All you need to know about using a family trust for purchasing a property.

Here’s what you need to know if you are thinking of using a family trust for the purchase of your next property.

What is a Family Trust? 

A trust is a legally recognised relationship that exists between the trustee and the trust beneficiaries. In simple words, the trustee holds assets in trust to the benefit of the beneficiaries.

In contrast to individuals and companies who can be liable in law, a trust is not an entity. The trust exists merely as the relationship between the legal owner (trustee) and beneficial owners (beneficiaries).

A family trust is also known as a discretionary trust, there is flexibility in the distribution of trust income and trust capital.

There are other types of Trusts such as unit trust or fixed trusts where the entitlements of beneficiaries are fixed, and the trustee does not have the discretion to distribute trust income and capital as they see fit. These are commonly used when there are third parties involved, like property developments.

Using a Family Trust

Using a family trust means that you will not be the legal owner but the beneficial owner. Instead, the trustee (an individual or a company) will own the investment property for your benefit.

Investors commonly choose to use a family trust to create that separation between the asset owner and those who will benefit from it.

Advantages

Asset Protection

As the property is not on your own name (individual or company), the property is protected from legal action. This means creditors cannot use the property to settle any debt owed.

Tax Planning

The family trust has the flexibility to distribute any income generated as they see fit.

Therefore, the trustee has discretion to divide the income between the beneficiaries in the most tax-effective way each financial year. There are specific rules for the trustee to make valid resolutions. Contact your advisors to make sure you are complying with all the rules.

The trust can also take advantage of the 50% CGT discount.

Estate Planning

A trust deed defines how the family trust will operate and be managed. It also defines all the roles in the trust.

Hence, control of the trust can be changed without generating a capital gains event or stamp duty. Allowing for a simpler and more efficient process.

Risks or Disadvantages

Negative Gearing

If the property you are purchasing will be an investment property at some point and it doesn’t generate enough income to cover its expenses, then the property will have negative income (losses). This means that your property is negatively geared.

The main benefit of negative gearing is that you can offset the loss against your income, this way you can lower your assessable income, resulting in a reduced tax bill.

However, if the property is in a family trust, you will not be able to deduct these losses from your taxable income. The losses will be quarantined in the trust until there is enough income in the trust to cover the losses.

Land Tax

Every state has different rules, and therefore some properties in trusts will not be eligible for concessions on land tax calculations.

Grants and Concessions

Similar to Land Tax, some first home buying concessions or stamp duty discounts are only available for individuals and therefore if the property in question is in a Trust you may not be eligible to access such concessions.

Finance

Finance might be a little more complex when a property is in a Trust. Some lenders decide to impose higher rates on Trusts and some don’t even consider it. You’ll need to understand the concept of guarantor and how your lending capacity is assessed as opposed to a homeowner.

Get started

In summary, being aware of all these advantages and disadvantages will allow to assess how they affect your personal circumstances and plans. If you are thinking on buying property through a trust, and have questions whether this structure is right for you, it is best if you consult your tax and financial advisor to consider your personal circumstances.