Introduction to Hybrid trusts

Hybrid trusts are an advanced tool for property investors. What’s the big deal? Well, they combine features of discretionary and unit trusts. Some of you may know discretionary trusts as family trusts. This guide explains how hybrid trusts work and their benefits. Learn why they might suit your property investment strategy. Also, you may wish to read up on Family Trust Elections if you are going down this route.

What Is a Hybrid Trust?

A hybrid trust is a really flexible structure. And for that, the ATO has imposed quite a few restrictions on it. But this trust allows investors to distribute income and capital gains efficiently. Here, unit holders own fixed entitlements, while trustees have discretion for other distributions. This dual nature offers tax advantages. Within the ATO red tapes!

Benefits of Hybrid Trusts for Property Investors

1. Tax Minimization: Distribute income to beneficiaries in lower tax brackets.

2. Flexibility: Adjust income and capital distributions based on circumstances.

3. Asset Protection: Safeguard assets from creditors.

4. Estate Planning: Create long-term wealth plans for beneficiaries.

How Does a Hybrid Trust Work?

Hybrid trusts have two key components:

1. Unit Holder Rights: Fixed income distributions to unit holders.

2. Discretionary Features: Flexibility for trustees to allocate remaining income and capital gains.

For example, if you hold investment properties in a hybrid trust, rental income can be split among beneficiaries. High-income earners can reduce their tax liability by redistributing profits. Compare this to either just having unit trusts, where you won’t have a say on varying distributions. Or in family trusts, where the trustee rules supreme.

Why Property Investors Choose Hybrid Trusts

Property investors benefit from the ability to balance fixed and flexible income distributions. Hybrid trusts are particularly useful for:

• Negative gearing benefits.

• Splitting income among family members.

• Protecting assets from risks associated with personal liabilities.

Example:

John and Sarah, a couple with differing incomes, set up a hybrid trust. They invest in rental properties. The trust allows John, the higher earner, to receive fewer distributions. Sarah receives more, reducing their combined tax liability. At the same time, their assets remain protected. The difference, in some cases, is you still retain some of the benefits of fixed distributions as if you have a unit trust anyway.

Setting Up a Hybrid Trust

Key Steps:

1. Consult a tax specialist or accountant who has some experience in this area – usually property

2. Draft the trust deed.

3. Appoint a trustee and beneficiaries.

4. Register the trust with the Australian Tax Office (ATO).

*Obviously, before all that, ensure you have a solid plan or property strategy, spanning out at least 10-15 years ahead. Do NOT get into these sorts of arrangements without having built spreadsheets, spent hours with your accountant & having a clear property strategy as well. The result will make you wish you hadn’t rubbed that lamp in the first place.

Costs

Setting up a hybrid trust typically costs $2,000 to $5,000. Ongoing maintenance fees include accounting and legal services. There will be returns, advice and other tax compliance costs. Again, build the business case first – or get help from us to do that first. (1 800 672 670)

Tax Implications

Hybrid trusts offer flexibility but come with compliance requirements. Key points to consider:

• Negative gearing benefits can be retained.

• Capital gains are distributed efficiently among beneficiaries.

• Regular financial statements are mandatory.

Internal and External Resources

Internal Links

• Why Use a Family Trust for Property Investments

• Top Tax Deductions for Property Investors

External Links

• Australian Taxation Office: Trust Structures

• ASIC/ATO: Registering a Trust

 

Call us on 1 800 672 670 to create a hybrid trust that suits your individual needs best.