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One of the most insightful and perhaps enlightening distinctions that I picked up from years of dealing with high net worth individuals is that they have figured a long time ago that;
“The secret to success is to own nothing, but control everything.”
– Nelson Rockefeller
You see one of the major differences between high net wealth individuals and the average Australian is that the wealthy have learned over time that the best way to hold assets, and to build wealth for that matter, is via trusts and corporate trustee’s structures, rather than in their individual names, which is the case for the average Australian landlord.
The smart money has learned decades ago, from their Accountants and Tax Lawyers how to maximise their ability to distribute tax between family members, protect and hide assets from creditors, and help with succession planning, all this is achieved through trusts! And this makes trusts an essential tool when it comes to wealth creation.
So my advice to you is don’t try to reinvent the wheel, just learn how to use it, and more importantly make it relevant to your current situation.
With respect to property purchases and holdings, the most commonly used trusts are Discretionary Trusts, Unit Trusts and Hybrid Trusts. Amongst the three most common trust structures it all depends on your particular individual circumstances as everybody is different and has different requirements and strategies which determine which type of trust structure is used for each property purchase.
For example, a property investor may hold several properties with different types of trust structures for each property. This definitely always depends on the particular situation every time a property is purchased, for example, you may be an employee running a business or you may be part of a complex family or joint venture structure with non-related parties so therefore it is always recommended that you obtain advice from your accountant and lawyer to determine the best trust structure every time you wish to purchase a property before you actually acquire the property.
Similarly, property investment can be very cost prohibitive and unforgiving if the incorrect trust structure is used in the beginning and to unwind and re-structure from an incorrect trust structure to the correct trust structure will subsequently give rise to capital gains tax and stamp duty liabilities as well as legal costs. It is very important to seek professional advice to ensure that the correct trust structure for your property is established from the beginning.
For many years, the Discretionary Trust has and still is the most common structure used for property investments especially for a closely-held family controlling assets which typically does not include anybody outside of the family group. Discretionary Trusts usually provide better asset protection, estate planning and also tax planning flexibility.
- Better asset protection is possible if a corporate trustee is appointed,
- Provides more privacy than a company,
- Flexibility in distribution of income and capital among beneficiaries,
- Trust income is generally taxed as income of the beneficiaries,
- Ideal for one family group,
- Trust loss rules can apply,
- Companies and Charitable institutions can also be beneficiaries,
- Asset protection for the beneficiaries is available.
- Individuals are not able to claim any tax deductions for any interest paid on funds that are borrowed and then used for the trust to purchase the property. The trust in itself can claim the interest expense on borrowing funds to claim the tax deduction for the interest expense.
- Income and capital losses are quarantined in the trust and can only be offset against future income. Therefore, these losses cannot be streamed to the beneficiaries and therefore the beneficiaries are unable to offset these losses against their other personal income.
- This can be a positive or a negative (depending on the circumstances of the beneficiary); however, beneficiaries have no control over the income or the assets that they receive which provides asset protection for them.
- Beneficiaries cannot include their portion of the income or the trust’s assets in their Will because the Trust Deed determines this.
- The powers of the trustees are restricted by the Trust Deed.