Best way to start out with trusts?

Hi all, I have about $450K equity and some company income to invest. I'm looking to start investing more in property and wanted to set up trust accounts; 1 for each property each with its own corporate trustee and with the ability to offset losses and income to reduce tax on all investments.

My (limited) understanding of how it would work would be that I would be the personal trustee of a 'master trust' which would own all the shares of the corporate trustees (which would each manage a trust owning an investment property). The master trust would not have employees, not own any trading businesses, no employees etc.

There would also be a bucket company owned by the master trust if the income exceeds what I can earn tax effectively. This bucket company would simply receive excess income (that cant be better distributed) and would be the company to take out loans etc to buy the property.

This was a method described to me, my questions would be:

1) Is this a safe way to organise trusts and companies for asset protection and tax purposes?

2) How would I safely start off the trust account, obviously it needs funds from somewhere and just starting out I wouldnt be able to get a loan unless it was a private loan. Would I loan it money from my equity/ sell one of my properties to it etc?

3) Wouldn't the above structure be dangerous as the bucket company could easily become insolvent if it is taking out loans and only getting residual income?

Please excuse my ignorance, any help would be appreciated!

 

Hi R F I,

My opinions on your questions:

If you are a director of a company that operates a business, then a typical rule of thumb is that you shouldn't be a director of any trustee companies of asset holding trusts.

You would put someone else in as director - such as your spouse. The idea with your investments is to control everything but own nothing.

If this is not feasible in your personal circumstances, then the structure you described does provide some asset protection - if in a convoluted way.

This is more of a financing question.

At the moment as far as I know banks will lend to a trust provided you have other equity they can take security over.

Or it might simply be a matter of drawing some equity you have personally (separate loan / LOC preferably) and lending this amount to the new trust, with the bank loaning the rest while taking a personal guarantee from you.

Try not to have different types of debts all with the same lender as it can reduce your borrowing capacity because the more you borrow, the more risk the lender takes on and the less they lend!

No.

A bucket company simply receives distributions from trusts and pays tax @ 30% on that income. It will not be borrowing.

A bucket company should only be used as a last resort when distributing trust income.

From 31 December 2009 (i.e. the 2010 financial year), if a (bucket) company receives a distribution from a trust, the trust has to physically pay the monies to the company, or else enter into loan agreement for the amount of cash 'retained' by the trust and pay interest and minimum capital repayments.

This differs to the previous practice where a trust could distribute on paper only and keep the cash in the trust indefinitely and the amount owed to the company would just sit there as a 'Unpaid Present Entitlement' (UPE) a.k.a. distribution receivable.

A bucket company is not an ideal structure for holding assets as it is not entitled to the 50% general CGT discount. Once the money gets in there it can be difficult to get it out.

It can be leant to individuals or trusts - but it needs to have a formalised loan agreement with an ATO specified rate of interest otherwise the amounts 'loaned' can trigger a deemed dividend - where the individual gets taxed on the entire amount of the 'loan' with any franking credits lost. Not a good situation. You can drip feed franked dividends - which is useful in years where the individual shareholders taxable income is quite low.

My advice

- Don't get too caught up in the structures
- Seek advice on a case-by-case basis - i.e. if you want to buy a certain property, before signing a contract, obtain advice on the most appropriate structure
- Before the end of each financial year have your accountant undertake some tax-planning with you and decide if anything needs to change prior to June 30 (i.e. is it appropriate to set up a bucket company?)
- Ensure you maximise your super contributions and look at superannuation as another structure to hold property (with or without a loan)
- Don't get sold into structures if they are not going to be utilised
- You can use the same trustee company for multiple trusts

I hope the above helps. If you want a second opinion from an accountant in VIC I can probably recommend someone.

SM

 

Don't forget each trust will be a separate tax entity so any losses of one trust will be trapped in that trust. However, you may be able to distribute income from a profit making trust to a loss making one.

 

I would be able to loan to the trust (should I/would I be able to charge interest on the loan?).I suppose it would partly compromise the security of the trust as if I am personally sued, they could recover the loan value (only) from the trust correct? (not that I intend on getting sued, however I do have rental properties so there is always a risk)


Also, I'm single and really have no choice but to be director of my company and corporate trustees, what is the reason why it is not preferable?


Is it better for me to own the corporate trustee company or to have another 'master' trust own it, for liability purposes?

Could you please clarify how I physically set up the trust? I would need legal and accounting advice, but who do I go through to actually set it up?

I would love a recommendation for a suitable accountant in Victoria, I'm regional near Bendigo.

Thank you so much for taking the time to help out. Its really helping me to start to get my head around this.

 

Thank you for your reply. Can I please clarify, to distribute income from one trust to another (eg. where one has a loss and one a profit), would I need to make the other trusts beneficiaries of each other or would I need to distribute the money between trusts as a loan?

 

A loan is not income so it can't offset a loss. It can help you pay a loss but not offset in in terms of tax. So you would need to distribute income from a trust with income to another trust with a loss. You will need to check your trust deed to see if the 2nd trust is a beneficiary of the first. You will also have to make sure this doesn't go against the laws against perpetuities, so you should see advice.

 

Thank you Terry, yes of course I overlooked that simple fact, sorry!

So ideally I would have a few trusts set up as beneficiaries of each other initially, which means I couldn't start with just one as I'd not be able to distribute income from it to another?

Do you have any suggestions on where I could read up on laws about perpetuities, so I'm not so ignorant when I see my solicitor?

 

Hi again Room,

A quick lesson on the rule of perpetuities:

Each trust has a lifespan of 80 years, meaning after 80 years has elapsed, any remaining capital of the trust must be distributed to the beneficiaries at that time.

The rule against perpetuities prevents a trust reaching the 80 years, then simply distributing all the capital into a NEW TRUST and kicking off for another 80 years - i.e. the monies can't simply be transferred from one trust to another for ever and ever.

From a tax perspective, I always used to think that a trust could only distribute to an older trust (i.e. one with an earlier vesting date). For example a trust settled in 2010 (2090 vesting date) could only distribute to related beneficiary trusts with vesting dates earlier than 2090.

However, after checking the taxation laws / rulings surrounding it, any trust can distribute to any other related trust (provided the other trust is considered a beneficiary under the distributing trusts deed) - but only if the trustee of the receiving trust elects (via trustee minute or trust deed amendment) to vest that trust earlier - so it doesn't extend part the 80 years of the original trust.

Apparently the rule of perpetuities doesn't apply to trust from South Australia. Weird.

Yeah - I am obviously not a lawyer - hence the reason we always recommended you get paid and competent advice. Or Google it.

Lesson concluded.

But if you set up a couple of trusts all on the same day, you will not have any issues.

To actually set up a trust, first incorporate the trustee company, then obtain a trust deed. I have a fantastic solicitor up here in QLD, very good quality and practical trust deed which I have used for many of my clients. Will cost you about $660 (by memory) and about the same again to incorporate a Pty Ltd company to act as trustee (not through the same place).

If you want a referral to an accountant in Bendigo, go have a chat to:

MGR Accountants Pty Ltd
Address:
1 Somerville Street
Bendigo, VIC, 3550

It is quite difficult for me to provide specific direction to you based on the information you have provided.

I wouldn't bother having a 'master trust' as the shareholder of your trustee companies. This is probably overkill for what you need.

I hope this helps.

Don't worry about asking 'dumb' questions to an accountant or solicitor. If they won't take the time to explain things to you to enable you to explain, then find someone else who will.

Before you meet with them write a list of questions and put together a brief summary of your assets and liabilities - i.e. rental properties, mortgages, business interest etc.

Anyway - I hope all the above helps.

Good luck
SM

 

Hi Superman

My understanding regarding the laws against perpetuites and trusts is what you stated - a trust with earlier vesting date should not distribute to a trust with a later vesting date as it could cause the infringement of the law against perpetuities by taking the property distributed to be held more than the statutory maximum of 80 years. But, the second trust could avoid this by bring the vesting date earlier. You have to be careful with this though as it could cause a resettlement - but generally if it is only the vesting date that is changed then it won't.

as an aside, aparently in the 1970s there were many trusts created with shorter vesting dates such as 25 years (not sure of what the reasoning behind this was??) and many of these trusts are due to vest soon. Some have been able to successfully apply to the courts to have the vesting date forward to avoid the stamp duty and CGT consequences.

As for SA, it is the only state that does not have legislation on perpetuities. That means, theoretically, trusts could last forever there. But there are many unknowns surrounding this - such as what about the common laws against perpetuities, does the trustee have to be located in SA? the registered office, the governing law of the trust, the trust property etc etc. Not so straight forward as some marketers out there would have you beleive. But I guess we won't know until 80 years have passed.

 

BTW, here is the law in NSW
PERPETUITIES ACT 1984


see s 7
PERPETUITIES ACT 1984 - SECT 7 The perpetuity period