Family Trust OR Family Trust and LTC?

[Delvon]

Given we are shortly to be sharedholders and Directors in a high-risk sector, we have decided with our Solicitor that a Family Trust is the best way forward. We've also received advice from our own Accountant and one other Accountant. Trouble being one Accountant recommends placing our rental property in an LTC with the Family Trust owning 98% shares in the LTC. On the other hand the other Accountant felt an LTC is of no value, and stated we should simply put our rental directly into the Trust. The rental property is approx break-even, perhaps slightly positively geared. Thoughts?

[Beano]

Given we are shortly to be sharedholders and Directors in a high-risk sector, we have decided with our Solicitor that a Family Trust is the best way forward. We've also received advice from our own Accountant and one other Accountant. Trouble being one Accountant recommends placing our rental property in an LTC with the Family Trust owning 98% shares in the LTC. On the other hand the other Accountant felt an LTC is of no value, and stated we should simply put our rental directly into the Trust. The rental property is approx break-even, perhaps slightly positively geared. Thoughts?

I would go for neither
Normal company , family trust shareholder
What are the tax rates of the beneficiaries?
What is the bugetted taxable profit over the next decade ?

[Delvon]

I would go for neither
Normal company , family trust shareholder
What are the tax rates of the beneficiaries?
What is the bugetted taxable profit over the next decade ?

Are you suggesting a normal company for the rental? The tax rates of the beneficiaries vary between the highest for ourselves and lowest for our kids. Taxable profit for next year only about $5,000 but we hope to see that climb.

[Rosco]

Normal Company? Be very careful as very difficult to get out Capital Gains. A Normal company is taxed at 28% vs Trust 33%, but the 28% is only an interim tax and long term often ends up at same 33%. With a Trust you can distribute to beneficiaries, a) children under 16 can normally get $1,000 tax free. b) children over 16 often at 10%. c) Often a lower income earning spouse, possibly taxed at 10% or 17.5%.
So overall I would hardly ever use a Normal Company.

98% - why. In the old days would leave 1 share each so that you could do shareholder salaries. But if LTC owned by Trust, then I would use 100%. So all income flows to Trust, then can distribute from there. Sometimes using 98% can create an ACC liability too.

LTC or Trust. It depends on your long term plans
1) If young and going to buy a few rentals over next 20 years, I would separate from personal house. So LTC.
2) If going to develop rental, ie house on back, some kind of building work, then I would seperate from personal house as Health and Safety risk.
3) If only ever going to have one rental - then might consider having this in the same Trust.
4) If have rentals in Trust , then might cost you more in Trust decisions, and third independent trustee might charge more over time to sign loan docs etc. Anti Money Laundering is a real pain.

What entity the rental is already in will make a big difference. If already in a company, likely to be a lot easier to change to LTC owned by Trust, then move to a Trust (lot more legal fees)

Ross

[Delvon]

Thanks Ross. We must do a Trust as the business we are entering later this year is in a sector ripe for sueing. Our only rental property only settles in a month from now. Our confusion is not whether to have a Trust, but more whether a) the IP is in the trust directly OR b) the IP is in an LTC but the Trust owns the shares.

[Rosco]

Which was what I answered on.

I put LTC vs Trust. But for your post this meant LTC owned by Trust vs Trust (sorry if that wasn't clear)

Ross

[Beano]

Each person have differing circumstances so it is important to seek professional advice

1:Normal Company? Be very careful as very difficult to get out Capital Gains.
Generally requires the winding up of the company

2:A Normal company is taxed at 28% vs Trust 33%, but the 28% is only an interim tax and long term often ends up at same 33%.
Deferring the payment of the extra 5% tax is a great benefit (to demonstrate the level of saving my imputation credit account is approaching $2m)
If the profit had flowed through the IRD would have hundreds of thousands of additional tax.
This deferral of the 5% has instead reduced borrowings compounding year after year.

3: With a Trust you can distribute to beneficiaries,
Which you still can through dividends
Some of the beneficiaries still pay no tax even years after working (surplus imputations)

Don't just look at the $5k profit today look at future

[Rosco]

Hi Beano,

Also consider lost imputations is the number 1 way accountants get sued. If lost, then effectively pay tax twice. This shows that there is a considerable risk of losing ICA's!

Agree, everyone is different. But with considering that, I still don't recommend a normal company very often, as for most people there is better options.

Ross

[Beano]

Hi Beano,

Also consider lost imputations is the number 1 way accountants get sued. If lost, then effectively pay tax twice. This shows that there is a considerable risk of losing ICA's!

Agree, everyone is different. But with considering that, I still don't recommend a normal company very often, as for most people there is better options.

Ross

Hi Ross
Keen to know
1: how IC are lost ?
I reconcile the tax paid and attached IC to see if the IRS records are correct
I cleared out the IC when tax changed
2: keeping the IC and profit in the company means I can control the distribution to the beneficiaries.
3: the first decade of distributions through the trust were good as the children could be any age (it was sad day when they moved it to 16 about 20 years ago ...it was such a shock I decided not to have any more beneficiaries ...I mean kids lol)

[Rosco]

ICA's are mainly lost through a change of shareholding. Obviously if accountants get caught out on this a lot, then non accountants also get caught out a lot.

If you plan to allocate to beneficiaries a lot
- Normal Company, you have to pay tax at 28%, then declare dividends at 33% (5% extra RWT). If beneficiary is taxed at say 17.5%, then can get the RWT refunded, but ICA's often become losses to carry forward.
- LTC owned by Trust or Trust, allocates income straight to beneficiary, so if beneficiary is taxed at say 17.5%, then just pay 17.5% tax.

As I put above, lots of reasons for one structure or another.

Ross