If you own one property, say your family home, you will most likely hold this in your name either alone or together with a partner. However, if you hold multiple properties, often holding these properties in a trust structure will be much more advantageous. In this post we look at three questions; what is a trust, and what are the advantages and disadvantages of holding multiple properties in a trust.
What is a trust?
A trust is a business structure often used for holding investments. There are many types of trusts with the main trusts being; discretionary/family trusts, unit trusts and fixed trusts.
The most popular trust for holding property investments is the ‘family trust’. Under a family trust structure, the assets of the trust (so in this case, property) are held for the benefit of beneficiaries. The beneficiaries in a family trust are your family members. So, essentially the trust is owning property for the benefit of your family. When you set-up your family trust, you prepare a family trust deed which lists the family members you would like to include as beneficiaries. It is important to understand that you don’t necessarily include ‘names’ of these family members, but you simply list an association of the family member to you. For example, the deed will make reference to ‘any children or future children, spouse or future spouse, sibling’ and so on.
Setting up a family trust can be quite complicated. There are many different roles and responsibilities that come with setting up and operating a family trust and it is important that you ask for professional help if you need help. If a trust is not set up correctly, and the annual reporting and regulatory requirements are not met, there can be problems later on. Here at Dexterous, we often assist our clients in setting up a trust structure to hold multiple properties.
What are some of the advantages of a trust?
- Asset protection – This works in many ways as the family trust is seen as a separate ‘legal’ entity to yourself and doesn’t form part of your personal assets. The assets are the assets of the trust.
Example 1: You own a number of properties in a family trust and you are sued personally. The properties in your family trust do not form part of your personal assets.
Example 2: Your adult children are struggling to save enough for a home deposit and you decide to buy a property for them to live in (very lucky children!). If you buy the property in a family trust it could be a lot simpler in terms of any potential disagreements down the track.
Example 3: Let’s say you own a number of properties with your partner, and your partner passes away. You will not need to transfer ownership of any of the properties as they are still being held for the benefit of the beneficiaries of the trust.
- Tax planning – Family trusts have many tax planning benefits. The main benefits being through the ability to distribute to multiple family members as beneficiaries.
Example: You own four properties which earned annual net rental income of $200,000. If you owned your properties personally, the $200,000 would be included as taxable income solely in your personal tax return. Even with no other income, this would mean you would pay tax at the top tax rate. However, if you owned the properties in a trust, your net rental income could be distributed to your family members. So, if you distributed $200,000 equally to four family members, each would record taxable income of $50,000 which means they would be paying tax at a much lower tax rate than the top tax rate.
- Capital Gains – If you hold your properties for more than 12 months in a family trust, you receive a 50% reduction on capital gains tax if you sell any of your properties. This benefit not only applies to trusts, but also applies to individuals. However, this benefit does not apply if you held your properties in a company structure.
What are the disadvantages of a trust?
- Additional time and money – The main disadvantages of holding your properties in a family trust is the additional time and money spent. Setting up a trust can take time and be costly, especially as you will generally need to seek the advice and assistance of a specialist to ensure it is set up correctly. Going forward beyond setup, there are additional costs as a family trust tax return and accounts will need to be prepared each year, which are generally more expensive to prepare than personal tax returns.
You are in a great position if you hold multiple properties, or can afford to buy multiple properties so it is important that you do everything possible to protect these assets and ensure an effective tax planning strategy is in place. If you would like to know more about family trust structures and whether they will be effective for your situation, feel free to get in touch on (02) 8072 0695.
Or send an email to Joanne Neo, Tax Director at firstname.lastname@example.org