Trusts and Asset Protection

The majority of investors put little thought into the ownership structure of their investment.

For most investors, this is an afterthought and much more effort is put into finding the best interest rate on a mortgage and looking for a property.

However, on a 0.1% saving in interest rate on a $500,000 mortgage is only worth $500. But structured incorrectly, and your property investment could cause you a  financial headache.

In this series, we look at the trust structure and how you can benefit from it.

Firstly, it is common for property to be held in the individual’s names (husband and wife as tenants in common is not unusual).

There is nothing wrong with this structure but may be less optimal if the husband and wife goes into business using the property to secure business finance. And a spell of bad luck may mean the  investment property is called up as collateral to repay the business loan. This was not uncommon during the recession in the GFC.

And sometimes owning a property as tenants in common is not the most tax efficient structure.

Now enter a trust structure.

Lesson number one: If structure correctly by a knowledgeable lawyer, the trust not only protects your assets but can be tax efficient.

Risks can arise from any situations including business dealings and even relationships. Individuals tend to protect themselves and their assets against
risks by taking out insurance. Another form of protection is a trust structure. This is where the legal ownership of the assets are transferred to the Trustees. As long as the process is completed in a timely manner and in the correct way, asset protection should be conferred and creditors won’t be able to touch the trust assets

Lesson number 2: You cannot move your assets into a Trust if you already have creditor problems.

Lastly, from a tax point of view, trust can be more tax efficient as the income can be allocated to the beneficiaries. The beneficiary may have a tax rate as low as 10.5% or 17.5% or 30% or at most 33%. Depending on what income tax bracket the beneficiary is on, a trust can be result in a tax efficient result.

The most important thing is that the beneficiary income need to be distributed in accordance with the terms of the Trust Deed.

Lesson number 3:  A trust can result in a more tax efficient  outcome as the income can be allocated to the beneficiaries.

Finally, Major changes coming for trust law:

Trustees will have more accountability to the beneficiary and must be more transparent in their reporting;

Practical and flexible trustee powers that allow trustees to manage and invest trust property in the most appropriate way;

And provisions to support cost-effective establishment and administration of trusts (such as clear rules on the variation and termination of trusts)

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