still borrow even if your properties are under trust?
2. Can you still use equity of property under trust as collateral to buy another IP?

Cheers

Hi ak22,

1) Yes you can still borrow, but you have to meet bank criteria. So does the Trust have the assets and income to meet bank requirements? If not, will the bank get a personal guarantee from a Trustee (you?), who does have the income?
You might find that no matter how good the Trust income and assets, that a bank still requires personal guarantees from you.

2) For who to buy another investment property? If it is the Trust, then as 1) above.
If it is your, or your LTC buying an investment property, then up to Trustees to decide. The Trustees would be looking at how this benefits the Trust, or how it benefits a beneficiary of the Trust. Some professional trustees will say no to this!

Ross

[Rosco]

There is a reason not covered .. Succession planning.. Where children have remarried etc... placing (especially) income generating assets into a trust can avoid inheritance related arguments. Proceeds can be applied to family members who can be beneficiaries without risking assets being claimed by children's partners..

My personal view is that land holdings (not houses) will become very solid economic foundations for the security of future generations as long as they are protected and where possible enhanced. Fragmentation and poor decision making can impact the financial stability of not only the current generation but the future ones as well. The gap between the haves and have not's is growing and is in part due to the effect of property on intergenerational wealth.

I and my children will make small sacrifices now to create an enduring legacy for our grandchildren and great grandchildren.. Trusts are the best way of doing that IMHO. The OP looks only at the immediate risks and issues around forming a trust.

Hi Shalodge,

Great points. This would generally be if you had large assets to pass onto your children, and grandchildren.

Another way of achieving this is a Trust set up upon your death. So rather than setting up a Trust now (only can exist for 80 years under current rules), your Will could form a new Trust for all children or a new Trust for each child upon your death. This would likely be under new rules that could allow a longer duration (proposed 125 years) and could be customised for your children rather than for you.
A Trust for each child would split up the overall assets, but then would give each child more control, and more ability to invest to help their personal situation.
Big cost savings - if you are looking at a Trust being in operation for say 40 years, there are likely to be at least $40k in additional costs. Compared to a simpler structure, and then creating Wills upon your death.

So is it worth establishing a Trust now, solely for Succession planning? It probably comes back to the points about your risk, your partners risk, and how large your current equity is.

Also, unfortunately, when the parents die, most children just want to wind up the Trust and get their hands on the cash/assets. If all the beneficiaries are fighting to get the Trust wound up , it can be very hard as professional trustees to stop this happening. A few years I was fired as Trustee for not agreeing to this!, and in another case have given in and wound up Trust as power of appointorship was going to sack me to get Trust wound up, which would have added unnecessary costs to the Trust with relatively small asset base.

Ross