Trading Trust or Company?

[krispedersen]

Hi all,

I'm looking at doing a bit of property trading (buying undervalue, renovating and then selling) and want to set up the appropriate structure. I understand the concept of tainting and to keep property puchases like these away from our "buy and holds."

My wife and I will be setting up a family trust later this year for properties we wish to hold onto but in the meantime what is the best structure for the trading?

Do I have to spend a few thousand in setting up a trading trust or can I jump onto the companies.govt.nz website and set up a company myself and proceed to trade through that?

Any help would be appreciated

Cheers

[Chemill]

Hi Krispedersen

Welcome to the forum.

I'm looking to do the same thing as you, so although I don't have solid knowledge on this, but I'll share my ideas.

A company is easier to set up for the trading purposes - It's easy to go online and setup, there are other things like a minute book and a couple of other issues that you may want your accountant to sort out. With the protection issue - you personally will own shares of this company

A trust is more complex to set up - professional advice is recommended. If correctly structured the trust will provide you with good asset protection.

What I'm looking at doing (need to put this past my accountant yet). Is start my "Investment" trust - this trust will then be the shareholder of a trading company and a long term hold company.

One recommendation somewhere in the post:
http://www.propertytalk.co.nz/postt3292.html
recommends One trust for personal wealth retention
One trust for long term holding
one trust for trading

Regards,
Chemill

[krispedersen]

Cheers Chemill,

Personally from my view point i'm not too concerned about asset protection in regards to the properties that i am trading because most of the profit will go into my trust which will contain the rentals that I plan to hold and so will be protected anyway.

As I'm not concerned about protection in these instances I can't see any other benefits for using a trust over a company

[ChiefWigum]

Hello Krispederson,

You need to have a trading trust for your developments not a company.

Here is an excerpt from an article on this site by GRA which explains why:

Click on 'Articles' > 'Trusts' > "Property Dealing and Developing" or click here: http://www.propertytalk.co.nz/content-90.html

A common misconception is that conducting dealing and investing activities in separate companies is enough to avoid tainting issues that may otherwise arise. For instance, the Whites have asked us if they should set up a loss attributing qualifying company (LAQC) for their rental activity and a LAQC for their dealing activity. We would not advise them to do this, as under the rules of association the two companies would be associated. That would mean that any rentals purchased while they are carrying on their dealing activity will be tainted.

Hope this helps.

ChiefWigum

[krispedersen]

Cheers ChiefWigum, looks like GR&A will be getting a bit of our money this year!!

[muppet]

Hi Kris

Chris Ashenden has this setup as per his post:

30. What I would do starting again is:
ONE trust set up properly for buy and hold
ONE trust set up properly for trading properties
ONE trust set up properly for wealth retention (family house, bach, tons of cash and your favourite classic ferrari).

[Dean@Massiveaction]

Trading trust is a must and the beneficiaries and deed of trust are critical to avoid tainting. Usually you need a corporate trustee for the trust. The details are critical, so spend the money to get it right.
If you don't like MAtthews' prices Mike VAllant from vhp.co.nz is also excellent in this area

[Roger_2004]

Trading Trust is the best way to go, as u only pay 20% tax as opposed to setting up a company & pay 33% tax!

[megsahr]

Hi,
Muppet very kindly summarised Chris’ story for us. The full version is
http://www.propertytalk.co.nz/postt3200.html

if you have a few hours to spend reading it. Well worth the investment of time.

[muppet]

Hi Guys

Here is the other part of Chris's Trusts' setup. I was in a rush earlier to take the Muppet to swimming classes.

39.Trustees: I prefer trusts with a corporate trustee (instead of individuals). This gives a bunch of advantages and to put it bluntly, if your accountant looks at you with a blank face when you suggest it to him, move on.

Trust deed: The trust deed be flexible, give you all the powers and might need and should be up to date. By this last one I mean that deed should be reviewed and updated at least yearly by a legal professional (typically a specialist barrister) who is current with trust case law.

Beneficiaries: This will vary depending on your circumstances and whether or not you are also going to set up a trading trust (or be tainted in your own name).

I get the deeds reviewed by both my lawyer and a specialist barrister.

[muppet]

Hi Guys

You can also check out this site for trust information:

http://www.rossholmes.co.nz

Regards

[CJ]

Trading Trust is the best way to go, as u only pay 20% tax as opposed to setting up a company, where u pay 33% tax!

Can you please clarify what you are saying above. ie. how it works.

I assume you mean that any profits will be distributed to a beneficiary who is on the 19.5% tax rate.

If so your statement is a bit misleading since many people wont be able to do this due to:

1. kids are on lower marginal rate but there is a rule that taxes them at 33% up until they are 18.
2. not everyone is on the lower tax rate after accounting for the profit attributed (ie. they have income over 33%)
3. not eveyone has a spouse on the lower rate.

IF one of these do apply then it will only be distributed and taxed at 19.5%.

Just a point, that if you are distributing out to beneficiaries, then you are moving wealth out of a trust. so for asset protection, you have to move it back in again. that is what is the point of gifting in $27k per year just to distribute it out again (other than tax noted above).

Note: I am not sure where I read this but I think that if you want to avoid tainting, your trading trusts beneficiaries should only be another trust. Therefore it is this second trust that needs the beneficiaries to be the person on the lower tax rate.

Just a few points to consider when discussing with an accountant.

CJ

[krispedersen]

Thanks Pooomba and Muppet, i've e-mailed both Mike @ VHP and Ross Holmes to see how much they cost. I'm quite willing to pay Matthew 5k for our family trust but don't see the need to pay that for a structure just to avoid tainting

[CJ]

$5k sounds too much for just one trust. Shouldn't cost more than $2.5k.

[krispedersen]

I'm no structuring expert but I understand GR&A's asset protection goes up and beyond what an average trust provides, the actual trust itself I believe was around the $2.5k mark but there's a bit more involved as well which gets the price right up there