Setting up a family trust to buy property? Read this.
People end up looking really bad when doing this one. In fact, many ask me, “Should I set up a family trust to purchase my next property?” This question is common and often the reason why clients call me. People may have heard about trusts. But they definitely do not fully understand them.
What Is actually a Family Trust?
A Family trust may seem simple but is, in fact, quite complex. The concept takes time to understand. Even lawyers and accountants, who study trusts during their training, may lack practical experience in using them.
Trusts are not separate entities like companies. First of all there are many MANY different types of trusts. Even hybrid ones. A trust is a relationship, not a legal person. A trust cannot own property, sue, or be sued. Instead, the trustee acts on behalf of the trust. The trustee owns property for the benefit of the beneficiaries. For tax purposes, though, a trust is treated as a separate entity.
This basic structure involves three elements: the trustee, the property, and the beneficiaries. Understanding these roles helps clarify how trusts operate.
Is a Trust the Right Choice For Your Specific Situation?
To get the right answer, you need to talk to a professional e.g. tax accountant or lawyer even, depending on what you are trying to do. All the blog posts you google will not give you the right answer. Why? The tiniest detail can throw it to the wolves. And you don’t know what you don’t know.
As a result, a family trust might not be the best structure for holding an investment property. Trusts offer benefits such as:
- Asset Protection
- Estate Planning
- Tax Minimization
Many believe trusts reduce taxes. However, trusts do not allow negative gearing benefits. Losses within a trust must carry forward and offset future profits. This can limit immediate tax savings.
Additionally, land tax rules vary by state. Some states offer no land tax threshold for trusts, while others set a low limit. Over time, these taxes can add up significantly.
Despite these drawbacks, trusts can still help minimize tax. For example, trusts may reduce taxes owed on the sale of a property. However, this requires careful planning and tax modelling.
The Importance of Tax Modelling
Tax modelling helps determine whether a trust is the right choice. Few accountants take the time to model different scenarios for their clients. This lack of preparation often leads to poor decisions. By exploring multiple options, you can better understand the financial impacts of using a trust. But you can’t do it just to get tax benefits. The ATO will quickly get all your refunds back and fine you handsomely too. (What is so “handsome” about a fine?)
Secondly: Using One Trust for All Properties (and many other interests as well)
A major risk of trusts involves liability. If a trustee is sued, the trust’s assets can be used to settle the claim. For example, if a tenant sues the landlord for a slip-and-fall injury, the trustee’s assets may be at risk.
Using one trust to hold multiple properties creates a vulnerability. If one property incurs a liability, the other properties within the same trust are also exposed. This risk can lead to significant financial losses. If you are business owner, this can quickly turn into an absolute landmine. A field filled with landmines!
Protecting Assets with Multiple Trusts Or “Structures”
Using separate trusts for each property can improve asset protection. This approach isolates assets, ensuring that a liability related to one property does not impact others. Multiple entities can further strengthen protection. However, managing several trusts requires expertise and careful planning.
Trusts Require Professional Guidance
Trusts are complex structures. A skilled property investment accountant can help navigate these complexities. They can assess whether a trust suits your needs and advise on structuring your investments.
Conclusion
Setting up a family trust to purchase property involves critical decisions. Avoiding these two common mistakes can save you significant financial stress. First, ensure a trust is the right structure for your goals. Second, protect your assets by avoiding a single trust for multiple properties. With professional guidance, you can make informed decisions and secure your investments.
I did not mean to scare anyone off. Trusts are incredible when used well. To do, unfortunately, you need to have the right accountant. Someone who is focused on this area. Most accountants do not specialise on trusts & you should be careful who you talk to – especially if you are looking at property. If you want to have quick chat with us, contact us on 1 800 672 670
References
- Australian Taxation Office. “Trusts and Taxes: A Guide.” Australian Government, 2023.
- NSW Revenue. “Land Tax and Trusts.” State of New South Wales, 2023.
- Smith, John. Property Tax Strategies for Investors. Real Estate Press, 2022.