What is a trust?
The law of trusts is one of the oldest areas of law which still applies to this day. For that reason alone, it brings great complexities to both the lawyer and the lay person. When trying to understand the use of a trust during the purchase of a property, it is important to realise that there are many different types of trusts that can be used.
The most commonly used trusts are Discretionary Family Trusts and Unit Trusts. These trust types are very similar in nature – that is, a fiduciary relationship is created whereby a person (“the Trustee”) holds property on Trust for the beneficial ownership of one or more persons (“the Beneficiary”).
Discretionary Family Trust
The discretionary element of a Family Trust provides the Trustee the ability to exercise their discretion as to which Beneficiary should receive trust property, and the proportion or amount. For example, a Trustee who purchases an investment property in a trust, say the ‘McDonald Johnson Family Trust’ may distribute any net proceeds or losses from the property across to the beneficiaries in whatever proportion they may choose.
Importantly, at the time of purchase, the Trustee has no obligation to decide how the trust’s net proceeds or loss will be apportioned throughout the trusts, as this can be decided at the end of financial year.
- Asset Protection – a major benefit to any trust is the ability to protect your property from creditors in the event that a bankruptcy occurs. This is because the property is being held and protected under the Trust for the benefit of the Beneficiary, opposed to an individual or company owning the property. These powers are governed by Section 58 of the Bankruptcy Act 1966 (Cth).
- Estate Planning – for a family, the major advantage is that the control of the trust’s asset (the property) will be passed on to the next generation without incurring any duties or taxes. In contrast, if an individual were to pass away without owning a trust, then the property held in their name would need to be sold or transferred, and this will incur stamp duty (to the purchaser) or capital gains tax (to the vendor).
- Tax minimisation – the ability to distribute net proceeds from an investment such as property held on trust allows the Trustee to minimise their taxable income. The benefit of distributing net income is that the Trustee reduces their taxable income by passing proceeds onto the beneficiary who pays tax on their share of the trust’s net income at the tax rates that apply to them. This often means the more beneficiaries the better, especially if children who are not yet earning an income are a nominated beneficiary. It should be noted that doing this in practice can be much more complicated than the theory behind it, and it is always advised that you seek tax advice from an accountant with experience in this area.
If you are more interested in establishing a Trust to purchase property get in contact with our property team today.
Next month we will discuss the advantages of using Unit Trusts when buying property.